How to calculate "Average Mortgage Balance" for the loan that was paid off mid-year?

[deepimpact]

Hello,

I had two mortgages in 2024 both in total higher than the limit of 750k, so I need to calculate average mortgage balance to figure out what portion of the interest paid is deductible. My main loan is straightforward as I have beginning and ending balance, however my second loan I only had it for 5 month and then I paid in off in the beginning of June.

Based on IRS publication 936 there are a few methods to calculate balance:

1) "Average of first and last balance method." - doesn't work because of "You didn't prepay more than 1 month's principal during the year.", since I did prepay more than 1 month's principal

2) "Interest paid divided by interest rate method." - seems like it doesn't work as well because "if at all times in 2024 the mortgage was secured by your qualified home", since I paid it off, half of the year it was not secured by my home

3) "Statements provided by your lender." - is the only option that works for me, I'll need to sum up beginning balance of every month and divide by the number of months. My thinking is that I'll also be able to use only a part of the last month (when I paid it off) e.g. I paid it off on 3rd of June thus I can only use 3/30 of the month of June and also I'll need to divide the total amount (sum of all balances) by 5.1 (5 months + 3/30 of the month).

Is my thinking correct, or am I missing a different/better method to calculate the balance? Thanks in advance!

[KrisD15]

Yes, your basic thinking is correct however it is not the beginning balance of each month, rather the ending balance or the AVERAGE balance for each  month. (which would only matter if the loan was paid off or initiated that year)

So for each month, add ending balance, divide by the number of months you had that loan. For the partial month, you could add the balances each day and divide by the number of days. Add the balance for the first loan with that of the second. 

Be aware that the TurboTax application cannot do the mortgage balancing for you. 

You will need to calculate the allowed interest on your own, enter the 1098 Forms and at the end of the interview select to edit the amount of interest allowed. 

Also, be aware that averaging may be counter-productive if one loan has an interest rate significantly higher than the other loan. 

As long as the average interest allowed by averaging is more than either of the two loans individually, the average would be a better choice. 

Pub 936

[deepimpact]

Thanks for looking into it!

My statements don't specifically mention ending balance of the month, but I can deduce it by subtracting principal I paid each month from the balance I have on my statement (10th of each month) which is also the same for beginning of the month.

For the last month do I need to include the pay off date as 0 ending balance? And the should I find the average for the second mortgage as average of full months and average of partial month?

For TurboTax I used Deluxe version, I think OOTB it uses average of first and last balance, but that doesn't apply in my case, so I'll edit the calculated interest that can be deducted .

[DaveF1006]

Yes, you report "0" as an ending balance. The average balance is typically used in determining the interest amount you pay on a mortgage over a certain period. Here’s how you can calculate it.

1. Sum of Outstanding Balances: First, add up the outstanding balance of the mortgage for each day of the period you are considering (this could be monthly, quarterly, etc.).
2. Divide by Days in Period: Once you have the total sum of all the daily balances, divide this by the number of days in the period.

[deepimpact]

Got it! I can use days, this gets a bit more tricky though, I need to know exact date when my payment got applied in each month I assume, because before the payment date I'll need to use previous balance of the month for each day and after payment date I'll use new balance for the remaining days of the month.