Mortgage Interest Deduction $750,000 Cap Becomes Permanent
The mortgage interest deduction $750,000 cap is now permanent under federal tax law, ending years of uncertainty for homeowners and prospective buyers. Congress also approved the return of deductible mortgage insurance premiums beginning in the 2026 tax year, reshaping how mortgage interest and other housing-related costs factor into income taxes.
The Tax Cuts and Jobs Act introduced a $750,000 limit on the mortgage interest deduction, which applies to mortgages originated after December 15, 2017. Under Internal Revenue Service guidance, taxpayers may deduct mortgage interest only on the first $750,000 of qualifying mortgage debt, or $375,000 for married taxpayers filing separately.
The cap applies to a primary residence and, in some cases, a second home. Interest payments tied to loan balances above the threshold are not deductible, regardless of the loan’s annual interest rate or repayment structure. For homeowners in higher-cost housing markets, the change permanently reduces the value of the mortgage interest deduction on their homes.
For newer loans, deductible mortgage interest must be calculated proportionally. Only interest tied to the first $750,000 of mortgage indebtedness qualifies, even if the borrower’s monthly payment reflects a larger loan balance or higher principal payments.
The calculation remains unchanged regardless of the lender’s interest rate method. Still, higher borrowing costs can increase the amount of non-deductible interest for borrowers whose loans exceed the cap.
Mortgages taken out on or before December 15, 2017, may qualify as grandfathered debt. These loans remain eligible for interest deductions under the prior $1 million limit if they meet IRS requirements. This distinction continues to benefit long-time homeowners, particularly those with a higher average mortgage balance from earlier purchase years.
Congress also restored a separate tax benefit tied to housing costs. Beginning with the 2026 tax year, certain mortgage insurance premiums may again be treated as deductible mortgage interest.
Mortgage insurance is commonly required when buyers make a smaller down payment, particularly for first-time purchasers using a conventional mortgage loan. These premiums are often bundled into the monthly fee, which raises the overall cost of borrowing.
In addition to interest, some borrowers pay mortgage points at closing to reduce their long-term borrowing costs. When properly structured, points paid to buy or improve a home may also be deductible, subject to IRS rules.
Some homeowners may qualify for a mortgage credit through a mortgage credit certificate issued by a state or local housing agency. Unlike deductions, mortgage credits directly reduce tax liability, though eligibility and limits vary by program.
Late payment charges are generally not deductible, even when listed on a mortgage statement. Taxpayers should also note that electronic payments made toward principal payments do not affect deductible interest calculations.
Mortgage interest and related expenses are reported on Schedule A (Form 1040). Taxpayers rely on Form 1098, also known as the Mortgage Interest Statement, to document interest payments reported by lenders.
Itemized deductions may also include property taxes and specific state and local taxes, though separate limits apply. Taxpayers must compare itemized totals with the standard deduction to determine which approach reduces overall tax liability.
Taxpayers should review their mortgage statements, mortgage terms, and loan origination date before filing their tax return to ensure accuracy. Those who refinanced should confirm whether the refinanced mortgage debt was used for home improvement, as this affects deductibility.
Buyers planning a purchase should consider how a down payment influences future deductions, total mortgage debt, and long-term interest costs. Reviewing documentation before submitting Form 1040 can help prevent filing errors and ensure you don't miss any benefits.
By William Mc Lee, Editor-in-Chief & Tax Expert—Get Tax Relief Now
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