If you deduct mortgage interest, the One Big Beautiful Bill Act (OBBBA) brings some important updates.
First, it permanently caps the mortgage interest deduction at $750,000 of acquisition debt ($375,000 if married filing separately). That cap was established by the Tax Cuts and Jobs Act (TCJA) passed in 2017. It was effective for 2018 and later tax returns. Homeowners with grandfathered debt predating December 16, 2017, still benefit from the higher $1 million cap.
Home acquisition debt is essentially the loan that was obtained to purchase your home. If that loan is later refinanced (for example, to obtain a lower interest rate), then the interest on the refinanced loan remains deductible. However, if as part of the refinance you increase the principal balance by taking out some equity, then the interest on the equity portion generally would NOT be deductible unless directly used for home improvement.
Speaking of equity loans, interest on home equity loans remains deductible only if the loan is used to improve your home—and total mortgage debt stays below the $750,000/$375,000 cap.
For example, I obtain a home equity line of credit (HELOC) for $100,000. I enter into a contract with a pool company to put in a new pool and spa for a cost of $80.000. I write a check on the HELOC account to pay the pool company for this home improvement project. The interest on the HELOC debt of $80,000 is fully deductible so long as the sum of the primary mortgage debt and the new HELOC mortgage debt is below the cap. If the total exceeds the cap, then only a portion of the interest will be deductible.
California and some other states never conformed to the lower cap on home mortgage debt. For California, it remained at $1,000,000 vs the federal $750,000 cap. Further, California still has a separate cap of $100,000 on equity loans not used directly for home improvement.
For example, I use a HELOC to purchase a new Tesla for $125,000 on January 1, 2025. The HELOC interest I paid for the year was $8,750. Let’s assume that my primary mortgage balance plus the HELOC balance is less than $1,100,000 (the CA limit for mortgage loan interest deduction). I can only deduct 80% ($100,000 / $125,000) of the $8,750 HELOC interest paid, for a net HELOC equity loan interest deduction of $7,000.
Starting in 2026, you may also deduct private mortgage insurance premiums (PMI). However, your AGI must be under $100,000 (filing as single or married filing jointly) or $50,000 (married filing separately). Above that, the mortgage interest deduction phases out quickly. The deduction amount is reduced by 10% for every $1,000 your AGI exceeds the $100,000 threshold.