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How Do Principal and Interest Work with Tax Deductions?

What you'll learn: Are you eligible for mortgage interest tax deductions? Learn more here.

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October 14, 2022

How Do Principal and Interest Work with Tax Deductions? Is That a Factor When Getting a Mortgage?

The transition to homeownership often comes with an array of new expenses: mortgage payments, real estate taxes, insurance, property repairs, home improvement projects… The list goes on and on. With costs running high, it’s no wonder many homeowners are relieved to learn about mortgage tax benefits. Read on to learn how homeownership can help you save money come tax time.

Mortgage tax deductions

Deductions reduce the amount of your taxable income – a goal for many American taxpayers. But what tax deductions for homeowners are available?

Can I deduct principal payments?

The principal of a mortgage is the amount you borrow for the loan. Your mortgage payments that go toward the principal reduce the loan balance. These payments are not tax deductible.

Can I write off mortgage interest?

In many cases, yes. The mortgage interest tax deduction is a favorite among homeowners because so much of mortgage payments go toward interest — especially in the first years of the loan.

The Internal Revenue Service (IRS) documents rules for mortgage interest tax deductions in Publication 936: Home Mortgage Interest Deduction . Generally, you can deduct the entire interest portion of your mortgage payment if you itemize your deductions on Schedule A (Form 1040).

To be deductible, the interest you pay must be on a loan secured by your main home or a second home, regardless of how the loan is labeled. The loan can be a first or second mortgage, a home improvement loan, a home equity loan, or a refinanced mortgage.

However, there are mortgage deductions limits to be aware of:

Loans taken out after December 15, 2017 – limit of $750,000 ($375,000 for married couples filing separately)
Loans taken out on or before December 15, 2017 – $1 million ($500,000 for married couples filing separately)
Loan proceeds not used to buy, build, or substantially improve your home – not eligible unless the loan was taken out before October 13, 1987; see IRS Pub. 936
Loans exceed the fair market value of the home; see IRS Pub. 936

What other home expenses can I deduct?

Homeowner tax benefits go beyond traditional interest payments. Here are a few benefits you may want to take advantage of:

Mortgage Insurance – Qualified mortgage insurance includes those required through Department of Veterans Affairs (VA) loans, Federal Housing Administration (FHA) loans, and private mortgage insurance (PMI).
Points – The mortgage points tax deduction includes loan origination fees and discount points. Because they are prepaid interest, these items are deducted over the life of the loan and not all in the year you paid them.
Real Estate Taxes – The deduction for state and local taxes, including real estate taxes, is limited to $10,000 ($5,000 for married couples filing separately).

Standard vs. itemized deductions

It’s important to know there are two deduction options on your federal tax return. You can either take the standard deduction or itemized deductions.

Here are the standard deductions for 2022:

Single or married individuals filing separately – $12,950
Married couples filing jointly – $25,900
Head of household – $19,400

The only way to claim the mortgage tax credits we’ve discussed is if you itemize deductions. If you decide to itemize, be sure your total deduction is greater than the amount of the standard deduction. We recommend using a mortgage interest tax calculator if you’d like to estimate your deduction, and consult a tax advisor before making a decision.

Remember, the goal is to choose the option that saves you more money.

The IRS details the type of expenses homeowners can and can’t deduct in Publication 530: Tax Information for Homeowners.

For more information about PenFed Mortgages:

PenFed Mortgage:

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Disclosures

¹Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 30_YEAR_FIXED_CONFORMING_POINT discount point, which equals percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 75%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.

^*Prime Rate is RV Prime Rate % as of Boat Prime Effective Date . The APR for this Home Equity Line of Credit (HELOC) is based on prime plus a margin and can change monthly. Fixed Rate Advances will be amortized over the Fixed Rate Advance Term, with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin, and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than 1020 ELOC OO CLTV 70 Rate % for primary residences and second homes.

Annual Fee: Notwithstanding the foregoing, an annual fee of $99 will be assessed on each account anniversary.
Home equity lines of credit (HELOC) are variable rate loans and the interest rate is subject to increase after consummation of the loan on monthly basis. Closing costs range between $500 and $8,500 for credit lines of $500,000. Contact a representative for additional details.

Appraisals: PenFed will attempt to establish value via an independent method. If that method is unsuccessful, or the value is not sufficient for the amount requested, an appraisal will be required regardless of CLTV. An appraisal is always required in the following circumstances:

For all loans with a loan amount greater than $400,000.

If an appraisal is required, it must be ordered by PenFed. You will be contacted for authorization and payment prior to ordering. Appraisal fees average $550 to $850 (some run higher).

Closing Cost Credit: PenFed will pay most closing costs associated with a home equity line of credit (HELOC), which includes credit report, flood certification, settlement/closing, property ownership and encumbrances search, recording, property search, and quick close. Member is responsible for any city, county, and/or state taxes if the subject property is located in FL, LA, MD, MN, NY, TN, or VA. If an appraisal is required, the member, who is responsible for the fee whether or not the loan closes, will pay the cost.

Interest may be tax deductible, consult a tax advisor for further information regarding the tax deductibility of interest and charges.

Fixed Rate Advance Lock-In You may lock in an Annual Percentage Rate for Advances during the Draw Period. During your Draw Period, you may choose to have three separate Fixed Rate Advances locked in at any one time, with a maximum of two new Fixed Rate Advances per calendar year. Each Fixed Rate Advance must equal or exceed Ten Thousand Dollars ($10,000.00) and you may not request a Fixed Rate Advance that would cause the amount you owe to exceed your Credit Limit. The only term option for your Fixed Rate Advance is 240 months (“Fixed Rate Advance Term”). However, the term of your Fixed Rate Advance cannot exceed your Repayment Period.

Fixed Rate Advances will be amortized over the Fixed Rate Advance Term with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than 1020 ELOC OO CLTV 70 Rate % for primary residences and second homes and 4.75% for investment properties.

Property Insurance: Property insurance is required.

Multiple PenFed Loans: Multiple PenFed Equity loans and HELOCs are available as long as the member and collateral qualify (except Texas). For Equity loans and HELOCs the total indebtedness cannot exceed $500,000 for all PenFed Equity and HELOCs combined.

PenFed does not lend on:

Mobile homes
Co-ops or time-shares
Properties that are currently listed on the market for sale
Commercial property or property used for commercial purposes, even if a residence is part of the property
Undeveloped property (land only)
Properties with more than 4 units

Properties that are currently under major construction/renovations: Property must be fully livable, with no safety issues. (Examples: no missing rails from stairs/decks, no open walls with wires showing, missing kitchen appliances/counters, missing bath fixtures or unfinished pool).

Additional limitations may apply

Home Equity Line of Credit:

This Account has a Draw Period of 10 years, followed by a repayment period of 20 years.
If only minimum payments are made during the draw period, the loan balance will not decrease.
In Texas, the maximum CLTV available is 80% on owner occupied properties. Additional restrictions apply in Texas, so please ask a representative for details.
In all other states, the maximum CLTV is 85% on owner occupied properties and second homes. Additional restrictions or requirements may apply based on application characteristics.
Property type of Condo has a maximum CLTV of 80%.
The maximum CLTV available is dependent on credit qualification.
Rates vary depending on owner occupancy and CLTV and other loan criteria.

Minimum Loan Amount Requirements in all States:

For an owner occupied property or second home the minimum loan amount is $25,000 and the maximum amount is $500,000 with a CLTV of 85% or less of the fair market value.

Other terms and conditions apply; call 844-918-4307 to speak with a representative for details. All rates and offers are subject to change without notice. To receive advertised product, you must become a member of PenFed.

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How Do Principal and Interest Work with Tax Deductions?