Wednesday, June 6, 2012

Mortgage Interest Deduction

The mortgage interest deduction is a major perk of home ownership, and one that helps determine how much home a buyer can afford. Just today, NPR ran a story entitled "Why Does the Mortgage Interest Tax Deduction Still Exist?". Others have been asking the same question even before national housing crisis drew everyone's attention to home purchase economics. As the market recovers, the spring and summer prime home buying season takes off, home buyers might be more interested in the origins of the mortgage interest deduction (MID) and why it's been such a hot topic for years.

The New York Times ran an excellent piece in 2006, "Who Needs the Mortgage-Interest Deduction?" that sheds light on why we still use a tax policy invented over a hundred years ago. Home buyer economics today are almost the complete opposite they were in the 1800s, when such purchases were made mostly in cash. Originally, the MID was lumped in with the deduction for all other types of interest. Over time, Americans came to use credit so much that offering a deduction for all interest wasn't practical for the IRS, but eliminating a deduction for mortgage interest hardly seemed to encourage the American dream. Other types of interest ceased to get a deduction and the MID was all that remained of the original deduction policy.

There are several reasons the MID has come under fire by various detractors. One is that many home owners don't get a huge benefit from the MID. This could be because they don't itemize their taxes or because the portion of the interest deducted doesn't add up to much unless you are dealing with properties worth millions. Another is that, however much the deduction might benefit individual homeowners, the deduction ultimately adds up to a huge loss for the IRS. The figures depend on which statistics you use and the angle of the study, but in general this is the basis of many detractors' arguments.

Proponents of the MID would, of course, point out that even if you don't deduct the largest possible return from your mortgage interest by owning a million dollar home, any deduction is still a boon. Mother Jones ran an informative article, "Why Everyone Loves Mortgage Interest Deduction" detailing the benefits of the MID, namely, that across the board returns as compared to income are comparable in all brackets-- "about 2% of income for everyone." They note that "although home ownership rates are obviously higher at higher income levels, the home ownership rate is 60% even at incomes as low as $25,000." In other words, home ownership is an appealing goal for all Americans, and no matter what your income level, the MID does offer a benefit for everyone in proportion to both their income and the cost of their real estate purchase.

Despite the fact the MID has been a popular point of debate in home economics for years, it will be around for many years to come. Homeowners can continue to look forward to that added perk when they make their purchase. For every article questioning the existence of the MID, there is another advocating its benefits to homeowners. Relator.com links to a number of articles detailing both sides of the MID conversation, as well as more on the history of the MID. If you are considering buying a home, or have recently done so, it's never to late to learn more about another aspect of owning real estate. Check out the Field Guide to Mortgage Interest Deduction and dig deeper today.