Many U.S. households see about $523 in mortgage interest deduction refunds.
One of the ways government helps to encourage homeownership is by offering certain tax deductions only to homeowners. In fact, the mortgage interest deduction alone is thought to encourage some people to enter into homeownership. A notable characteristic of many mortgage loans is that much of their early lives are composed mostly of interest payments, with little applied toward principal. Depending on your mortgage's principal balance, you may see a significant tax deduction and subsequent refund for some time.
Average Interest Returned
Mortgage Loan Payments
Mortgage lenders are in business to make money, and they charge interest for their loans. Through amortization, as your mortgage ages, more of your payment is applied toward its principal balance and less toward its interest. For example, in the first year of a $100,000 30-year, 4.00 interest rate mortgage, about $4,000 of its $5,700 in total payments will be interest. Your 30-year $100,000 mortgage at 4.00 interest will also cost you about $72,000 in total lifetime interest paid.
Mortgage Interest Deduction
interest you pay on your home's mortgage is fully deductible on your tax return. (The exception is for loans above $1 million; the deduction on these is capped.) In other words, $4,000 in annual mortgage interest reduces your taxable income by that $4,000 amount. For instance, $80,000 worth of taxable income would be reduced to $76,000 if you paid $4,000 in mortgage interest on your home for that year. However, you can only claim the mortgage interest deduction if you itemize your taxes. The Internal Revenue Service says about 25 percent of households claimed mortgage interest in 2010.
Additional Homeownership Deductions
Mortgage interest isn't the only allowable homeownership deduction available to you. Any property taxes you paid on your primary residence are deductible, as are any points you paid to obtain a better mortgage loan interest rate. Points paid on mortgage loans to purchase your home are fully deductible in the year that you paid them. You can also deduct points you paid if you refinanced your mortgage, though they're gradually deducted over the entire life of your refinanced loan.
Additional Homeownership Expenses