The Mortgage Interest Tax Deduction Should Be Repealed
I will no doubt be crucified for this one. Americans love their tax deductions and there’s one deduction they like more than all the rest combined: the mortgage interest tax deduction. People love it because they think it saves them money, but in reality it does no such thing. Here’s why.
Why The Mortgage Interest Tax Deduction Is A Bad Idea
The mortgage tax deduction was ostensibly enacted by congress in order to make home-ownership more affordable for the average American. Perhaps the deduction did serve that purpose originally. The day the mortgage interest tax deduction went into effect, the purchasing power of those in the market for a new home increased significantly. Let’s give congress the benefit of the doubt and assume sellers didn’t immediately catch on. Thus, the first round of buyers got a great deal on a new home courtesy of good ol’ Uncle Sam.
For the average modern American family, the deduction might be worth perhaps $100 per month. Sounds great, right? Not so fast. The real estate market has become increasingly sophisticated over the past few decades as the home-ownership rate has skyrocketed. While the mortgage interest deduction might once have actually improved home affordability, those days are certainly long gone. Today, the value of the mortgage interest tax deduction is priced in to the cost of real estate. That is, the market has automatically adjusted itself over the years (as markets are wont to do) to cancel out the benefits of the popular deduction. Since buyers tend to base what they think they can afford on monthly cash flow instead of total cost, the mortgage deduction tends to increase the amount buyers are willing to bid on a given property compared to what they would be willing to pay in the absence of a deduction. In essence, the deduction actually increases the average price of residential real estate by the average value of the deduction, rendering it useless.
“So the mortgage interest deduction is useless,” you say. “But at least it doesn’t hurt anything, right?” Ah, but it does! Millions of dollars per year are wasted on tax services to account in large part for these deductions, money that could be invested far more productively elsewhere. It is impossible to estimate, of course, but I feel confident the economy as a whole has suffered indirectly as a result of this deduction. Every dime spent adhering to the tax code is a dime that could have been invested in new jobs, better infrastructure, better education, and better health care. Too bad Americans will never give it up.
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Americans will not give up anything they feel they are entitled to, whether or not it’s good for the society as a whole. I’m in no way shape or form advocating totalitarianism, or liberalism for that matter, I’m simply saying that this is another example of the sense of entitlement that is becoming ever more prevalent in our society, and that it’s a very detrimental thing.
“Since buyers tend to base what they think they can afford on monthly cash flow instead of total cost, the mortgage deduction tends to increase the amount buyers are willing to bid on a given property compared to what they would be willing to pay in the absence of a deduction.”
Your premise directly contradicts your conclusion. The deduction for mortgage interest is a once-a-year credit and has zero effect on one’s purchasing power within a given pay period.
Are you implying buyers don’t take the tax deduction into consideration when deciding which property to buy? People adjust their withholdings to take their deductions into account, so it DOES enter into their monthly cash flow. Either that or they rationalize “hey, I’ll get it back at the end of the year anyway so it’s not real money I’m spending.”
Stephanie Lynn- first it’s not a “credit’, it is a deduction from you Gross Income. Also, the writer DOES support his premise – the total yearly deduction is spread equally over 12 months although you only claim it once a year…it reduces your monthly payment.
And, to the writer- the word in your text should be went into “effect” not “affect”.
Also, cash buyers base the price they are willing to pay on the market value of the property just like those who take out a mortgage. I wouldn’t sell my home cheaper for cash from an individual any more than cash from a mortgage company. So, the mortgage deduction really does have a tangible benefit to consumers. With the strong real estate sales and construction industry lobbys, I don’t see the deduction going away any time soon. Now the write-off for a vacation home mortgage interest, I’m not so sure we won’t see it go away in the near future. The only thing stopping its elimination now is that 99% of Congress have second homes.
The argument is based on fear-mongering and not reality, IMO.
The reason why mortgage deduction is a big write-off is for homeowners because homeowners are gouged by how much of their money does not go toward the principal of the mortgage. The first several years is essentially going to principal. If you get a 30-year mortgage, the amount you paid for the house is usually more than twice what was the value of the house when you bought it. Even with a 15-year mortgage, you can add roughly another 50% to the value of the mortgage.
Second, I know I certainly didn’t buy my house with the consideration of a mortgage deduction. That sounds more like the thinking of someone who is looking at a house as an investment property, and not a place where you plan to live for a long period (or live for the rest of your life).
Third, I’ve read other articles on this topic and the thought process in those articles seems to revolve around the percentage of homeowners in this country and that the deduction does not favor the poor and working class. Generally, the argument was the mortgage deduction is not relevant to taxpayers with a household of less than $100,000. In 2009, the national wage in the United States was $40,ooo per year — and in some parts of the country, that is hardly anything. Even where I live in a small town in the South, that’s not a killing by any measure. That’s not even counting the relative cost of living in areas. Not to mention nearly 70% of people are homeowners.
Sometimes, people get into this political rhetoric of “taking away stuff from the rich” and it seems like they think the standard of living today is like it’s in the ’50s. The median house in the United States is $148,000 in the South; $237,000 in the North; $140,ooo in the Midwest; and $204, ooo in the West. It generally takes two people to make a mortgage payment in most middle-of-the-road neighborhoods.
Make mortgages more reasonable (IMO, it shouldn’t be more than 10 years) which will lower the housing prices and that will take care of the mortgage deduction issue.
EDIT: In my first paragraph, the statement should have said, “The reason why mortgage deduction is a big write-off is for homeowners because homeowners are gouged by how much of their money does not go toward the principal of the mortgage. The first several years is essentially going to interest.”
What do you mean by fear mongering? Your $100K number is far, far, far, far too high. I made less than half that when I bought my first place and I took the deduction.
I was referring to stories like this, which seems to be a common argument for repealing the mortgage interest deduction:
http://www.veteranstoday.com/2010/07/15/mortgage-interest-deduction-an-unfair-subsidy-for-the-rich/
The general argument is that mortgage interest deduction and deduction for property taxes primarily benefit taxpayers with income of more than $100,000.
Fine, except that the average wage in the United States is $40,000 per year. A two-income family bringing in $50,000 per year in 2011 is not exactly what I call high-rollers.
In other words, Kyle, you said you don’t make close to $100,000 per year and you benefited from the mortgage interest deduction. So it evidently isn’t a sole benefit to the wealthy (and in today’s standards, depending on where you live $100,000 is not exactly rolling in the money).
IMO, the reason the mortgage interest deduction is relevant is because of how much interest people have to pay over the course of their homeowner loans. If you’re arguing to make it less relevant, then deal with the financial institutions that make it a standard practice of making 30-year loans.
House prices would be lower to begin with if the mortgage deduction didn’t exist, is my point. There is no net benefit to anybody. Yeah, you can write it off, but you had to pay a higher price for the privilege.
If you get rid of the mortgage interest deduction, you essentially will increase the tax burden of homeowners. As of December 1, it is estimated there are about 15 million homeowners who owe more on their mortgages than their homes are worth. In those cases, it may cause more people to walk away from their houses.
I’m not seeing how a mortgage deduction has a direct impact on the price of housing. According to new estimates compiled by the nonpartisan Joint Committee on Taxation — Congress’ top technical resource on all tax law matters — the mortgage interest deduction is not quite as big a hole in the federal budget as previously estimated.
Home values are down in many parts of the country, and lower purchase prices and far stricter underwriting mean smaller mortgage amounts. Interest rates have hit half-century record lows, and have remained at or near those floors for much longer than anyone had estimated. Thirty-year mortgages at 4.5% obviously require much less in monthly interest payments than do similar loans at 5.5% and 6%.
Again, mortgage interest is not even a major issue if mortgages have shorter terms. The banks and mortgage companies make a killing on homeowners thanks to the terms of conventional mortgages. By the time a 30-year mortgage is paid off, the borrower has paid for the house multiple times over.
If there had been no deduction to begin with, prices would never have gone up as much as they did. I’m not sure how much clearer I can be. The market responded to the tax incentives offered by the government by raising prices. The reverse happens whenever tax benefits are reduced.
If the Mortgage deduction drove up the price of real estate, didnt it also drive up the assessments of real estate taxes? The increased assessments should more than make up for the meager tax benefits many homeowners get. Leave the deduction alone.
Huh? I’m not sure I follow. What do property taxes have to do with the mortgage interest deduction?