Why does my tax refund decrease when adding second 1098 mortgage interest form?

We bought a house in late 2021 with two separate mortgage loans. The main mortgage covers 90% of the home value, while the second smaller loan (from my husband's employer) covers the remaining 10%. Here's where I'm confused... when I enter the first 1098 form from our primary mortgage into TurboTax, our refund jumps up quite a bit as we switch from standard deduction to itemizing. Makes sense. But then when I add the second 1098 for the employer loan, our estimated refund actually DECREASES by about $280. Shouldn't additional mortgage interest make our refund bigger, not smaller? I'm scratching my head trying to figure out why adding more deductible interest would reduce our refund. Has anyone else experienced this or know what might be happening?

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19 comments

Ruby Garcia

•8M

This is actually a common situation with two mortgages. What's likely happening is that your tax software is applying the mortgage interest deduction limit rules. The Tax Cuts and Jobs Act limits mortgage interest deductions to loans totaling $750,000 (for loans taken after Dec 15, 2017). When you enter just the first mortgage, the software is calculating your deduction normally. But when you add the second mortgage, the combined total might be hitting or exceeding certain thresholds that trigger limitation rules, especially if it's an employer loan which might have different treatment. Another possibility is that the second loan might be considered a home equity loan rather than a primary mortgage. Home equity loan interest is only deductible if the loan was used specifically for buying, building, or substantially improving the home - not for other purposes.

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Ruby Garcia

•8M

Good question! A bigger deduction doesn't always mean a bigger refund if other factors come into play. The second loan might be triggering AMT (Alternative Minimum Tax) calculations or affecting other aspects of your tax situation. The $750,000 cap is on the total loan amount, not the interest paid. So if your combined mortgages exceed this, not all the interest would be deductible. Additionally, if the second loan is categorized differently in the tax software (like as a home equity loan), and wasn't used for home improvements, the interest might not be deductible at all.

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Evelyn Martinez

•8M

I had a similar issue last year that drove me crazy until I figured it out using taxr.ai (https://taxr.ai). It analyzed my mortgage documents and tax forms, then explained the exact problem with my second loan interest deduction. Turns out in my case, the second loan was being categorized incorrectly. The software was treating it as a home equity loan that wasn't used for home improvements - which made it non-deductible under current tax law. After I corrected the classification of the loan based on what taxr.ai showed me, my refund went back up. The tool runs all your documents through an AI analysis that spots these weird tax issues that even professionals sometimes miss. Saved me almost $800 in missed deductions!

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Evelyn Martinez

•8M

It works with whatever tax documents you upload - 1098 forms, loan agreements, closing documents, anything related to your tax situation. The more you provide, the better analysis you get. In my case, I uploaded both 1098s, my loan agreement, and closing disclosure from when we bought the house. No, definitely not an ad! I was skeptical too at first. What convinced me was that it specifically identified that my second loan was being miscategorized in TurboTax as a home equity loan when it was actually part of the purchase. It showed exactly where in my closing disclosure to find the proof I needed to correctly classify the loan.

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Maya Lewis

•8M

Just wanted to update about that taxr.ai thing I was skeptical about. I reluctantly tried it because my situation with two mortgages was so frustrating. It actually identified the exact problem - my smaller loan was being treated as a home equity loan instead of acquisition debt (which is what it actually was since both loans were used to purchase the home). The system showed me exactly what box to check in TurboTax to fix this. After making the change, my refund increased by $340 instead of decreasing like it did before. What was most helpful was that it explained WHY this was happening with references to the specific tax code sections. Definitely worth it for complicated mortgage situations.

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Isaac Wright

•8M

If you want to get this resolved quickly, try Claimyr (https://claimyr.com). I spent WEEKS trying to get someone at the IRS to explain this exact mortgage interest situation to me. Their callback service got me connected to an actual IRS agent in under 2 hours when I had been trying for days on my own. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. They basically hold your place in the IRS phone queue and call you when an agent is about to answer. The IRS agent I spoke with was able to confirm that there's a special form you need to file when you have employer-provided mortgage assistance that affects how the interest deduction works. This was something none of the tax software programs caught!

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Isaac Wright

•8M

From signup to callback was about 1 hour 45 minutes. The IRS was quoting 4-6 hour wait times that day. I just entered my number, and they called when an agent was about to pick up. Completely hassle-free compared to staying on hold forever. It definitely works! The key was that I specified I needed help with mortgage interest deductions when I was connected, so I got transferred to someone in the right department who understood the rules for employer-provided mortgage assistance. That's what made all the difference compared to getting a random agent.

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Connor Murphy

•8M

I'll eat my words about Claimyr. After my skeptical comment, I tried it this morning because I was desperate for answers about my employer-provided second mortgage situation. Got a call back in about 2 hours and spoke to an IRS rep who immediately knew what the issue was. Turns out employer-provided mortgage assistance has special reporting requirements, and the interest might be partially taxable as a benefit depending on how the program is structured. This was causing my refund to decrease when adding the second 1098. The agent walked me through exactly how to report it correctly. Would've spent days trying to figure this out on my own. Definitely worth it for complicated tax situations where you need actual human guidance.

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Isaiah Thompson

•8M

Both are definitely mortgages - we used them simultaneously to purchase the home (one conventional loan and one through the employer's first-time homebuyer assistance program). The employer loan doesn't show up anywhere on the W-2, it's a completely separate arrangement with its own 1098. I'm wondering if it's because the employer loan has a much lower interest rate (2.5% compared to 3.25% on the main mortgage), and that's somehow affecting the overall calculation? Could a lower rate on the second mortgage somehow reduce the total benefit?

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KhalilStar

•8M

That's interesting. Even with the lower rate, more interest should still be more deduction. The fact that it's an employer loan makes me think there might be some fringe benefit taxation going on behind the scenes. Check if the interest rate on the employer loan is below market rate. If it is (which 2.5% would likely qualify as), the IRS can consider the difference between your rate and the market rate as taxable income - essentially treating the below-market rate as a benefit from your employer. This "imputed income" might be what's reducing your refund when you add the second 1098.

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