If I Buy a Home for $300,000 How Much Mortgage Interest Can I Deduct?  

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Let’s say you put down 3.5% down on a FHA loan and pay mortgage insurance monthly as well and want to know how much mortgage interest you can deduct under the new laws. For decades, one of the advantages of home ownership was the ability to deduct mortgage interest from your tax return. While home owners can still do this, the Tax Cuts and Jobs Act passed by Congress at the end of 2017 made major changes to the rules about how much home owners can deduct from their taxable income. Below is more information about the new tax rules and how much you can deduct in mortgage interest.

home loan interest

Overview of Interest Deductions on Home Loans in 2018

In 2018 and beyond, Americans are able to deduct the interest that they pay on their first mortgage up to $750,000 in new debt. Married couples who file separately can claim up to $350,000 each for their mortgage interest deduction. This is a decrease from the past which was $1 million for the single filer and married couples filing jointly, and $500,000 for the married couple filing separately. Up until 2025, the new limits will not apply to loans that were originated before December 15, 2017.

It is also important to note that mortgage interest deductions for other home equity debt, such as second mortgages, was eliminated; it used to be $100,000.

In the short run, the changes only affect those who take out new home loans. If you bought a home before Dec. 15, 2017, you can deduct your mortgage interest up to $1 million, until 2025. Even if you decide to refinance your mortgage, the previous limit applies as long as the debt was taken before Dec. 15, 2017. Also, people who closed on their home loan prior to Jan. 1, 2018 can use the previous limit of $1 million if they bought the home before April 1.

The new tax law has reduced the advantage of itemizing your mortgage interest instead of taking the standard deduction. For many Americans, the new standard deduction of $24,000 for married couples filing jointly is better than taking the mortgage interest deduction.

Example: Let’s assume you have a mortgage for $300,000 and you put down 3.5%, so the amount financed was $289,500. If you have a 30-year fixed rate mortgage at 4.5% (typical rate in June 2018), you will be able to write off approximately the mortgage interest below in the first five years:

  • $12,954
  • $12,739
  • $12,514
  • $12,279
  • $12,033

If this is a married couple filing jointly, they would be better off to take the standard deduction of $24,000. The only exception would be if the couple has a lot of other deductions to put them over $24,000, such as charitable donations, business expenses, college expenses and childcare expenses.

Predictions Are That Far Fewer Will Itemize Mortgage Interest Paid on Home Loans

According to a CNBC report, it is expected that far fewer Americans will itemize their taxes because of the higher standard deduction. It is estimated that approximately 14 million taxpayers will take the mortgage interest deduction under the new rules, compared to 32 million in 2017. That is a drop of about 57%. For people with an income of $75,000 to $100,000, there were 4.5 million tax returns taking the mortgage interest deduction in 2017, and 1.8 million in 2018.

The law changes mean that many home owners will not have a tax advantage over renters as they have in the past. However, it is worth noting that with the increase in the standard deduction, at least some home owners will see little change in their taxes owed and may actually end up paying less.

It is worth remembering that while the mortgage interest deduction has been an important advantage of owning a home, there are many others. Millions of Americans do not just buy a home to enjoy tax advantages. They want to have a home of their own and be part of their community for the long term. They also want to have equity build up in their property, which they do not get from renting. So, if you are down about losing some of your mortgage interest deduction benefits, remember there are many other good reasons to own a home.

About Tom Murphy

Tom Murphy grew up in La Jolla, California surfing and carving his niche in the local real estate market. Mr Murphy has a stellar record as a loan officer with over a decade of experience helping people secure the right home loan. He now works at Movement Mortgage in Carlsbad CA.