Mortgage Interest
Quick Definition
Mortgage interest is the cost a borrower pays to a lender for the use of money borrowed to purchase, build, or improve a home. It is calculated as a percentage of the outstanding loan principal and is paid as part of the monthly mortgage payment. On a traditional amortization schedule, interest dominates the early years of the loan and declines as the principal balance shrinks. For taxpayers who itemize deductions, mortgage interest on up to $750,000 of qualifying debt is deductible on federal returns, a limit made permanent by the One Big Beautiful Bill Act of 2025.
What It Means
Mortgage interest is the single largest cost of homeownership beyond the purchase price itself. On a $400,000 loan at 6.5% over 30 years, the borrower pays roughly $510,000 in interest over the life of the loan, more than the amount borrowed. Understanding how interest works, how it is calculated, and how it can be reduced is essential for anyone buying a home or managing an existing mortgage.
The interest rate on a mortgage is determined by broader economic conditions, the borrower's credit profile, and the loan type. In July 2026, the average 30-year fixed-rate mortgage was 6.54%, according to Freddie Mac, up from 6.49% in June and down from 6.72% one year earlier. The National Association of Realtors reported the median existing-home price at $434,100 in July 2026. For a buyer putting 20% down on a median-priced home, the loan amount would be about $347,000, and the monthly principal and interest payment at 6.54% would be approximately $2,200.
Mortgage interest is front-loaded. In the first year of a 30-year loan, roughly 80% of each payment goes to interest and 20% to principal. By year 20, that ratio flips. This is why making extra principal payments early in the loan has a outsized effect on total interest paid: every dollar of principal you eliminate early saves you interest for the remaining term.
How It Works
How Interest Is Calculated
Mortgage interest is calculated on the outstanding principal balance. Each monthly payment covers one month of interest, with the remainder applied to principal:
- Calculate monthly interest: Annual rate divided by 12, multiplied by outstanding principal
- Subtract from payment: The interest portion is taken from the total monthly payment
- Apply remainder to principal: Whatever is left reduces the loan balance
- Repeat next month: Interest is recalculated on the new, lower balance
Amortization Example
On a $350,000 loan at 6.5% for 30 years, the monthly principal and interest payment is $2,212:
| Month | Starting Balance | Interest (6.5%/12) | Principal | Ending Balance |
|---|---|---|---|---|
| 1 | $350,000 | $1,896 | $316 | $349,684 |
| 2 | $349,684 | $1,894 | $318 | $349,366 |
| 12 | $346,043 | $1,874 | $338 | $345,705 |
| 60 (Year 5) | $327,353 | $1,773 | $439 | $326,914 |
| 120 (Year 10) | $298,782 | $1,618 | $594 | $298,188 |
| 240 (Year 20) | $206,548 | $1,119 | $1,093 | $205,455 |
| 360 (Final) | $2,200 | $12 | $2,200 | $0 |
In year 1, the borrower pays $22,580 in interest and $3,764 in principal. In year 25, they pay $8,800 in interest and $17,544 in principal. The shift is gradual but powerful.
The Mortgage Interest Deduction
The IRS allows homeowners who itemize deductions to deduct mortgage interest paid on qualifying debt. The rules, as of the 2026 tax year:
- Debt limit: $750,000 ($375,000 if married filing separately) for mortgages originated on or after December 16, 2017
- Older debt: $1 million ($500,000 if married filing separately) for mortgages originated before December 16, 2017
- Qualifying property: Primary residence and one second home
- Use of funds: The loan must be used to buy, build, or substantially improve the home
- Home equity debt: Interest on a home equity loan or HELOC is deductible only if the funds are used to buy, build, or substantially improve the home
The One Big Beautiful Bill Act (OBBBA) of 2025 made the $750,000 limit permanent, eliminating the previously scheduled expiration. This provides certainty for homeowners planning around the deduction.
To claim the deduction, the borrower must itemize on Schedule A. For 2026, the standard deduction is $16,100 for single filers and $32,200 for married couples filing jointly. A homeowner needs total itemized deductions exceeding those amounts for itemizing to make sense. Mortgage interest, combined with the expanded SALT deduction (up to $40,400 for 2026, phasing down above $505,000 MAGI), property taxes, and charitable contributions, can push many homeowners past the standard deduction threshold.
Form 1098
Each January, lenders send borrowers Form 1098, reporting the total mortgage interest paid during the prior year, plus mortgage points paid at closing and any mortgage insurance premiums. This form is what the borrower uses to claim the deduction on their tax return.
Real-World Examples
Example 1: The Interest Deduction Decision
A married couple buys a home with a $400,000 mortgage at 6.5%. In the first full year, they pay approximately $25,700 in mortgage interest. They also pay $6,500 in property taxes and make $4,000 in charitable contributions. Total itemized deductions: $36,200. The 2026 standard deduction for married filing jointly is $32,200. Itemizing saves them $4,000 in deductions, which at a 24% marginal rate saves about $960 in federal tax.
By year 10, their interest has dropped to about $19,200, and total itemized deductions fall to $29,700, below the standard deduction. They switch to taking the standard deduction. This is a common pattern: the mortgage interest deduction is most valuable in the early years of a loan and fades as interest declines.
Example 2: The Cost of Rate Differences
Two borrowers each take out a $350,000 30-year fixed mortgage. One gets 6.0%, the other gets 7.0%:
| Rate | Monthly P&I | Total Interest Over 30 Years |
|---|---|---|
| 6.0% | $2,098 | $405,353 |
| 7.0% | $2,329 | $488,367 |
A 1 percentage point difference costs the second borrower $231 more per month and $83,014 more in total interest over the life of the loan. This is why shopping for the best rate, and considering mortgage points to buy the rate down, can have a massive long-term impact.
Example 3: Extra Payments Save Interest
A borrower with a $350,000 loan at 6.5% pays an extra $200 per month toward principal. The loan pays off in about 24 years instead of 30, and total interest drops from roughly $446,000 to about $340,000. That extra $200 per month, totaling $57,600 over the life of the loan, saves over $106,000 in interest. The earlier the extra payments start, the bigger the savings, because each dollar of principal eliminated early stops accruing interest for the entire remaining term.
Key Points to Remember
- Mortgage interest is front-loaded. In the early years, most of each payment goes to interest, not principal.
- The mortgage interest deduction allows itemizers to deduct interest on up to $750,000 of qualifying debt, a limit made permanent by the OBBBA in 2025.
- The deduction only helps if total itemized deductions exceed the standard deduction ($16,100 single, $32,200 married filing jointly for 2026).
- A 1% rate difference on a $350,000 loan costs roughly $83,000 more in interest over 30 years.
- Extra principal payments early in the loan have an outsized effect on total interest paid.
- Form 1098 from your lender reports the interest you paid each year for tax purposes.
- The average 30-year fixed rate was 6.54% in July 2026, per Freddie Mac.
Common Mistakes to Avoid
- Assuming the deduction always helps: Many homeowners with smaller mortgages or lower rates find their itemized deductions fall below the standard deduction. Run the numbers before assuming you will benefit.
- Confusing APR with interest rate: The APR includes certain fees and costs, while the interest rate is the pure cost of borrowing. The APR is usually higher. Compare APRs when shopping lenders, but understand what drives the difference.
- Ignoring the amortization schedule: Borrowers who do not realize how front-loaded interest is often fail to make extra principal payments early, when they would have the most impact.
- Using home equity debt for non-qualifying purposes: Interest on a HELOC is only deductible if the funds buy, build, or substantially improve the home. Using a HELOC to pay for college or consolidate credit card debt makes the interest non-deductible.
- Forgetting that refinancing resets the clock: Refinancing into a new 30-year loan starts the amortization schedule over, meaning interest dominates the payment again. Even at a lower rate, extending the term can increase total interest paid if the borrower does not make extra payments.
- Overlooking mortgage points as a deduction: Mortgage points paid to buy down the rate may be deductible in the year paid if they meet IRS criteria, or they may be deducted ratably over the loan term. Check IRS Publication 936.
Related Concepts
Mortgage interest connects to several financial and tax concepts. Mortgage points are a form of prepaid interest that can lower the rate, and they have their own deduction rules. The amortization schedule determines how interest and principal split each month, and an amortization schedule tool shows the full payment breakdown. The underlying interest rate is set by market conditions and the Federal Reserve's monetary policy. The APR wraps certain costs into a single rate for comparison. Every mortgage involves closing costs and a down payment that affect the loan amount and thus the interest paid. Borrowers can model their payment and interest costs using our mortgage payoff early calculator and house affordability calculator.
Frequently Asked Questions
Q: Is mortgage interest deductible in 2026? A: Yes, if you itemize deductions. You can deduct interest on up to $750,000 of qualifying mortgage debt ($375,000 if married filing separately) on your primary residence and one second home. The One Big Beautiful Bill Act of 2025 made this limit permanent. If you take the standard deduction, you cannot also deduct mortgage interest.
Q: How much of my payment is interest in the first year? A: On a 30-year fixed loan at 6.5%, roughly 80% of your first year's payments go to interest. On a $350,000 loan, that means about $25,700 in interest and $3,700 in principal in year one. The ratio shifts gradually each year as the balance declines.
Q: Should I pay off my mortgage early to save on interest? A: It depends on your financial situation. Paying off a 6.5% mortgage is equivalent to earning a guaranteed 6.5% after-tax return, which is attractive. But if you have higher-interest debt, no emergency fund, or are not maxing retirement contributions, address those first. Also consider whether itemizing deductions makes the effective mortgage rate lower than the stated rate.
Q: Can I deduct interest on a second home or rental property? A: Yes, interest on a second home mortgage is deductible under the same $750,000 limit as your primary residence, if you itemize. Interest on a rental property is deductible as a business expense on Schedule E, which is separate from the itemized deduction limit. Rental mortgage interest reduces rental income before calculating your profit or loss.
Q: What is the difference between mortgage interest and mortgage points? A: Mortgage interest is the ongoing cost of borrowing, paid monthly as a percentage of the principal. Mortgage points are upfront fees paid at closing to reduce the interest rate, in effect prepaid interest. Points are deductible as mortgage interest if they meet IRS criteria, either in the year paid or ratably over the loan term.
