What Is Qualified Mortgage Interest?

Mortgage interest can be a significant tax deduction for homeowners, but not all mortgage interest qualifies. The IRS has specific rules that determine whether you can deduct it on your tax return. Understanding these guidelines is essential to maximizing potential deductions while staying compliant with tax laws.

Several factors influence whether mortgage interest is deductible, including the type of loan, how the funds are used, and proper documentation.

Eligible Loan Types

The type of loan used to purchase or improve a property determines whether the interest paid qualifies as a deductible expense. The IRS has specific criteria for different types of mortgages, and understanding these distinctions helps homeowners avoid mistakenly claiming ineligible deductions.

Primary Home Mortgage

A mortgage on a primary residence generally qualifies for interest deductions if the loan meets IRS requirements. The home must be the taxpayer’s main living space, meaning they reside there most of the year. The loan must also be secured by the property.

For mortgages taken out after December 15, 2017, taxpayers can deduct interest on up to $750,000 of home acquisition debt ($375,000 for married individuals filing separately). If the mortgage was obtained before this date, the previous limit of $1 million ($500,000 for married filing separately) still applies. These limits apply to the combined total of all qualifying mortgages the taxpayer holds.

Second Home Mortgage

Interest on a mortgage for a second home can also be deductible if the property is not rented out for more than 14 days in a year. If rented beyond this threshold, the home may be classified as a rental property, which changes how the interest is deducted.

The loan must be secured by the property, and the same debt limits apply as with a primary residence. Homeowners with multiple properties can designate only one as their second home for tax purposes. Interest on mortgages for additional homes is generally not deductible unless the properties are used for business or rental purposes.

Construction Loan

Interest on a construction loan may be deductible if the loan is used to build or substantially improve a home that will serve as the taxpayer’s primary or second residence. The IRS requires that construction be completed within 24 months, and the taxpayer must intend to move into the home once it is finished.

During construction, interest paid on the loan can be deducted if the loan will eventually be converted into a standard mortgage secured by the completed home. If construction exceeds the 24-month period, interest paid beyond that timeframe may not be deductible. Keeping detailed records, including construction timelines and loan agreements, is necessary to ensure compliance with IRS rules.

Home Equity Loan

A home equity loan allows homeowners to borrow against the equity in their property. Interest on these loans is deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s primary or second home. Under the Tax Cuts and Jobs Act of 2017, using a home equity loan for personal expenses does not qualify for an interest deduction.

The loan must be secured by the home, and the total mortgage debt—including the original mortgage and home equity loan—must remain within the IRS limits of $750,000 ($375,000 for married filing separately). If the total debt exceeds these thresholds, only a portion of the interest may be deductible. Proper documentation showing how the funds were used is necessary to substantiate the deduction in case of an audit.

Points That May Qualify

Prepaid interest, commonly referred to as “points,” may also be deductible. When a borrower pays points to secure a lower interest rate, the IRS allows these costs to be deducted as mortgage interest if certain conditions are met. The loan must be used to purchase or improve a primary residence, and paying points must be a common practice in the area where the loan was issued. The amount paid in points must also be clearly itemized on the closing disclosure or settlement statement.

The timing of the deduction depends on how the points were paid. If paid in full at closing, they may be deductible in the same year. If rolled into the loan balance, they must be deducted gradually over the life of the mortgage.

For refinanced loans, points are typically deducted over the loan’s term rather than in a single year. The only exception is if part of the refinanced loan is used for home improvements, in which case the associated points may be deducted immediately. If the loan is paid off early due to refinancing again or selling the home, any remaining unamortized points can often be deducted in the year the loan is closed.

Mortgage Insurance Premiums

Mortgage insurance is often required by lenders when the down payment is below 20%. The IRS allows deductions for qualified mortgage insurance premiums (MIP) if the loan meets specific criteria, but eligibility is limited by income thresholds.

To qualify, the mortgage must be for a primary or second home, and the insurance must be provided by a government agency such as the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the Rural Housing Service (RHS), or be private mortgage insurance (PMI) issued by a commercial lender. The deduction begins to phase out for taxpayers with an adjusted gross income (AGI) above $100,000 ($50,000 for married individuals filing separately) and is eliminated once AGI exceeds $109,000 ($54,500 for married filing separately).

The way mortgage insurance premiums are paid affects deductibility. Borrowers who pay the entire premium upfront at closing must spread the deduction over the loan’s term or 84 months, whichever is shorter. Monthly PMI payments, however, are fully deductible in the year they are paid, provided the taxpayer qualifies under the income limits. If the loan is refinanced and new mortgage insurance is required, the deduction rules reset based on the new loan terms.

Refinancing Scenarios

Refinancing a mortgage affects how interest deductions are handled. The tax treatment depends on whether the refinance is considered acquisition or non-acquisition debt. Acquisition debt refers to loans used to buy, build, or substantially improve a home, while non-acquisition debt includes cash-out refinances where the proceeds are used for other purposes. Only interest on acquisition debt remains deductible, subject to IRS loan limits.

If a homeowner refinances into a loan of equal or lower balance without taking cash out, the new loan retains its acquisition debt status, and the interest deduction remains unchanged. However, if the refinance results in a higher loan balance due to cash being withdrawn, the deductible portion of interest must be adjusted based on how the additional funds are used. For example, if a homeowner refinances a $300,000 mortgage into a $350,000 loan and uses the extra $50,000 for home renovations, the interest on the full loan amount may still qualify. If the cash is spent on personal expenses, the interest on that portion is not deductible.

Documentation and Recordkeeping

Proper documentation is necessary to substantiate mortgage interest deductions and ensure compliance with IRS regulations. Without adequate records, taxpayers risk losing deductions or facing challenges in the event of an audit.

Lenders typically provide Form 1098, Mortgage Interest Statement, which reports the total interest paid during the tax year. This form is a primary source of documentation and should be retained along with monthly mortgage statements, loan agreements, and closing disclosures. For refinanced loans or home equity borrowing, additional records detailing how funds were used are necessary, as only interest on amounts used for home acquisition or improvements is deductible. Taxpayers who pay points or mortgage insurance premiums should also keep settlement statements and receipts to support their claims. In cases where deductions are spread over multiple years, maintaining a clear record of prior deductions ensures accuracy in future filings.