The mortgage interest tax deduction is one of the best sales tools that real estate agents have at their disposal. It costs them nothing to mention that in all but the most expensive homes, all of the mortgage interest on a primary residence is a federal tax deduction if you itemize your deductions.
Sounds fantastic, but the catch is that the interest is a tax deduction, not a tax credit. So if you pay $10,000 in primary residence mortgage interest during the tax year, you don’t get $10,000 off of your tax bill. You get $10,000 times your marginal tax rate, or at most a few thousand dollars. It’s a bit like paying a dollar for a quarter.
On the chopping block. Is it really a disaster?
Flexo over at Consumerism Commentary mentioned that the mortgage interest deduction was on the chopping block at the national level. The deduction is definitely in the sights at different levels, from state offices to federal congressional supercommittees.
This could be a personal disaster for homeowners that are depending on the deduction to make ends meet, as it can amount to several hundred dollars or even over a thousand dollars per month (annualized). For everyone else, it will spell the end of a nice kickback from Uncle Sam. In the long run, though, the removal of this subsidy (just like the removal of any subsidy) will affect home prices for everyone. Removal of the mortgage interest deduction makes homes marginally less affordable, which pulls the price down a bit across the board. So, it’s pay higher prices with a deduction, or pay lower prices without a deduction (and have a lower mortgage payment).
The deduction is irrelevant
What is relevant, though, is that rates are extremely low, still. As of this post, 15-year mortgage rates and 30-year fixed mortgage rates are 3% and 4%, respectively. Fixed, as in your payment will still be the same at the end of the mortgage, but it will hurt far less than it does now. They may go down further, but they can’t go down much further. (I doubt banks will ever pay us to borrow money.)
So pay no worries to the federal tax deduction for mortgage interest. Watch instead the rates themselves. It’s a great time to borrow for the purchase of a house if everything else makes good financial sense.