Decoding the Deduction

Hate to buy without a coupon or a promo code?

Long before discounts became integral to American consumerism, homebuying has had a nice big incentive attached to it: the mortgage interest deduction.

Since it was enacted decades ago, Congress has periodically debated the merits of the deduction, as it is right now.

While Congress has never eliminated this cherished homeowner perk, which lets you reduce the size of your tax liability by the amount of mortgage interest paid annually, the deduction does vanish somewhat the longer you pay your mortgage.

On the standard, fixed-rate mortgage, most of each monthly payment goes towards paying off interest in the early years, says Los Angeles accountant Michael Eisenberg. But as the loan matures, more of the payment is earmarked to reducing the principal, which is the actual amount you borrowed.

Indeed, a recent study by the National Association of Home Builders finds that younger households benefit the most from the mortgage deduction, since amounts on interest paid annually decline as owners keep paying off the loan.

But for those households in the early years of their mortgage, the interest deduction is fat. In fact, Eisenberg says, if you get a tax refund because of the amount you’re deducting, it may be worthwhile to have your employer adjust the amount they withhold for taxes from your paycheck -- giving you more monthly income.

The deduction gets lots of attention from Congress. Homeowners should also talk about it with their accountant, to maximize its benefits, concludes Eisenberg.