2026-11-02 · 4 min read · Orange County
How Does the Mortgage Interest Deduction Work for First-Time Buyers?
The short answer
How does the mortgage interest deduction work for first-time buyers in California? If you itemize, you can generally deduct the interest on up to $750,000 of mortgage debt on your federal return, and California uses a higher $1,000,000 limit on your state return. It only helps if your itemized deductions add up to more than your standard deduction. Talk with a CPA before you count on it in your budget.
What Is the Mortgage Interest Deduction?
When you buy a home with a loan, much of your early monthly payment is interest. The mortgage interest deduction lets you subtract qualifying home loan interest from your taxable income, which can lower your tax bill.
I'm Jeanette Nelson, a REALTOR® with Jeanette Nelson Real Estate, Keller Williams Realty, serving Orange County, Huntington Beach, Costa Mesa, Fountain Valley, and surrounding areas. First-time buyers often hear that owning a home "saves on taxes." Sometimes it does, and sometimes it doesn't change much. Here's how it works.
This is general information, not tax advice. A CPA or tax professional can tell you how it applies to you.
How Much Mortgage Interest Can I Deduct?
On your federal return. IRS Publication 936 says you can deduct home mortgage interest on the first $750,000 of debt, or $375,000 if married filing separately, for loans taken out after December 15, 2017. Older loans can fall under a higher limit.
On your California return. The Franchise Tax Board (FTB) lists California's limit for home purchases at $1,000,000, compared with $750,000 federally. California does not conform to the federal change. If your loan is between those amounts, your CPA adjusts for the difference on your state return.
In Orange County, where many first homes cost well over $750,000, this gap can matter. The limit applies to the loan amount, not the price of the home.
Do I Have to Itemize?
Yes. The IRS says you must itemize deductions on Schedule A to deduct home mortgage interest.
Itemizing only helps when your itemized deductions add up to more than your standard deduction. For tax year 2026, IRS Publication 505 lists the federal standard deduction at $32,200 for married couples filing jointly and $16,100 for single filers.
Your itemized deductions can include mortgage interest, property taxes within federal limits, and charitable gifts. Add them up with your CPA to see which way comes out ahead. You choose separately on your California return, and California's standard deduction is different, so the answer may not match.
Can I Deduct Points and Mortgage Insurance?
Points. If you pay points to get a lower rate on the loan for your main home, IRS Publication 936 says you may be able to deduct them in full the year you pay them, if you meet all of its tests. One test is that the points are clearly shown on your settlement statement. Otherwise, points are generally deducted over the life of the loan.
Mortgage insurance. This one changed. IRS Publication 936 for 2025 says the deduction for mortgage insurance premiums had expired. IRS Publication 505 for 2026 says it has been reinstated starting in 2026. FTB says California does not conform to the federal deduction for mortgage insurance premiums. If you're paying private mortgage insurance, ask your CPA how it applies to your return.
What Paperwork Will I Get?
Each January, your servicer generally sends Form 1098 if you paid $600 or more in mortgage interest during the year on one mortgage. It shows the interest you paid, and it can show certain points and mortgage insurance premiums too.
Keep your final closing statement from your purchase. It lists the points you paid and the prepaid interest from closing day, which your CPA may need.
Should the Deduction Change How Much I Spend?
It shouldn't be the reason you stretch. A deduction lowers taxable income, not your mortgage payment, and the benefit depends on your tax bracket and whether you itemize.
Build your budget on your real monthly cost first. Then treat any tax savings as a bonus. For help with that, see How Do I Avoid Being House Poor After Buying My First Home? and How Will My Property Taxes Be Set When I Buy?
Let's Start With a Conversation
If you're planning your first purchase and want to see the full picture, I'd love to walk through it with you and connect you with a lender and CPA. Call or text me at 714.366.8575 | DRE: 01397168, or contact me. Jeanette Nelson is a REALTOR® with Jeanette Nelson Real Estate, Keller Williams Realty, serving Orange County, Huntington Beach, Costa Mesa, Fountain Valley, and surrounding areas.
Frequently asked questions
Is mortgage interest deductible on my California return?
Yes, if you itemize on your state return. FTB lists California's limit for home purchases at $1,000,000, higher than the federal $750,000.
Can I deduct my whole mortgage payment?
No. Only qualifying interest can be deducted. Principal is not deductible, and property taxes and insurance follow their own rules.
Do I get the deduction the first year I buy?
You can deduct qualifying interest you paid that year, including prepaid interest from closing, if you itemize. Your CPA will confirm the amount.
What if my loan is over $750,000?
Federally, interest is generally deductible on the first $750,000 of qualifying debt. California's limit is $1,000,000. Your CPA figures the deductible share.