As humans, we naturally run for the hills when we hear the word taxes. By default, it’s a word that comes with negative connotations – so why should you continue reading a blog about the notably arduous subject? Taxes don’t always have to be a scary thing, especially when it comes to being a homeowner.

Tax deductions are often the topic that catches people's attention. The mortgage interest deduction is one of the valuable deductions provided by the Internal Revenue Service (IRS). In this blog post, we will explore what the mortgage interest deduction is, and why you should claim it on your taxes.

What is the Mortgage Interest Deduction?

The mortgage interest deduction is a tax incentive for homeowners that allows them to subtract the amount of mortgage interest paid from their taxable income. By doing so, homeowners can reduce the amount of taxes they owe. This deduction can be claimed for loans used to purchase or improve your main home, as well as loans for second homes that meet IRS limits.

Why Should You Embrace It?

The potential tax savings resulting from the mortgage interest deduction can indirectly improve your financial situation by reducing your taxable income, lowering your tax liability, and increasing your available cash flow, making it easier to meet your mortgage payment obligations.

The ability to deduct mortgage interest and other related expenses can result in substantial long-term savings over the life of the mortgage. The overall effect of these deductions, especially when combined with other tax strategies, can result in significant tax savings that homeowners can use for other financial goals.

For Example: If a homebuyer purchased a house for  $600,000 with a $480,000 30-year mortgage with an interest rate of 6.5%, their monthly payment would be $3,034 and the annual mortgage interest would amount to approximately $31,000 in their first year. Thanks to the mortgage interest deduction, the homebuyer can deduct this amount from their taxable income when filing their tax return. If the homebuyer falls into the 25% tax bracket, they would be able to reduce her taxable income by $31,000 and save $7,750 in taxes.

Deducting your mortgage interest from your taxes gives you the flexibility to itemize deductions on your tax return. By using itemized deductions, your property taxes can also be deducted.*

For Example: If a homeowner paid $6,000 in property taxes for the year and choose to itemize their deductions, $6,000 can be subtracted from your taxable income. This reduces the amount of income that the government considers when calculating your taxes. Ultimately, it can lower the total amount of taxes you owe or increase your tax refund.

We hope this blog has provided you with positive insights on mortgage interest deduction, and why taking advantage of this incentive can offer invaluable benefits and financial opportunities as a homeowner.

*Woodbridge Pacific Group is not a financial advisor. Please consult a financial advisor or tax professional for further information and assistance. Payment examples do not include taxes, HOA, or insurance. Payment examples are based on a Purchase Price of $600,000; 20% Down Payment $120,000; $480,000 loan amount; 30 Year Fixed Conforming Rate of 6.50% (APR 6.77%); and $3,033.93 monthly mortgage payment. Rates are based on time of publish and are subject to change without notice. There are no guarantees of these rate examples, as rates change daily.