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One of the largest tax items up for debate is the deductibility of mortgage interest. It is WIDELY misunderstood IMO. (SonnyPage and other realtors please forgive me for what I am about to say.) The National Association of Realtors (NAR) continues to spread the gospel about how important the interest rate deduction is to housing sales. I sure hope all prospective homeowners understand exactly what savings if any they will achieve from the deduction.

The value of the deduction has been greatly diminished to the point of elimination mainly due to very low mortgage interest rates. The problem is that the NAR and politicians have not caught on to this yet.

Here are the numbers to illustrate the nominal case:

US Median Home Price= $186,100
Assume 5% down, gives a loan amount= $176,795
Current 30 year fixed mortgage rates = 3.45%
Maximum interest paid in the first 12 months of the mortgage= $6,045
Assume 2.0% property taxes = $3,722

Total MAXIMUM deduction for interest and taxes= $9,767

Current standard deduction for married filing jointly= $11,600

So purchasers of the median house MUST come up with an additional $1,833 in itemized deductions BEFORE they get a single cent of tax benefit from the mortgage interest deduction.

The median family income is ~ $50,000, so coming up with an additional $1,833 in deductions in addition to the house payments will be difficult for most people.

Also understand that mortgage interest decreases each year as the mortgage is paid off. Even if the interest paid lowers your taxes in year 1, the effect will diminish each year as the interest paid goes down.

I have found close to zero first time home buyers that understand these simple calculations and that they will get little to no benefit from the mortgage interest deduction.

I have found zero REALTORS that properly explain this to prospective homebuyers. They keep perpetuating the myth of some kind of large income tax savings.

Why don’t we talk about who DOES benefit from the mortgage interest deduction?

Somewhat simplified, the main beneficiaries are the left coast (California, Oregon, Washington) and the right coast (New York, Connecticut, Vermont, Washington DC area). These areas have high house prices in addition to typically high income taxes. They are the main beneficiaries of the mortgage interest deduction.

Middle America, the other ~ 44 states get little to no benefit from the deduction. Yes, I know if you buy a multimillion dollar house in Podunk, Iowa you are helped out, but not many folks in Podunk are buying multimillion dollar homes. Most likely they are buying $100k houses.

We have another us versus them tax debate, however it is never framed in these terms. I am not picking sides, just attempting to make the different sides clearly understood.

BOTTOM LINE (slightly exaggerated) is that only “rich folks” with expensive houses gets any benefit from the mortgage interest deduction. Johnny and Susie Six-pack in middle America get no benefit, and in fact are helping subsidize the housing for “rich folks.” Maybe this is what Americans want, but I am not sure the Six-pack family would support it if they really understood what was going on. . .


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