What Homes Qualify

• You can deduct interest on the mortgages issued for two homes: your primary residence and a secondary home. The mortgage must use the house as collateral. In order to deduct mortgage interest from a second home, you must either living in for at least 10 percent as long as it is rented out during the year or two weeks, whichever is great, or not use the home as a rental property. The proceeds from the mortgage must be used to construct, purchase or fix your home. If they are not, you are limited to only deducting the interest on the first $50,000 of the loan or the value of the house, whichever is less. If you are married filing jointly this amount increases to $100,000.
  
  

Mortgage Interest

• The amount of interest you can deduct is based on the principal of the loan rather than having a cap on the total interest. For loans issued before October 13, 1987, there is no limit to the amount of the mortgage that you can deduct the interest on. For loans after, you are limited to deducting the interest up to $500,000 of loans for singles and $1,000,000 of loans for married couples, including those issued before 1987. For example, if you are single and have two mortgages, one for $700,000 issued in 1984 and one for $400,000 issued in 2000, you can deduct all of the interest from the first mortgage but none from the second since you are already deducting interest on more than $500,000 in loans. However, if the first loan was only for $300,000 you could deduct the interest on the first $200,000 of your second loan.
  
  

Mortgage Points

• Mortgage points are paid when you first take out the mortgage. A point is equivalent to 1 percent of the total cost of the loan so if you paid two points on a loan of $300,000 you would pay $6,000. There are two types of points: discount points and origination points. Origination points are for the cost of creating the loan. These points are only deductible if they are not for itemized loan expenses like notary fees or preparation costs. Discount points are paid to lower the rate of interest on the loan. Each point will generally lower the interest rate of the loan by about 0.25 percent. These points are deductible in the year you make them.