If you are a homeowner, one of the biggest deductions on your tax return—if not the biggest—is usually the deduction for mortgage interest. As a general rule, you can deduct most or all of the mortgage interest you have paid during the year, but there are several possible complications. The following is a quick review of the current rules.

Acquisition debts: You may fully deduct the mortgage interest paid on loan proceeds used to buy, build or substantially renovate a home if the loans are secured by either your principal residence or one other home (e.g., a vacation home). Key limit: The total principal amount of the acquisition debts cannot exceed $1 million.

Home equity debts: When it is permitted by state law, you also may fully deduct the interest on home equity loans secured by a qualified residence. But the total amount of such loans is limited to $100,000. Moreover, these amounts cannot exceed your equity in the residence (the home’s value less other loans). With a home equity loan, you can use the loan proceeds any way that you see fit.

Mortgage debt existing prior to October 14, 1987, (commonly known as “grandfathered debt”) is treated as acquisition debt regardless of the amount. The mortgage interest on post-October 13, 1987, acquisition debt is deductible on debts up to $1 million; the interest on home equity debt is deductible on debts up to $100,000.

If a grandfathered debt is refinanced, it is treated as acquisition debt up to the amount of the existing debt. This amount is treated as grandfathered debt only for the remaining term of the original debt. Any excess may be treated as acquisition debt or home equity debt, but the total debt cannot exceed the fair-market value of the home.

Points: You may be required to pay “points” up‑front when you take out a mortgage. The points are currently deductible as mortgage interest only if paid to purchase, build or improve a home. For example, if you pay points on a home equity loan used to buy a new car, the points must be deducted over the loan period. But if the proceeds are used to finish your basement, the points are currently deductible.

Of course, when you refinance an existing mortgage, any points you are required to pay must be deducted over the life of the loan.

Caution: If your adjusted gross income (AGI) for the year exceeds a specific threshold ($156,400 for 2007), your total itemized deductions (other than those for medical expenses, casualty and theft losses, gambling losses and investment interest) are reduced. The reduction generally is equal to 3% of your AGI above the threshold. However, the overall reduction cannot exceed 80%.

Final note: Mortgage lenders are required to report your interest payments. But don’t automatically assume that the figure provided by a lender is 100% accurate. Check to make sure that all the qualified interest you paid in 2007 is properly shown on the forms you receive.