Mortgage Interest Deduction

This term has been splashed across the front pages of many media outlets. What is it and what does it mean for today’s homeowners?

 

The “mortgage interest deduction”, or MID, is a way for homeowners to recoup some of the cost associated with interest paid on mortgage loans for qualifying houses (there’s a cap), for both equity debt (loans to improve your home) and acquisition debt (loans to build or buy a home).

How much does it save today’s homeowners? According to Trulia.com, 38.5 million homeowners (around half) take the mortgage interest deduction. The average mortgage interest tax deduction is $12,200, and a typical benefit for home owners is $3,050 a year.

The National Association of Realtors has been a leading proponent of keeping the mortgage interest deduction alive, despite Washington toying with the idea of eliminating the deduction in hopes of saving the government money during these tough times where federal debt has reached new highs.

With a federal debt load of over $14 trillion in 2011 it’s no wonder Congress is seriously considering ways of bringing in more taxes. Increased revenue could be a main solution in reducing our debt and increasing our financial stability as a nation.

Many first-time buyers aren’t even aware of this deduction, but the NAR retains that it is essential to keeping buyers coming to the table and helping the housing market improve. The real harm could come from essentially raising taxes on already struggling American families, they say.

Moe Viessi, NAR President, stated, “NAR firmly believes that the mortgage interest deduction is vital to the stability of the American housing market and economy. We urge the president and Congress to do no harm.”

He continued that “while progress has been made in bringing stability to the housing market, the recovery has been slow. The nation’s homeowners already pay 80 to 90 percent of U.S. federal income taxes. Raising taxes on them, now or in the future, could critically erode home values at all price levels. This would destroy middle-class wealth accumulation and trillions of dollars in home values nationwide.”

On the flip side of the coin it’s important to consider that a large portion of today’s buyers are making all-cash purchases. While many of those are investors, many still are buyers simply wanting to continue on in a debt-free lifestyle.

According the the NAR cash deals are up and now represent 30 percent of nationwide sales.

“We have been hearing about some baby boomers buying homes for their kids with all cash, giving their kids a loan that gets a better return than cash sitting in the bank,” Lawrence Yun, chief economist for the National Association of Realtors, said during a recent presentation at Cleveland State University, the Plain Dealer reported.

These types of purchases may mean missing out on certain deductions and on low rates, but it also means 100% assurance you own your home.

These all-cash buyers find ready and willing sellers who have the assurance that the sale will close, as opposed to the large number of buyers today who need to use financing to buy. The number of contract cancellations in recent months due to being unable to get a mortgage has been a large factor in slowed sales.

Additionally, a mortgage interest deduction isn’t an incentive for all-cash buyers, who now make up a large share of the market. The deduction could even be seen as a government reward for those that buy a house by way of a lender instead of through saved funds.

Still, the NAR presses that the MID is vital to the stability of the housing market and economy.