Mortgage interest deduction is a great way to reduce your taxable income. If you're considering a big move, it's important to understand how it could affect your taxes. Let's say you live in Texas, where there are no income taxes, and you've been offered a job in San Jose. You can deduct the interest you pay on your home loan if the loan meets the IRS mortgage requirements.
Despite the hype, the majority of homeowners don't receive any tax relief from the mortgage interest deduction. This deduction applies to loans used to purchase, build, or substantially improve a primary residence or second home. Depending on factors such as credit score and down payment, the PMI typically ranges from 0.5% to 1% of the total loan amount. Taxpayers who don't have deductions that add up to more than the standard deduction amounts won't need to itemize and, therefore, won't get any tax benefit from paying interest on their mortgages.
The interest and point payments you make are combined with all other deductions you claim in Schedule A, which reduces your taxable income on the second page of your tax return. Instead of spending large amounts of money on interest for little in return, it would be much better to pay cash for your new home. Thanks to a law passed in 1913 (and amended in 198), most interest paid on mortgage loans is eligible for mortgage interest deduction. This deduction reduces the amount of total taxable income based on the taxpayer's tax category.
Over time, as your savings from the mortgage interest deduction fall (for the reasons described above), that difference will become even more pronounced. Second mortgages used to consolidate debt, cover college expenses, or finance another financial goal don't qualify for the mortgage deduction. You can only deduct interest paid on loans or lines of credit from the home equity if you borrowed the money to buy, build, or substantially improve your primary home or second home. Structured in this way, it is not surprising that this tax deduction is mainly used by higher-income households.
If you buy at the beginning or middle of the year, your first year of homeownership will likely also result in your largest mortgage interest deduction because mortgages generally pay off early, meaning your interest payments are allocated early. This makes it easier to save money on taxes.