Which Mortgages Can Save You Money on Taxes?

If you are in the market for a new home, congratulations! It is an exciting time. But before you sign on the dotted line, make sure you know which kinds of mortgages offer the best tax benefits and savings for your situation. After you read this article, you will have a better idea of how to choose the right mortgage, you will be better prepared when it is time to file your taxes, and you may ultimately save money on monthly payments and taxes.

Remember, it is always a good idea to check with a tax professional regarding your unique situation.

Most common types of mortgages—the tax advantages and disadvantages of each

Fixed-rate mortgages

How they work: Fixed-rate mortgages have the same interest rate over the life of the loan. They do not have the lowest interest rates, so you may spend more on interest payments during the repayment period, but your monthly payments will be predictable.

Tax advantages and disadvantages: This is a fairly standard loan and has no special tax advantages or disadvantages.

Adjustable-Rate mortgages (ARMs)

How they work: Adjustable-rate mortgages have fluctuating interest rates. Typically, there is an initial low interest period and then the rate adjusts periodically based on current interest rates. The low introductory rate means you could pay less in interest depending on how often the interest is adjusted and how long you stay in the home.

Tax advantages and disadvantages: Because your interest rate changes, your monthly payments will change which will impact both your budget and how much you can deduct from your taxes.

Department of Veterans Affairs (VA) loans

How they work: VA loans are mortgages from private lenders, but are backed by the VA. They are exclusively for active military members, veterans, and eligible spouses. VA loans tend to have less stringent credit requirements and lower rates and they do not require a down payment or private mortgage insurance (PMI).

Tax advantages and disadvantages: A recent change in tax law means that as of 2022, homeowners can no longer write off PMI expenses. VA loans do not require PMI, which gives you a big tax advantage.

Federal Housing Administration (FHA) loans

How they work: FHA loans are mortgages from private lenders, but are backed by the U.S. government. The interest rates are low and require down payments as low as 3.5%. FHA loans have less stringent credit guidelines than many mortgages and are often popular with first-time homebuyers.

Tax advantages and disadvantages: This is a fairly standard loan and has no special tax advantages or disadvantages.

Jumbo mortgages

How they work: As of 2026, conventional loans limit the amount you can borrow to $832,750 or less in most counties and may be as high as $1,249,125 in high-cost counties. If that is not enough to pay for your dream home, you will need to get a jumbo mortgage that lets you borrow more. These mortgages typically require a higher credit score and a better debt-to-income ratio than other loans.

Tax advantages and disadvantages: For tax purposes, it is best to avoid loans higher than $750,000 (or $375,000 if you are and married and filing separately), because you likely will not be able to deduct all of your mortgage interest from your taxes.

Other types of loans—the tax advantages and disadvantages of each

Joint mortgages

How they work: A joint mortgage is a mortgage agreement that is shared by two or more borrowers. In a joint mortgage agreement, all people apply for the loan together and all are responsible for repaying it. These can sometimes be easier to qualify for because they consider all applicants in totality. The applicants’ income, assets, debts, and credit scores are considered together. This can help you get approved for a larger loan or make up for a partner with a lower credit score.

Tax advantages and disadvantages: This is a good deal for couples who file their taxes separately, as well as family or friends who buy a house together. And, the joint mortgage holders can split the mortgage income tax deduction based on the amount each party actually paid.

Construction loans

How they work: These loans are used to finance building a new home. They are typically short term with a variable interest rate.  During the construction period you often only have to pay interest, which makes them a good way to start building.

Tax advantages and disadvantages: You can deduct mortgage interest on a construction loan, following the same rules as an ordinary mortgage, as long as you move into the house within 24 months of getting the loan.

Second home mortgages

How they work: All of the tax breaks that are available for a first home are available for a second home, with the same limits. Be aware, however, that your second home must be a true second home—not a rental property—to qualify for any home mortgage deductions. You can rent your home out for up to 14 nights, but no more, if you want to take traditional homeowner deductions.

Tax advantages and disadvantages: If you have a second home that is only used as a rental, you can deduct costs as business expenses (form 1040 Schedule E), but not as typical mortgage interest expenses.

Mortgage modifications

How they work: A mortgage loan modification is a change in your loan terms, usually due to financial hardship. Modifications may involve extending the number of years you have to repay the loan, reducing your interest rate, forbearing, or reducing your principal balance.

Tax advantages and disadvantages: If your lender forgives some of your debt, it typically has tax consequences, requiring you to pay taxes on the forgiven debt.

Home loan refinances (refis)

How they work: Refinancing means taking out a new loan with different terms to pay off your existing mortgage. This could help lower your interest rates and reduce monthly payments, though you will have to pay closing costs on the new loan.

Tax advantages and disadvantages: Due to the passage of the 2018 Tax Cuts and Jobs Act (TCJA), your tax liability will change if you have a loan that goes over the current limit of $750,000 (or $375,000 if you are married and filing separately), preventing you from deducting mortgage interest on debt in excess of those numbers. Existing loans are granted an exception on previous rates of up to up to $1 million (or $500,000 if you are married and filing separately). Refinances of grandfathered loans that do not increase the principal balance will keep your grandfathered status as well.

Beyond that, your tax benefits will stay the same. You can write off interest and property taxes (up to a certain amount) as well as any points you bought to reduce your interest rate.

Home equity loans and lines of credit (HELOCs)

How they work: These are ways to borrow against the equity in your home to gain easy access to cash. Because they typically have lower interest rates, they are great for paying down debt, financing college education, or paying for home improvement projects.

Tax advantages and disadvantages: The 2018 Tax Cuts and Jobs Act (TCJA) prevents you from deducting the cost of interest on a home equity loan or a home equity line of credit unless it is used for home improvement. While you can still spend the money on anything, the total cost of borrowing will be higher if you are not using the money on projects that help boost your home’s equity.

Other types of property transactions—the tax advantages and disadvantages of each

Land purchases

How they work: If you are buying land, you will be getting a land loan rather than a traditional home mortgage. Like other kinds of mortgage investing, these loans usually require a larger down payment—anywhere from 20% to 50%—and have a higher interest rate.

Tax advantages and disadvantages: The tax implications of purchasing land depend on its purpose. If you are buying it to build a home, you may be able to write off the interest just like a standard home mortgage (as long as you will be moving into the home within 24 months). If you are buying as part of an ongoing real estate business, you may be able to deduct interest and other expenses as business expenses.

Investing in real estate

How it works: If you are investing in real estate to rent or to flip, you will find getting a mortgage is more expensive. Mortgages for investment properties typically require a larger down payment—think of 20% as a minimum—often with higher interest rates and credit score requirements.

Tax advantages and disadvantages: There are tax perks associated with real estate investment properties, including tax deductions for rental properties.

Answers to common questions

Is there a first-time homebuyer tax credit?

The first-time homebuyer credit was available in 2008, 2009, and 2010, offering qualified first-time buyers tax credits of up to $8,000. However, this was not just free money—it needed to be repaid over 15 years by filing Form 5405.

Congress introduced the First-Time Homebuyer Act on April 28, 2021. It makes homeownership more affordable for low- and middle-income Americans. However, this bill has yet to become law.

That means that there is currently no federal first-time homebuyer tax credit available. However, you may qualify for state-level tax credits. Additionally, many other programs and tax savings exist on the state level to help first-time homebuyers.

Are there tax deductions for rental properties?

Yes. Rental properties come with a number of tax differences, including potential write-offs.

• Mortgage interest is deductible, though it must be claimed as part of the expenses related to the property on form 1040 Schedule E rather than with your home mortgage interest deduction.

• Business expenses are deductible, including advertising and maintenance costs, again, on form 1040 Schedule E. These expenses must be typical for the rental industry to be deductible.

• If you are losing money renting a property and you are not a real estate professional, you may be able to write off some of your losses.

• The cost of the structure is depreciable for tax purposes (but not the land it is on).

But investment properties make money, too, and that must be reported as income. If you sell an investment property, it will also typically qualify for capital gains taxes, or short-term capital gains taxes if you have owned the property for less than a year.

Are moving expenses tax deductible?

The Tax Cuts and Jobs Act of 2017 eliminated the deduction for moving expenses for most taxpayers between 2018 and 2025, except certain members of the armed forces and their families. After that, the rules will revert to previous tax law. Bear in mind that if you move and are reimbursed for expenses by your employer, that reimbursement will be considered taxable income—again, with exceptions for military members.

What is the mortgage interest deduction limit?

The IRS allows you to deduct up to $750,000 of the interest you pay on your home loan if you are a single filer or married and filing jointly (limit is $375,000 per person if you are married and filing separately).

Is HELOC interest tax deductible?

Only if you used the money to buy, build, or improve your home, and if you itemize your deductions when you file your taxes.

Please consult a tax professional if you have questions

Please keep in mind that this article only provides some tax basics; however, the tax laws are ever-changing, and every person’s individual situation is different.  Please consult a tax professional for all of your tax-related questions.