Mortgage Interest Tax Deduction Calculator

Taxes can be something you dread, but if you own a home, you may find they are not so bad, especially in the early years of owning that home. That is because you can actually save money through tax deductions for the interest you are paying on your mortgage loan. While you won't get back all of your home loan payments, a considerable amount of money is yours to use as you need. Best of all, you can enjoy this benefit for as long as you are paying interest on your loan.

Learning how to use your mortgage for tax benefits is important. Always work closely with your tax professional to help you accomplish this and get the most tax advantages from your home. A mortgage tax deduction calculator can show you how much you are likely to be able to deduct, though. Use it as a tool to guide your estimates.

How Interest Works On Your Mortgage

Before estimating how much a tax deduction is likely to save you, understand how interest is calculated on your mortgage. In the beginning years of your loan, each payment includes far more interest than principal. Your payment is split, and the way it is calculated benefits the lender rather than you: the more principal left on your loan, the more interest builds on that principal. The takeaway is that in the first years of homeownership you pay much more interest than principal, which means you are more likely to save money on your taxes in the early years of your mortgage than in the later ones.

How Much Can You Deduct?

If you itemize your taxes, you will likely see a benefit from your mortgage interest. A portion of the amount you paid in interest to your lender over the year is tax deductible. These funds are allowed to come back to you in the form of a tax deduction. Now, the question is, how much can you get back?

The best way to find out is to enter your specific loan scenario into a mortgage calculator built around tax deductions for mortgage interest. This gives you the exact number you are likely to get for your tax deduction. Here is an example of a common scenario.

If you have a mortgage in the amount of $250,000 with an interest rate set at 6.5 percent and a loan term of 30 years, here's what you will get to write off as a tax deduction:

As you can see, the tax deduction for your interest shrinks as time goes by. The reason is simple: toward the end of your loan repayment period, you are paying nearly all principal and little interest on the loan (you've already paid most of the interest during the early years of the loan, of course!). Nevertheless, this is a significant write-off you should not miss on your taxes each year.

Be sure to take the time to work with your tax professional to learn what you specifically can write off as a deduction on your interest. Not everyone sees the same savings in terms of interest payments, and in your situation you might actually save more by taking the standard deduction on your taxes. These questions are best left to a professional who can work with your individual situation.

What About Points? They Can Help, Too

If you paid points on your mortgage loan, you can also write off this type of interest on your taxes. You will find this can be quite a beneficial reason to consider paying points. Points are percentages of your loan that you pay as an upfront interest payment. This amount can save you a considerable sum on your taxes, but again, it is subject to your specific situation.

Tips To Remember About Mortgage Interest

There are several things to keep in mind when using mortgage interest for a tax deduction. Besides working with a tax professional, consider these tips.

1. Tracking the interest you pay is not difficult: most mortgage companies provide a statement of this information within the first month of the year following the payments.
2. Do watch the government and Congress. New restrictions and changes happen often, and mortgage interest has been a subject of debate, including the write-offs received on larger home loans.
3. Use a mortgage calculator designed specifically to report the interest paid during a loan. It will calculate exactly how much is being paid that can then be used as a tax deduction. Not just any mortgage calculator will work here, though.

Many states, and even local communities, have their own laws regarding mortgage interest deductions. Be sure you know what is allowable in your state and your tax jurisdiction. Then take the time to use a mortgage calculator to find out how much money your mortgage interest payments can provide in terms of a tax deduction. This benefit may be just what you need to tip the scales and have you purchasing a home.