Wednesday, November 28, 2012

What the Mortgage Deduction Means to Taxpayers

Can you believe these people in Washington D.C.? They are in absolutely no hurry to solve the fiscal cliff crisis. Imagine running a business the way these people do. They would be out of business in a New York minute.

As part of the fiscal cliff talk, we are hearing some mild talk about getting rid of deductions and credits. One of those is the mortgage deduction that affects everyone with a mortgage. A large part of the Great Recession is the problems associated with the housing market. This shows that these people in Washington D.C. are totally lacking in any financial knowledge. They have no clue about basic finance.

Right now, if you are in the 28% tax bracket and own a mortgage, you can file Schedule A and put down the interest you paid for the year and get a tax deduction. In order to simplify things, this means that you receive a 28% savings on your tax return for the interest that you paid. If you take away this deduction, then this would mean that the prices of houses are now more than 28% over priced when you factor in the interest costs. Therefore, the housing market would be immediately impacted. This means further that if your house was worth $200,000 with the mortgage interest deduction, then it will immediately drop down to roughly $129,000 without the mortgage interest deduction and factoring in the interest costs.

Everyone who owns  a mortgage would be affected. This would crush the housing market and tank the economy like we have never seen before. You think things are bad now. Wait until you see what happens if they take away the mortgage deduction.

Think about it. If you are going to buy a house and you know that you will not have a mortgage deduction, then this means that the net amount that you can afford for housing has to and will go down. Normally, on a $200,000 mortgage with 10% down, a 30 year term with a 4% interest rate, the payment is $859 per month. With the mortgage deduction, the net payment with a 28% tax deduction is only $618 per month. The net effect is that you can buy a bigger house with the mortgage deduction.

If you take the mortgage deduction away and factor in the interest costs of what $618 per month will buy on a 30 year mortgage, then the affordability of what you can buy is now about $129,000. Do you see the potential impact on the housing market? Suppose you are trying to sell a house for $200,000 before they remove the mortgage deduction. If they remove this deduction, then the people who can now afford your home becomes a much smaller group. Someone who previously could have easily bought your $200,000 house with the mortgage deduction can now only afford a $129,000 home without the deduction. I see said the blind man.

Removal of the mortgage deduction will cause a housing market meltdown of nuclear proportions.

Let's hope these people in Washington D.C. come to their senses.

Support your local real estate agent. These folks are our first line of defense.