Is the Mortgage Interest Deduction For Real?

When people talk about the financial benefits of home ownership, one of the big points they typically make is that the interest paid on the mortgage is deductible. This is only semi-true and in any event is not really the big win that many people claim it is. So today I’d like to run through the reasons why the mortgage interest deduction is not always all it’s cracked up to be.
What is a deduction?
A deduction is something that decreases the amount of income on which you are taxed. Let’s say that your taxable income before any deductions is $60,000, putting you in the 15% Federal tax bracket if you’re married and filing jointly. If you have a $1,000 deduction, your taxable income is decreased to $59,000. In the 15% tax bracket, that saves you $150 in taxes (0.15 * $1000).
Some deductions, such as the standard deduction that we’ll discuss below, are simply given to you if you meet certain criteria. But most deductions are the result of expenses that the government has decided to incentivize. In other words, if you spend money on something the government likes, such as your business, that money can be deducted. It’s important to remember here that any money spent, even if it’s deductible, is still costing you. If you are able to deduct a $1,000 expense and you’re in the 15% tax bracket, you’ve still spent $850 when you include the $150 tax savings. So you spent less than if the expense wasn’t deductible, but most of the money is still gone.
How does the mortgage interest deduction work?
The mortgage interest deduction falls into the category of a deductible expense. You are spending money on interest, money that you will never get back. The fact that it’s deductible means that you might spend a little bit less than the full amount, but it’s still an expense.
So what’s the catch with the mortgage interest deduction?
The catch with the mortgage interest deduction is that for many people it may not actually be deductible. For many others it will only be deductible in part. The reason for this is the existence of the standard deduction.
The standard deduction is an amount that the government allows all people to deduct from their taxable income, regardless of their expenses. In 2013 the standard deduction is $12,200 for a married couple filing jointly and $6,100 for individuals or married couples filing separately. Whether you have a mortgage or not, you are allowed to take this deduction.
The only time you wouldn’t use the standard deduction is when you have other deductions that in total add up to a greater amount. There are a number of potential deductions called “itemized deductions” that you can add up to determine whether you would take them or the standard deduction. The IRS source for the topic is here, or you could look at a simpler explanation from TurboTax here. Among the most common itemized deductions are mortgage interest, charitable contributions, property taxes, state and local taxes and medical expenses exceeding a certain threshold. If all of your expenses across these categories add up to more than the standard deduction, you would choose to take those deductions. Otherwise, the standard deduction will be best.
So bringing it back to mortgage interest specifically, that interest is only deductible to the extent that it exceeds the standard deduction when combined with the other itemized deductions. Let’s say that you take out a 30 year, $200,000 mortgage at a 4.5% interest rate. Using Bankrate’s mortgage calculator I see that in the first year of that mortgage, which is the year with the greatest amount of interest paid, you would pay $8,933.99 in interest. For a married couple filing jointly, that’s almost $3,300 less than the standard deduction amount. So even if you had $3,300 in other deductions, they still wouldn’t save you any money because it would simply equal the standard deduction you could have taken anyways. In that case, your mortgage interest would in fact not provide any benefit as a deduction.
If you somehow spent a lot in those categories and had say $8,000 in additional deductions, your total would come to about $16,900, which would allow you to itemize. But that’s only $4,700 more than the standard deduction, so your mortgage interest would still not be fully deductible. You would have to hit $12,200 in itemized deductions on top of the mortgage interest before that interest was fully deductible.
What’s the take away?
The point here is that mortgage interest is not automatically deductible. There are many cases where it may only be partially deductible or not deductible at all. So it shouldn’t be an assumed benefit of home ownership. And even if it is deductible in full, it’s still an expense that simply becomes slightly cheaper because it’s deductible. If you’re paying the interest anyways, having it as a deduction is better than not. But it’s still money leaving your bank account.
Before you buy a house, make sure you’ve really run the numbers for yourself and understand the true financial impact. Don’t rely on popular soundbites that may or may not tell you the whole story.
Photo courtesy of Images_of_Money

Sometimes people are surprised that we aren’t itemizing our tax deductions, but for most married couples buying a modest home it’s just not worth it. You come out ahead using the standard deduction.
Many people, like you, get no benefit from it. Many other people get a much smaller benefit that they might think. The standard deduction is pretty big, especially as you say if you’re married.
We do itemize for a variety of reasons so the mortgage interest deduction does come into play in our household. However, we don’t pay a lot of interest anyways so it doesn’t really make that much of a difference.
When you add your mortgage interest on top of your other itemized deductions, what portion of it is deductible?
Never assume anything with taxes. Yes, it is nice to get the mortgage interest deduction, that one has been on the chopping block more time than I can count.
That’s a good point. Personally I think it’s a ridiculous tax benefit and would be happy to see it go.
Great explanation. I think many people are confused about this topic and just assume that it is a huge savings. As for me, we don’t itemize since we rent but will definitely itemize if we buy. With the cost of any type of housing, we will be over the standard deduction. Heck we are pretty damn close to it now and that is only from state and local taxes. And just read your post on why you don’t own a house yet…very interesting. And the back and forth comments with Matt from Saverocity was like another article in itself. Very timely and relevant posts for me…
I think that one of the big takeaways too is that even if you get it, it’s not truly a “savings”. Sure you pay less interest than you would otherwise, but you’re still paying interest. It’s still a net expense.
I like that someone’s actually reading through the comments on these articles. I agree that the discussion with Matt was a good one. I definitely appreciate it when people can intelligently talk about other points of views, even if I disagree with them. It makes the whole discussion better.
Thanks Matt. I’m learning a lot about the US tax system from reading your blog. In many ways it’s similar to the UK system. Although the UK abolished tax relief on mortgage interest payments back around 1997.
I would like to see the US do the same thing. It doesn’t make a lot of sense to me.
Good points there. The mortgage broker doesn’t always mention that. My tax preparer always says his fees are deductible as well so he’d be happy to raise them if I want to deduct more…
Haha, what a generous guy!
I have a friend who tells his clients that saving money on taxes is always secondary. If you’re basing your decisions on tax deductions instead of personal freedom, you’re not going to get very far. Great tips.
Great point Joe. It’s similar to tax-loss harvesting. It’s a nice tool to take advantage of when you can, but you’d rather just have gains.
My exhusband and I never got any benefit out of mortgage interest. It was never enough interest paid to make any difference. That always made me mad!
That’s definitely frustrating. I don’t think a lot of people realize that that’s a real possibility before they take on the mortgage.
I love my mortgage interest deduction. Living in CA, the housing costs are through the roof (couldn’t resist), so the mortgage deduction gives me a very large refund every year, even though I max out my withholding with my employer.
If the IRS ever does away with the mortgage interest deduction, the CA housing market is going to have some serious problems.
I definitely understand why some existing homeowners would struggle if the deduction was removed. I’m not necessarily in favor of getting rid of it all of a sudden, as I don’t really think that’s fair to the people who planned on it. But I don’t see, as a general rule, why we want to incentivize mortgages. I think that it would be fairly simple to start phasing out the deduction, even if it was just for new borrowers. Going forward the housing market would adjust pretty quickly.
I’ve always considered the primary goal of the mortgage deduction to promote home ownership in order to promote civil stability. It’s to the benefit of the government, not to the citizens.
Homeowners typically don’t move as much, they set down roots and form communities. The government appreciates this because it makes it easier to collect their taxes, and keeps revenue (and other things) more predictable.
I can certainly understand that, but if they’re going to go that route then I would prefer that they do more to keep prices down, not push people into debt. They always take about making homes “more affordable” while artificially pushing down interest rates and therefore propping up prices. Since when is more expensive the same as more affordable? If they really want to help people own their homes then do more to help them own outright.
Getting the deduction is a nice “bonus” but shouldn’t be the sole reason to buy a house. I try to explain to people that if you pay $10K in interest, you aren’t “saving” $10K. You are saving the percentage of your income tax bracket. So if you are in the 25% tax bracket you are only writing off $2,500.
Completely agree. You’re not saving money. You’re still spending it, just a little less than you would otherwise.
Whenever we’ve itemized, I’ve always known that we exceeded our standard deduction and thus were making out better with the mortgage interest deduction. But I doubt I’ve ever dug deep enough to know that that’s all you get from it. Not really too much of an influence is it ..
It really depends on the situation how big an influence it is. Even if it’s better than the standard deduction, it may only be slightly better and most of the interest may in effect still be non-deductible. Of course, to really get the benefit you simply have to pay more in interest. Kind of like buying more than you need at the grocery store just because you get 5% cash back on your credit card. Not a winning strategy.
This is the one financial topic that I seem to have the most conversations about. The amount of misinformation out there on mortgage deductions is staggering, especially considering how simple a concept the standard deduction is. I hear people talking about the mortgage interest deduction actually being a credit, that it’s an above the line deduction, etc. etc.
Anyway, we’ve never itemized and I doubt we ever will unless we start giving gobs of money away to charities. If that happens, I assume we’ll be pretty rich, so I welcome that opportunity to itemize!
I hope you get that rich! I agree that there’s a lot of misinformation out there. It bothers me to no end when someone blindly cites the benefit of the mortgage interest deduction. I think it’s often either used as a sales tool or as a way to justify a purchase that maybe wasn’t as well thought out as it should have been.
Hey –
My family recently bought our first house, and discovered about 3 months too late that there IS such a thing is a (federal) tax CREDIT for mortgage interest as well. You have to file some extra paperwork at closing, but in my state for example, if you qualify, you can claim up to 40% of your mortgage interest paid as a dollar for dollar actual credit (non-refundable, so similar to the Saver’s Credit), up to $2,000 per year during the lifetime of your loan, is my understanding. (Rules vary based on where you live, but it is a federal credit.) You than deduct that portion of your interest from your itemized deductions (no double dipping) if you itemize. I couldn’t believe I had never heard of this. We meet all the criteria too so it’s really a bummer. Maybe you’ve written about it before, but if not, it would be a great thing to tell young parents about!
I felt better that this guy hadn’t heard of it either, but he has a really informative podcast about it now: https://radicalpersonalfinance.com/305-mortgage-credit-certificates-coolest-mortgage-interest-credit-youve-never-heard/
Like you discuss here, you wouldn’t want to get a mortgage just for some tax perks worth a portion of the interest you’re paying, but if you’re planning on getting one anyway…
Hope this helps someone!
Huh, I didn’t know about this either. Thanks Olivia! Looks like I’ll have to dive in an maybe write a blog post about it. I really appreciate the heads up!
^To follow up, here’s some info straight from the IRS.
https://www.irs.gov/credits-deductions/individuals/mortgage-interest-credit-at-a-glance
To clarify, I don’t *think* you have to itemize to claim this credit.