Proposals floating on Capitol Hill to curb the mortgage interest deduction gloss over all the ways home owners, and even renters, would be hurt by the change. Let’s set the record straight.
Myth #1: The mortgage deduction is just for rich people.
- The mortgage interest deduction helps mostly middle- and lower-income families.
- 65% of families who use it earn less than $100,000 per year.
- 91% earn less than $200,000 per year (that’s where most economists draw the line between rich and middle-class).
- Only 9% earn more than $200,000 per year.
This myth may have arisen because of a related fact: If you buy a house, you’re much more likely to accumulate wealth by the end of your life. Home owners have an average net worth of $200,000, while the average renter’s net worth is $5,000, according to the Federal Reserve’s Survey of Consumer Finances.
Myth #2: I’m not affected by the mortgage deduction because I don’t own a home
If the mortgage interest deduction goes away, home values would fall by 15%, the NATIONAL ASSOCIATION OF REALTORS® estimates. When home values fall, tax revenues follow suit, giving your local government two choices:
- Raise property taxes. Not only will home owners pay more in taxes, renters won’t escape unscathed either as landlords raise rents to cover their costs.
- Cut services that everyone—renters and owners—enjoys
One proposal floating around Congress is to replace the mortgage interest deduction with a 12% nonrefundable mortgage interest tax credit. (Deductions reduce your taxable income; credits reduce your tax liability.) This plan would increase taxes for many home owners.
- Example: If you paid $10,000 in mortgage interest, and you’re in the 25% bracket, you’d pay $1,300 in extra taxes.
- The $10,000 deduction you have now saves you $2,500 on your taxes (25% x 10,000).
- The 12% credit would save you only $1,200 (12% x 10,000) on your taxes.
- In this scenario, if the mortgage interest deduction is changed to a 12% credit, you’d lose $1,300 (the current $2,500 savings minus the $1,200 you’ll save under the 12% plan).
There are 75 million American home owners, and 38.5 million of them 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 mortgage deduction is a key benefit to first-time home owners and trade-up buyers because you pay the most mortgage interest when you first take out a mortgage. (You won’t pay equal amounts of principal and interest until year 13 or later, depending on your interest rate.)
People with large families also get a lot of bang from mortgage interest deductibility—they buy relatively big houses for their big families.
It will mean lower property values for all American home owners, including the one-third who own their homes outright and the 12 million who take the standard deduction.Even if you don’t have a mortgage, getting rid of the MID will affect how much home you can afford to buy—and how much a buyer will pay for your home.
Home owners already pay 80% to 90% of the federal income tax collected. If mortgage interest deductibility disappears, you and your fellow home owners could foot 95% of federal income tax.
If you’re at the beginning of your mortgage, losing the mortgage deduction will cost you a bundle:
- $26,685—a 15% drop in value for the median home valued at $177,900.
- A proportionally smaller gain in overall home equity over your lifetime, because your home now starts from a lower value.
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