The IRS provides a tax deduction for mortgage interest to encourage home ownership in the United States. In most cases, according to the IRS, you can deduct all of your home mortgage interest. How much you can deduct depends on the date of the mortgage, the amount of the mortgage and how you use the mortgage proceeds.

Time Frame and Size

For mortgages taken out after Oct. 13, 1987, the home mortgage interest deduction is limited to the interest on the first $500,000 of the mortgage. If you are married and file a joint return, the limit increases to $1 million. On mortgages taken out on or before October 13, 1987, there is no limit on the size of the mortgage.

Form 1098

At the end of the year, you will receive a Form 1098 from the financial institution in charge of your mortgage that tells you how much of your payments went toward interest and how much went toward paying down the principal of the loan.

Tax Brackets

The amount of money your mortgage interest deduction saves you depends on your marginal income tax bracket. For example, if you are in the 25 percent bracket, being able to deduct $10,000 would save you $2,500 on your taxes. However, if you are in the 35 percent bracket, that same $10,000 deduction would save you $3,500 in taxes.

Considerations

The mortgage interest tax deduction is an itemized deduction, which means you must give up the standard deduction and file Form 1040 and attach schedule A in order to claim the deduction. Plus, as you get closer to paying off your mortgage, the interest deduction goes down because your payment is being applied less toward the interest and more toward the principal.

Qualifications

In order for a loan to qualify for the mortgage interest deduction, you must be liable for the loan and the loan must be secured by your primary home or a secondary home that you use for at least 14 days per year (or 10 percent of the time that you rent it out, whichever is greater). If you use an unsecured loan for purchasing a home, you cannot deduct the interest as mortgage interest.

Source:

Investopedia--Mortgage Interest

Kiplinger--Tax Breaks for Buying a Home