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Many homeowners wonder if they should keep their mortgage solely for the tax benefits The mortgage interest deduction allows you to reduce your taxable income by deducting the interest paid on a home loan secured by your primary residence or second home. This tax break makes homeownership more affordable for millions of Americans However, the deduction has diminished in value due to tax law changes. You may be better off paying off your mortgage early despite losing the tax break. Here’s what to consider when deciding whether to keep a mortgage for the interest deduction.
How the Mortgage Interest Deduction Works
The mortgage interest deduction lets you subtract your yearly mortgage interest from your taxable income if you itemize deductions on Schedule A of Form 1040. This reduces your tax liability and increases your refund. There are a few rules:
- The mortgage must be secured by your primary residence or a second home. This includes traditional mortgages, home equity loans, and home equity lines of credit.
- Interest on home loans up to $750,000 qualifies ($375,000 if married filing separately).
- The home’s proceeds must be used to buy, build, or substantially improve the home.
- You must itemize to claim the deduction. You can’t claim it if taking the standard deduction.
So if you pay $15000 in mortgage interest in a year and fall into the 22% tax bracket, the deduction saves you $3300 (15,000 * 0.22). Without it, you’d pay taxes on that $15,000.
The Tax Deduction Benefit Has Declined
Several tax law changes over the past decade have reduced the savings from the mortgage interest deduction:
- The standard deduction nearly doubled. Fewer taxpayers now itemize and can claim the mortgage interest deduction.
- The state and local tax (SALT) deduction was capped at $10,000. With fewer itemizable expenses, more taxpayers take the standard deduction.
- The mortgage limit fell. You can only deduct interest on the first $750,000 of mortgage debt.
For many, the standard deduction yields a larger tax break than itemizing. Claiming the standard deduction while paying off your mortgage may save more money overall.
Other Reasons to Pay Off Your Mortgage Early
Aside from tax law changes, several other factors support paying off your home loan ahead of schedule:
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Interest makes up a smaller portion of payments over time. When you first get a mortgage, most of your payment goes toward interest. But as you pay down the loan, more goes to principal. The deductible interest decreases.
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Paying interest to save taxes loses money. If you pay $15,000 in mortgage interest to save $3,300 in taxes, you are still out $11,700. It’s better to pay off the loan and avoid that interest.
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A paid off home provides safety. Owning your home free and clear gives you security and stability. You reduce housing costs and won’t risk foreclosure if you lose your income source.
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Equity can be accessed tax-free. Home equity loans let you tap into your home’s equity. If used for home improvements, the interest is tax deductible. If used for other purposes, the borrowed money is not taxed.
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Investing early mortgage payoff funds earns more. If investing the money instead of paying extra on your mortgage, the potential returns may exceed the interest savings from keeping the mortgage.
When You Might Want to Keep the Mortgage
Depending on your tax situation and goals, keeping your mortgage could make sense:
- Your itemizable expenses exceed the standard deduction.
- You’re in a high tax bracket and the deduction provides substantial savings.
- You have sufficient emergency savings and low-rate debt.
- You need liquidity and access to cash flow more than equity.
- You can earn a higher return investing extra funds than the mortgage rate.
Run the numbers for your situation before deciding. If the savings from the tax deduction are minimal, letting go of the mortgage may be the smarter financial move overall.
Strategies to Maximize the Interest Deduction
If you want to keep the mortgage for tax purposes, here are some tips to maximize the value of the interest deduction:
- Pay enough to itemize deductions. Accelerate charitable giving or medical expenses as needed.
- Get the most expensive house you can afford and qualify for. A bigger loan means more deductible interest.
- If rates drop, refinance your mortgage for a lower rate. This increases the amount applied to deductible interest.
- Make just the minimum monthly payment. Paying extra principal reduces your deductible interest amount.
- Use a home equity loan or line of credit to consolidate higher-rate debts. This makes more of your interest deductible.
Review your tax situation yearly and re-evaluate whether keeping the mortgage continues to provide meaningful savings compared to paying it off. With proper planning, you can make the most of the mortgage interest deduction.
The mortgage interest deduction is not as valuable as it once was due to tax law changes and the decline in itemizing. While keeping a mortgage solely for the tax benefits may seem beneficial, you’re often better off eliminating the debt. Run the numbers to see if the tax savings outweigh the benefits of paying off your home loan early based on your personal situation. With strategic planning, you can maximize the value of the deduction if you choose to keep the mortgage.
How much mortgage interest can I deduct?
The mortgage interest tax deduction allows you to deduct interest paid on up to $750,000 of eligible mortgage debt — or up to $375,000 if married filing separately — from your federal taxable income. This applies to mortgages obtained after Dec. 15, 2017.
If you got the mortgage after Oct. 13, 1987 and prior to Dec. 16, 2017, you can deduct the interest paid on up to $1 million of eligible mortgage debt, or up to $500,000 if married filing separately. If you got the mortgage on or before Oct. 13, 1987, there is no cap. Mortgage Icon
If you were under contract on a home before Dec. 15, 2017, and the mortgage closed prior to April 1, 2018, you’re considered to have gotten the mortgage prior to Dec. 16, 2017.
These rules are the result of the Tax Cuts and Jobs Act of 2017. Many of the provisions of this law expire on Dec. 31, 2025, so the rules could change again for tax year 2026 and beyond.
The deduction applies to all mortgages on what the IRS deems “qualified” homes. This includes your main or primary home and a second home, provided you don’t rent out the second home, or you rent it for a portion of the year, but also use it yourself in that year. Calculator:
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- The mortgage interest tax deduction allows you to deduct interest paid on up to $750,000 of eligible mortgage debt on your annual federal tax return, or up to $375,000 if married filing separately.
- The mortgage interest deduction also applies to the interest on HELOCs or home equity loans, provided you used the funds to buy, build or improve the property.
- To claim this deduction, you’ll need to itemize; you cannot take the standard deduction.
The mortgage interest tax deduction benefits some homeowners, but it might not make sense to take advantage of it if you paid less in mortgage interest than the standard deduction.
Why The “Tax Benefit” Isn’t Worth Keeping A Mortgage
FAQ
Is it better to pay off a mortgage or keep it for tax purposes?
If you use extra cash to pay off your loan, the opportunity cost could be the bigger returns—and compounding growth—investing that money long term could have earned. Give up a tax deduction: If you itemize your tax deductions, eliminating your mortgage would also remove your mortgage interest deduction.
Do you get a bigger tax return if you have a mortgage?
Despite the hype, the overwhelming majority of homeowners receive no tax break at all from the mortgage interest tax deduction. They must itemize their deductions when determining their income tax liability to qualify for the deduction and claim it.
What are the tax benefits of holding a mortgage?
The main tax benefit of owning a house is that the imputed rental income homeowners receive is not taxed. Although that income is not taxed, homeowners still may deduct mortgage interest and property tax payments, as well as certain other expenses from their federal taxable income, if they itemize their deductions.
How does having a mortgage affect your tax return?
You can deduct the mortgage interest you paid during the tax year on the first $750,000 of your mortgage debt for your primary home or a second home. If you are married filing separately, the limit drops to $375,000.