What Qualifies As Mortgage Interest?
There are a few payments you make that may count as mortgage interest. Here are several you may consider deducting:
Otherwise, you have to deduct them ratably over the life of the loan
Interest on the mortgage for your main home: This property can be a house, co-op, apartment, condo, mobile home, houseboat or similar property. However, the property will not qualify if it doesn’t have basic living accommodations, including sleeping, cooking and bathroom facilities. You can also use this deduction if you got a mortgage to buy out an ex’s half of the property in a divorce.
You can still deduct mortgage interest if you receive a non-taxable housing allowance from the military or through a ministry – or if you have received assistance under a State Housing Finance Agency Hardest Hit Fund, an Emergency Homeowners’ Loan Program or other assistance programs. However, you can only deduct the interest you pay. You cannot deduct any interest that another entity pays for you.
Interest on the mortgage no credit check payday loans Knoxville TN for a second home: You can use this tax deduction on a mortgage for a home that is not your primary residence as long as the second home is listed as collateral for that mortgage. If you rent out your second home, there is another caveat. You must live in the home for more than 14 days or more than 10% of the days you rent it out – whichever is longer. If you have more than one second home, you can only deduct the interest for one.
Mortgage points you have paid: When you take out a mortgage, you may have the option to pay mortgage points, which pay some of your loan interest upfront and in advance. Each point, which typically costs about 1% of your mortgage amount, can get you about .25% off your mortgage rate. Mortgage points are paid at closing and must be paid directly to the lender to qualify you for the deduction. In certain instances, points can be deducted in the year they are paid. If you have questions, you should consult a tax professional.
Late payment charges on a mortgage payment: As long as the charge wasn’t for a specific service, you can deduct late payment charges as home mortgage interest. However, just because you can deduct this, you should still never make late payments to your mortgage; doing so can result in damage to your credit score, along with other penalties.
Prepayment penalties: Some lenders will charge you if you pay off your mortgage early. If you have to pay a prepayment penalty, you can deduct that as mortgage interest. However, the penalty must be from paying the loan off early and cannot be from a service or additional cost incurred from the loan. Rocket Mortgage® doesn’t charge prepayment penalties.
Interest on a home equity loan: A home equity loan is money borrowed from the equity you have in the home. You can receive it in a lump sum or a line of credit. For the interest you pay on a home equity loan to qualify, the money from the loan has to be used to buy, build or “substantially improve” your home. If the money is used for other purposes, such as buying a car or paying down credit card debt, the interest isn’t deductible.
Interest you pay before you sell the home: If you sell your home, you can still deduct any interest you paid before the home was sold. So, if you sold the home in June, you can deduct interest you paid January through May or June, depending on when you made your last mortgage payment on the home.