beginners question on mortgage interest and taxes?

Question

lets assume the purchase price of a house will be $1mio. (just to have a nice, round number). i put down $400K / get a mortgage for $600K. the monthly payment, assuming 6.5% on a 30 year fixed loan, will be about $3800. of that, $3200 will be payment towards interest and the remaining $600 will be towards principal (i think i have the amortization schedule correct.)

now, the yearly interest paid ($3200 * 12 months) will be around $38K. when i file my taxes next year, i am told i can deduct the interest that was paid on my taxes. does that mean i will get the $38K back in the form of a refund?

Answer 1

Hello, Peter! Mortgage interest and real estate taxes are itemized deductions, which you can use to reduce your taxable income. It would indeed lower the amount of tax you owe, which might even result in a refund, but the refund difference won't be dollar for dollar what you paid in mortgage interest and taxes. Only a credit is a dollar-for-dollar tax reduction.

Incidentally, the interest portion of your monthly $3,800 will slowly decrease as you pay off the loan, so you can't just say "$3,200 x 12." I just ran a sample amortization schedule, and the interest portion of your payment in the first year would go from around $3,250 in Month 1 to $3,220 in Month 12. Your amortization schedule should have it broken down so you can see how much interest you will have paid at the end of each year.

For more information, the IRS has compiled Publication 530 (linked below) especially for first-time homeowners. I strongly recommend you check it out. Good luck! :-)

Answer 2

What you will get will be a 1098 at the end of the year from the bank that you borrow the money from. They will list on it the interest you paid to them for the year, and also Real estates taxes paid if they pay the taxes for you (it would be included in your monthly mortgage payment to them), and if you paid any points (paid up front fee to get a lower interest rate) to them they may list that on the 1098 form. You can report the interest paid, the real estate taxes paid, and the points paid (as long as they are not for refinancing your mortgage), on Schedule A - Itemized deductions. Those plus other deductions on the Schedule A need to be added together to see if they exceed your standard deduction (it differs depending on your filing status and your age or if legally blind). If you're able to itemize, they will help to reduce your taxable income. So no, you don't get the $38K back in the form of a refund, and your interest amount that you pay each month will decrease and the principal amount will increase.

Answer 3

No, you can subtract the total of your itemized deductions before you figure your taxes. What you actually save would be the itemized deductions minus the standard deduction for your filing status, times your tax bracket, or less.

In your example, say you're married filing a joint return, and you already have enough deductions to itemize before the mortgage interest, so the standard deduction is already replaced. Say also that you're in a 25% bracket. Then you'd save $9500 in taxes assuming your tax liability is at least that much - if your total tax is less than that, then the mortgage interest would reduce your tax to zero.

By the way, interest doesn't stay steady over the life of the loan, it decreases with each payment as your principal if paid down, but your assumption is close for the first several years.

Answer 4

When you file your tax return you have to itemize the mortgage interest payments and you get a deduction for the same. It's not dollar for dollar and depending upon your income you could get a refund or have your taxes reduced significantly. Good luck.

Answer 5

No, your taxable income will be reduced by that amount. Actually, your taxable income will be reduced by the difference between your itemized deductions and the standard deduction amount for your filing status. Your tax savings will be based upon your marginal tax rate as applied to that amount.

Let's say that you're filing MFJ and your standard deduction is $10,700 (2007 amount). If your only itemized deduction was the mortgage interest and it was $38,000, the value of the tax deduction would be $27,300. If your marginal tax rate was 28% your tax savings would be $7,644.

Make sense now?

Answer 6

No. There's a difference between a deduction (which reduces your net taxable income), and a credit (which directly reduces the amount of tax you pay)

The mortgage interest deduction is a deduction, not a credit.

Answer 7

No, that amount would be added to your itemized deductions which in turn reduces your taxable income.

Answer 8

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