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What is a Home Mortgage Interest Deduction?

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  • Written By: Ken Black
  • Edited By: Andrew Jones
  • Last Modified Date: 15 November 2016
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    Conjecture Corporation
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A home mortgage interest deduction allows individuals who have a mortgage on a first or second home to deduct the interest paid on that mortgage from their income taxes. It is not a refundable tax credit, but it has the ability to possibly lower the income tax liability for an individual. This is an especially common deduction in the United States, as many homes qualify for the deduction. A home mortgage interest deduction reduces the amount of taxable income a taxpayer must declare.

When a person takes out a home mortgage loan, there is an interest rate associated with that mortgage. The purpose of a home mortgage interest deduction is to promote home ownership, which in turn can help the economy by turning houses over and spurring property improvements. The interest rate associated with that mortgage translates to a real amount of money. While many consider that money to be lost, those who itemize their deductions on their tax returns may find they can save significantly by taking advantage of a home mortgage interest deduction.

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In order to take advantage of a home mortgage interest deduction, the homeowner must have a secured debt on a qualified home. Secured debt means the home is used as collateral and could satisfy the debt in the event of a loan default. A qualified home is a home that is either a first or second home, and is not used as an income-generating property. There are some exceptions to this rule. For example, it is possible rent out a portion of a home as long as it is still a primary residence.

The qualification for a home mortgage interest deduction also depends on how much debt a taxpayer has, and how much the mortgage is worth. Generally, U.S. mortgages taken out on or before 13 October 1987 qualify, which is called grandfathered debt. Mortgages taken out after that date qualify for the deduction if the mortgage and any grandfathered debt total less than $1 million US Dollars (USD), or $500,000 USD for those who are married but filing separately. Other provisions may also apply that qualify or prevent the deduction from being used.

The home mortgage interest deduction can also apply to any mortgage insurance premium payments a homeowner must make in connection with the mortgage on a first or second home. In order to take this deduction, the insurance contract must have been issued after the year 2006. The year in which the premiums can be claimed may depend on the year in which they were paid, or the year in which benefits apply if prepaying. For example, if a homeowner prepays mortgage insurance in July for the entire year, half the premium payment could be deducted in the current year, and half could be deducted in the next year.

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