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June 8th, 2010

Mortgage Interest Deductions Threatened

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Existing and mounting federal deficits have changed the way many lawmakers and economists feel about mortgage interest deductions. The once sacred and holy tax break for homeowners is now at risk of being eliminated, at least for some.

Proponents of mortgage interest deductions are of the opinion that the tax break increases homeownership, and thus enriches communities. The feeling is that the deduction is an added benefit that allows homeowners to relieve some of the financial stress of owning a home; homeowners depend on it:

The conventional wisdom says these tax breaks are important because A) they increase home ownership and B) homeowners are more engaged in their communities than renters.

The Christian Science Monitor defends that not only have neither of the above-mentioned points been proven true, mortgage interest deductions are also inefficient:

We do know, however, that the deduction is not a very efficient way to encourage home ownership. Most benefits go to high-income households that would probably buy a house with or without the deduction. Since non-itemizers get no benefit from the deduction, it is not surprising that most of the subsidy goes to upper-bracket taxpayers.

Recent threats in Washington to eliminate the deduction have centered on the country’s wealthier homeowners. While the proposed elimination was included in the White House’s 2009 budget (but later rejected by Congress), it was included once more in their 2010 budget, claiming that it could save over $20 billion a year.

Forgetting what the government, the analysts and the writers think about mortgage interest deductions, we want to know what you think: How important is your mortgage interest deduction? Did it influence your decision to buy a home? How will you feel if they are eliminated for wealthier homeowners?

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25 Responses to “Mortgage Interest Deductions Threatened”

  1. Dave Says: June 8th, 2010 at 2:54 pm

    I’d love to see the mortgage deduction rolled back for wealthier homeowners. If you can afford a $500,000 house, we don’t need to be subsidizing your ownership of it; we’d be better off giving that money to people who need it, since we seem to have made so many more of them lately.

  2. Tim Manni Says: June 8th, 2010 at 3:23 pm

    Hey Dave,

    Thanks for commenting. What would your reaction be if they eliminated the deductions for all homeowners, no matter their tax bracket? Is there a better way to go about this?

    Thanks,
    Tim

  3. WayneT Says: June 8th, 2010 at 5:57 pm

    So they want to get rid of MID for the wealthy? When they realize they can’t generate enough revenue, they’ll have to go after someone else. Give you three guesses who they are!!

    Taxing the wealthy is just a ruse to go after the “little guy”

  4. Wesley Says: June 8th, 2010 at 6:44 pm

    The tax deduction should go away. Most people are suckered into buying a house because a realtor or misinformed friend convinces them that they will sava a ton of money in taxes. This savings is simply not true for most of us. If you dont believe me go ask an accountant. It also hurts people because it encourages them to buy a larger house than they can afford or need because they will get a larger write off. I bought a house I can easily afford, and plan to pay it off early. The tax benefit is of no use since I get more money back on the standard deductions already given to me. Also, it encourages people to not pay off their homes because they feel like they would miss out on the deduction. If people were given the hard numbers, and told that buying their house saved them $300 in taxes this year, they would feel ripped off. But noooo, only a very few people do the actual math to see if what they think is true.

  5. Sharon W Says: June 8th, 2010 at 7:19 pm

    I don’t know where these “experts” get the idea that this deduction only affects the wealthy. All of my family and friends are “middle class” not wealthy and have greatly benefitted from this deduction. Almost all of them have used the savings to do needed repairs on their homes at one time or another. How else can the middle class afford to replace a furnace or air conditioner or replace windows or siding? These are high ticket items that most of us can’t budget for. And taking out a loan only adds to our burden. We count on that tax saving.

  6. Joe Says: June 8th, 2010 at 7:23 pm

    It never ends. Every nook and cranny is going to be taxed.
    Yes Dave, first 500k, then 250k, then 100k is too much. Just like the statists trying to regulate salaries. It’s always nice creating class warfare. It’s always nice when the other guy is getting screwed. Those people that can afford 500k homes Dave likely employ people. It never stops. Off to rice fields we go…

  7. Tim Manni Says: June 9th, 2010 at 8:18 am

    Joe & Wayne T,

    I can see where you guys are going with this, and I gotta say, I don’t disagree. I’m not saying that it’s going to happen or that it’s necessarily inevitable, but I wouldn’t be surprised, as Wayne said, if “they can’t generate enough revenue, [so] they’ll have to go after someone else.” And I can’t say that it’s absolutely fair that the wealthier population is the first to be targeted. While many of us aren’t wealthy, those who are, like everyone, work hard to get what they got. Granted their financial position allows them to have more options, but is it fair to eliminate this tax break for one and not everyone?

    Thanks for your comments guys, hope to hear back from you.

    Got an idea for a blog post? Let me know, I’ll try to write about it!

    Thanks,
    Tim

  8. Tim Manni Says: June 9th, 2010 at 9:23 am

    Sharon W,

    I don’t think the consensus is that the “deduction only affects the wealthy,” it’s more along the lines that the wealthy tend to have more expensive houses (hence larger home loans) so they get more in mortgage interest deductions (MID).

    You make a great point Sharon, this deduction can help homeowners make home repairs without having to tap home equity or take out another form of loan. That being said, there are other ways for homeowners to make repairs if they didn’t have the MID.

    All in all, you’re right, many people depend on this tax break.

    Thanks for your comment,
    Tim

  9. Tim Manni Says: June 9th, 2010 at 9:29 am

    Wesley,

    “Most people are suckered into buying a house because a realtor or misinformed friend convinces them that they will save a ton of money in taxes”: that’s definitely the consensus among many who are against the deduction. And from what I’ve read, there isn’t too much concrete proof that MID is a homebuying incentive.

    Thanks for your comment Wesley,
    Tim

  10. Steve Says: June 10th, 2010 at 2:55 pm

    Dave says: “If you can afford a $500,000 house, we don’t need to be subsidizing your ownership of it; we’d be better off giving that money to people who need it, since we seem to have made so many more of them lately.”

    what about those of us who bought a modest $160,000 home 12 years ago that is now appraised at 450,000? My taxes are over $6000 per year. During this time my salary (working man, firefighter) has increased by about 12%. I am just slipping further into debt with no end in sight.

    The ‘free’ health insurance is going to cost me over $2000 per year because i will be financing insurance coverage for those ‘underinsured’ individuals and paying the feds to hire thousands of IRS agents to forcibly collect these unconstitutional fees.

    Will taking away my mortgage interest deduction be “the straw that broke the camel’s back”? Yes, I will probably be forced into bankruptcy.

    How much more can we be expected to take?

  11. Tim Manni Says: June 10th, 2010 at 4:23 pm

    Steve,

    I agree with you: owning a $500,000 home doesn’t necessarily make you rich. However, if in 12 years you have tripled your investment, that’s great.

    What “free health insurance” that’s “going to cost [you] over $2000 per year” are you referring to? I’m confused by that.

    I believe the discussion surround eliminating the mortgage interest deduction for wealthier Americans hinges upon your annual salary (above $250K), not your home price.

    Thanks for your comment,
    Tim

  12. Camille Says: June 15th, 2010 at 9:09 pm

    All,
    I think it is important to recognize that in various areas of the country, $500K won’t even buy you a garage… and “middle class” people pay that easily for homes in areas such as NY, Boston, Northern California, due to the cost of living in those areas.

  13. Tim Manni Says: June 16th, 2010 at 8:19 am

    Camille,

    Great point!

  14. Tom Says: June 16th, 2010 at 5:59 pm

    The math is simple: if I’m in the top tax bracket and can afford a $500,000 home with a deduction, then I can afford a $300,000 home without one.

    What impact will that have on the struggling housing market?

    How is that a fair deal to all of us who took out mortgages assuming a deduction? And what will the default rate become then when it’s taken away? Are we again going to blame “those homebuyers who stretched beyond their means” to house their families?

    And if the housing market shrinks further beyond it’s already 30-40% reduction in home values, what will that do to the consumer wealth effect and therefore to our economy that’s still struggling to recover?

    I can’t wait to cast my vote for every pol who backs such a bill.

  15. Tim Manni Says: June 17th, 2010 at 10:47 am

    Hey Tom,

    Thanks for commenting. The thing is, I’m not sure if this if for new loans only, I assume it would be, but I haven’t heard for sure. If it is only for new loans, I don’t the impact would be as bad…I just don’t know yet.

    Thanks,
    Tim

  16. Tom Says: June 17th, 2010 at 1:26 pm

    Hope you’re right, Tim; that would solve the problem of defaults on existing loans.

    Of course the impact on new sales (referenced by the $500k/$300k example) would still be there, so everyone’s home value would shrink accordingly. This would mean a shift of billions of equity value out of the pockets of consumers into government coffers.

    For aging boomers counting on their home equity for retirement and whose homes are already down 30-40%, this would be catastrophic. For new buyers it wouldn’t have much impact either way, since they’d be able to buy the same home for less money using lower unsubsidized payments.

  17. Tim #2 Says: June 23rd, 2010 at 8:07 am

    Seems to me that everyone should be working out the “numbers” for themselves before buying a home and anyone who would listen to a realtor about finances/taxes is, at the very least naive.

    What no one yet has mentioned (and the most ironic) is that Obama and Congress passed this “stimulus” deal of giving people an $8000 tax credit if they buy a house in 2009/2010. Now after they get people to pull the trigger to stimulate the economy and the housing market, the govt’ is going to eliminate the interest deduction. Unbelievable.

  18. Tim Manni Says: June 23rd, 2010 at 4:57 pm

    Tim #2,

    “What no one yet has mentioned (and the most ironic) is that Obama and Congress passed this stimulus’ deal of giving people an $8000 tax credit if they buy a house in 2009/2010. Now after they get people to pull the trigger to stimulate the economy and the housing market, the govt’ is going to eliminate the interest deduction”: haha, great point.

    Thanks for commenting, great stuff,

    Tim

  19. Heather Says: July 16th, 2010 at 12:13 pm

    Camille, thanks for pointing out the truth that many people looking at $500K are actually looking at “starter” homes in NYC, San Francisco, etc.

    I think it is crazy that our tax statutes use the same income levels throughout the country, without regard to the cost of living. I earn a decent salary in San Francisco (comfortable, no complaints – but still renting!), but I bet Dave would think I’m “rich” just based on the number.

  20. Tim Manni Says: July 19th, 2010 at 10:33 am

    Heather,

    Good point. Thanks for commenting,
    Tim

  21. Jack Says: July 28th, 2010 at 9:56 am

    I think if passed we will see a shift in the way younger home owners operate . I.E. I am a single 27 year old preparing to buy a home in Southern California. The tax credit will be a huge advantage to me as I don’t have a lot of write offs at my age and marital status. But if this tax credit goes away I will be more apt to rent my home out as an investment property and rent for my own personal residence. Cost of home ownership as a resident is too high in my area for it to make sense without the MID.

  22. Dennis Says: September 23rd, 2010 at 4:44 pm

    Your discussing this like it actually has some merit. I say to The statists.. Stop stealing from us! Politicians abuse of power and mis-management of govt has to end. Stop spending, get your house in order or get the hell out of Washington, DC and let folks who have the interest of the People and our Country at heart run things. They will do the right thing.
    The same old game in Washington will soon be coming to an end.

  23. Eric Says: October 27th, 2010 at 10:36 pm

    Face it People! WE are all SHEEP!! And UNCLE SAM is the FARMER!!! You can talk all you want. For it or against, it really doesn’t matter. Our voice doesn’t matter. Why? Because it’s all for me and screw you. The only way things will change is when WE the PEOPLE put aside our differences and UNITE for a common cause. Namely to RECLAIM our RUNAWAY GOVERNMENT!!!

  24. Ryan Miller Says: April 6th, 2011 at 9:41 pm

    The mortgage interest write-off I recieve yearly is essential to my standard of living. I am a 27 year-old, single male, living in CA. I put myself through college, contribute a small amount monthly to my 401K and HSA plan, and have bet on buying low during the recession and selling high in the years to come.

    Last year I was able to write-off nearly $16K in interest paid to my mortgage bank, Bank of America. Had it not been for these significant tax write-offs, I would most likely opt to rent and simply contribute more to my 401K. With the pride-of-ownership that comes with homeownership, I opt to pay a local tax accountant to itemize my deductions (versus filing online), pay a local insurance broker to insure that my home is well protected (a service that would not be required if I did not own a home) and I purchase home improvment products at my local hardware store, not to mention the local contractors I have employed to paint, maintain, landscape, and generally improve the overall appearance and value of my home. If I were simply a home renter, I would not consider these services and neither would my landlord, most likely.

    I wonder if Congress factors in the “multiplier effect” money contibuted to the economy by services and finances rendered by local merchants etc. from homeowner purchases and the fact that most folks in my positions would not care to own a home if the deduction were revoked?

    In fact, I heard that the tax law was up for review again and I am considering the fact that housing prices, which are already unstable, may continue to drop if the law is enacted and the deduction is revoked, which leads me to consider simply selling and getting out before the market is impacted by another stupid mistake at the Federal and Congressional level. Ughhhh!

  25. STEVEN WAGG Says: November 11th, 2012 at 9:48 am

    Don’t worry about only interest deductions. Now that Obama thinks his 49% of the vote makes him a dictator just watch what he does to take from those who have and give to those who don’t. As the wealthy begin to exit this country with their wealth our demise will be quick and painful.

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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