When you buy a home, a major benefit is the tax savings you receive from the mortgage interest rate deduction. To take this deduction, you need to itemize your mortgage interest expense using Schedule A of IRS Form 1040.
If you own a second home, you can also deduct the mortgage interest expense you pay on it. The following types of mortgage interest are deductible in full in the year paid:
Interest on grandfathered debt. This is the interest on mortgages taken out before Oct. 14, 1987.
Interest on mortgages taken out since Oct. 14, 1987 to buy, build or improve your home. The IRS calls this home acquisition debt. In order to qualify for the full mortgage interest deduction, total mortgage debt from these first two categories cannot exceed $1 million, for married couples filing jointly. For married couples filing separately, the limit is $500,000.
Interest on mortgages for purposes other than to buy, build or improve your home. The IRS calls this home equity debt.
If you paid $600 or more in mortgage interest, your lender will send you Form 1098: "Mortgage Interest Statement," or a similar form, by Jan. 31. The form will show the amount of deductible mortgage interest and points for the tax year. The amount should be entered on Line 10 of Schedule A. The amount of any mortgage interest not shown on Form 1098 should be entered on Line 11.