How Are You Affected by the Mortgage Interest Tax Deduction?

by A Blinkin on December 3, 2012

This is a heavy subject that deserves a lot of discussion. I, unfortunately, have the attention span of a 3rd grader surrounded by Legos so an abbreviated analysis will have to do.

The History

Interest deductions, in general, began in 1913. At this time, the majority of Americans paid upfront for their homes rather than financing so the deduction wasn’t highly utilized. The deduction, which included interest paid on personal loans and credit cards, was later revised in 1986 to exclude these items.

The Advantage

If you have been reading for a while, you should know that Miss Blinkin and I purchased our first home earlier this year. Here’s a breakdown of how the interest deduction would affect our finances:

Based on a loan amount of $250,000 / a marginal tax rate of 28% / an interest rate of 3.1%

Year Beginning Balance Interest @ 3.10% Payment Ending Balance Tax Savings
1 $250000 $7677 $12810 $244867 $2150
2 244867 7516 12810 239573 2105
3 239573 7350 12810 234112 2058
4 234112 7178 12810 228479 2010
5 228479 7001 12810 222669 1960
6 222669 6818 12810 216677 1909
7 216677 6630 12810 210496 1856
8 210496 6435 12810 204121 1802
9 204121 6235 12810 197545 1746
10 197545 6028 12810 190763 1688
11 190763 5815 12810 183767 1628
12 183767 5595 12810 176551 1567
13 176551 5368 12810 169109 1503
14 169109 5134 12810 161432 1437
15 161432 4893 12810 153514 1370
16 153514 4644 12810 145347 1300
17 145347 4387 12810 136924 1228
18 136924 4122 12810 128235 1154
19 128235 3849 12810 119273 1078
20 119273 3567 12810 110030 999
21 110030 3276 12810 100495 917
22 100495 2976 12810 90661 833
23 90661 2667 12810 80518 747
24 80518 2348 12810 70056 658
25 70056 2019 12810 59264 565
26 59264 1680 12810 48134 470
27 48134 1330 12810 36653 372
28 36653 969 12810 24812 271
29 24812 597 12810 12598 167
30 12598 213 12810 0 60

As you’ll notice in the table above, the Mortgage Interest Tax Deduction would save us approximately $2150 in taxes the first year. The tax benefit would then decline each year given the amortization over 30 years.

The Chopping Block

In an attempt to slash away at our growing deficit and avoid the Bernanke-coined “Fiscal Cliff,” we risk losing this tax deduction. This possibility is met with mixed reviews (my commentary in italics).

Tax expert and Law Professor Edward Kleinbard says “we simply cannot afford wasteful government subsidy programs anymore, and this is one of the most important examples of that.”

We also can’t afford wasteful government spending. The subsidy program wouldn’t exist if the tax didn’t exist. The tax wouldn’t exist if the spending didn’t occur. Seems like there’s an easy solution to me.

Moody’s Chief Economist Mark Zandi disagrees by saying that “people account for it when they think about how much house they can afford to buy. You take that away, and house prices are going to weaken.”

Ummm…We just bought a house and not once did we consider the deduction when calculating how much house we could afford. Maybe this is Advanced Homebuying?

In March of this year, a bipartisan expert panel unanimously opposed the Mortgage Interest Deduction.

This panel included a Libertarian Economist…I’ll agree with whatever he thinks.

My favorite is the National Association of Realtors which claims that “housing is the engine that drives the economy, and to even mention reducing the tax benefits of homeownership could endanger property values.”

This extremely biased claim is incomplete. Housing is the engine that drove the economy…into the shitter. As a regular reader, you should already know that Homeownership is not the American Dream

In Conclusion

If you were to ask me if the deduction will stay or go, I would have to say “I don’t know.” It’s impossible to see the future. All I know is that no politician wants to vote for anything that could hurt their chances of being reelected.

 

  • http://www.moneylifeandmore.com/ Lance@MoneyLife&More

    You must remember that mortgage interest deduction is an itemized deduction. If you don’t have other itemized deductions to exceed the standard deduction it’d be foolish to take this over the standard deduction. On top of this, the only real savings is the amount of interest or total itemized deductions over the standard deduction.

    I don’t benefit at all from my mortgage because the interest payments (and principal for that matter) are so small my standard deduction makes more sense for me.

    Hope that helps!

    • Funancials

      Thanks for adding…My title is a tad misleading. I wanted to focus more on the possibility of removing the Tax Deduction rather than discussing “how the interest deduction affects you” (like my title says).

  • John S @ Frugal Rules

    Lol at your last point! It’s very true and I am sure we did not learn our lesson. We benefit from it as we itemize, but like you, was not figured or counted on when we bought our house. That would’ve just been foolish to do and could cause some to buy more than they should.

    • Funancials

      In the spirit of Christmas, it kinda reminds me of Clark W. Griswold spending his Christmas bonus before he gets it. Best terrible analogy I could come up with…

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  • spronkworks

    First, I believe that the mortgage interest deduction should be eliminated along with other loopholes (the most damaging being the exclusion of employer provided health insurance). However, your statement, “We just bought a house and not once did we consider the deduction,” is not material and may reflect more upon your financial acumen than on the question at hand. In aggregate (which is what matters for the economy), there is no doubt that the mortgage interest deduction allows people to buy more expensive homes. But are they getting bigger/better homes or are prices simply pushed up with cheap borrowed money? I would say the latter, and the incentive to borrow money was a crucial element of the financial crisis. But the effect is much smaller at lower interest rates, so now is the time to eliminate the deduction, perhaps with existing mortgages grandfathered.

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