How much does the Mortgage interest deduction really save us?

[xxxsdesdexxx]

Last edited Fri Nov 30, 2012, 03:33 PM - Edit history (1)

How much does the Mortgage interest deduction really save us? Not much for me after my analysis.

Here are my numbers -- yes I also factored in the other common deductions for homeowners -- the property tax deduction. The Standard Deduction for those who are married and filing jointly is $11,400.00 in 2012. I would argue, that my wife and I are in the middle class -- we make about $72,000 or so a year. We have a 30 year loan at a fixed interest rate of 3.875% for $228,000.00. In the first year, where the mortgage interest deduction is always the highest, I paid $8,763.00 in interest. My property taxes were $3,127.00 dollars. The total I would deduct then would be $8,763.00 + $3,127.00 = $11,890.00. Our marginal tax rate is 15%. The difference between the itemized deduction we are taking and the standard deduction ends up being $490.00 dollars which translates to a tax savings of $73.50. What's my point? With such low interest rates, can the middle class go without the mortgage interest deduction? In my case, yes. In you're case maybe not. This deduction becomes more and more favorable with higher interest rates and with higher amounts borrowed.

I'd recommend for all of you to figure out how much you're really saving by taking the mortgage interest deduction. Is it as much as you thought, more than you thought, or less than you thought?

Should we get rid of it? I'm not saying yes or no. What I'm recommending is that you figure out how much it saves you, if anything.

[msongs]

1. get rid of it for everybody just because YOU don't save much. ok nt

[xxxsdesdexxx]

6. Should we get rid of it? I'm not saying yes or no

Should we get rid of it? I'm not saying yes or no. What I'm recommending is that you figure out how much it saves you, if anything. There's a lot of people out there who I'm sure could not go without it -- especially those with higher interest rates -- but there are others out there who are misinformed thinking it's saving them more than it really is.

[hollysmom]

2. first you have to have a mortgage. then you can calculate.

home equity loans are also tax deductible, correct?

[NoOneMan]

3. Depends on if you think promoting affordability increases housing demand, and thereby prices

[NewJeffCT]

4. It also depends on where you live in the country

and if you take out a 30 year loan or not.

Our previous mortgage started off at 30 years & $500,000 (and, we had put 20% down), and I think we had $15,000 or $16,000 in mortgage interest that first year. Then, we also had $9,000 in property taxes and $800 for insurance. So, somewhere around $25,000.

Of course, we lived in an upper middle class suburb in Connecticut, but our home wasn't out of line for the town or region in terms of pricing.

(And, the same home in an equivalent town in northern NJ probably would have been well over $1 million with property taxes of over $20,000, if not over $30,000. And, in Westchester County NY or lower Fairfield County in CT, you're probably looking at even higher prices)

[obnoxiousdrunk]

5. There is no

hazard insurance deduction.

[xxxsdesdexxx]

7. I believe you are correct, so I will edit my original post to remove that.

[djean111]

8. For people who are unable to refinance at a low rate because they have lost their jobs,

or are underemployed, the mortgage deduction can be a big deal.
I don't thin we can make a decision like that, really, and certainly not based on individual circumstances.
I do not think the middle class, or those making less, really need to "share the pain" - because this is just an excuse for the 1% to further insulate themselves from pain.
Your question sounds like a trial balloon, sort of.
Anyway, I don't think any of us here are part of the "we" who could get rid of it - once the people elected get to Washington, they are almost all working for someone else. "We" seem to have no power after the elections.
Getting rid of the mortgage deduction is just another squeeze, and may hurt the very slowly recovering housing market.
They can get rid of subsidies to oil and gas and coal; they don't need to get rid of the mortgage deduction.

edited to add - you can deduct a percentage of hazard insurance if you run your business from your home or you are a business owner, in some cases.

[sinkingfeeling]

9. Considering I deduction 4 to 5 times the amount of the standard single tax deduction of $5800,

I would very much like to keep deductions.

[Proud Public Servant]

10. Using your numbers

If I had not been able to deduct mortgage interest and real estate taxes last year, I would have had to add around $25k to my income, on which I would have owed an additional $6,250 in taxes. That ain't hay.

[unblock]

11. part of what pisses me off about this discussion is that i never would have bought my house

we bought our house and made a 30-year commitment to pay a mortgage based on a budget we felt we could live with. we planned out financial lifestyle based on what was for us, as for most people, if the single biggest purchase of our lives.

had mortgage interest been non-deductible, we never would have even considered this house. in fact we would literally be living in a different zip code.

but we can hardly just up and move to something more affordable. we're stuck here.

we're underwater on our mortgage because home prices have fell. no big problem, because we don't plan on moving. but if interest becomes non-deductible, then not only is my house worth even less, but my cost of living here goes up. normally if my cost of living goes up, one can at least consider moving. in my case, i can't without some form of trashing my credit.

so basically, we had an opportunity to make a vitally important decision, and taking away this deduction would turn it into the wrong decision, and we are stuck with that mistake for years and years and years.


this goes beyond the fact that this would cost my about three week's pay every year. i'd be much happier paying that exact same amount through straighforward rate increases, though this is well beyond what people are talking about in terms of rate increases.

[NoOneMan]

12. In a way, you are almost suggesting that the deduction increases demand

Had there never been a deduction, demand would be lower at these prices (you wouldn't have bought), suggesting the prices would need to meet demand. So in all, the deduction is probably saving you nothing, as the market has adjusted to compensate for it.

Homes are being priced as high as the market can bear, such that they remain affordable. This "affordability" measure then just seems to create some excess amount of money that never materializes for the buyer; what does materialize is higher interest payments to banks that the government subsidizes.

Does revoking it cause harm now that the market has adjusted? Absolutely.

[unblock]

15. is there an offsetting effect? sure. is it a 100% offset? of course not.

yes, i understand, had there never been a mortgage interest deductions, the house i'm in would have been cheaper than it is today.

my ability to spend on house would have been less, but then so would the price of my house.

i understand the argument and agree with the concept, but there's simply no way house prices would come down to completely offset my lowered affordability. mainly because i'm the worst case, my mortgage is now in fact over 100% of the house value (i was a responsible borrower when i sign up, honest!) and i'm only a couple years into my 30-year mortgage, and therefore the bigger chunk of my mortgage payment by far is interest. someone who needs a much smaller or shorter mortgage isn't affected nearly as much; deductibility doesn't drive them completely out of the market and cash buyers aren't affected at all.

prices would come down, that's for sure; but not enough to make the whole thing a wash.

[NoOneMan]

16. The damage is already done

This measure made prices go up. Revoking it will not guarantee a complete adjustment; that depends on a lot of factors, and people do not want to sell for less than they bought due to an external affordability measure (not always taken directly into account).

Its a real bummer though to the people who bought depending on it, like you. Best of luck

[JDPriestly]

52. You make a good point, unblock.

The mortgage interest deduction is a big help to young people, first-time homebuyers who may also have student debt. They can't even qualify for a loan on their income unless they have that deduction.

Plus getting rid of the mortgage interest deduction would really hurt people who have to sell a house they bought at a time when the mortgage interest deduction was the law because these earlier buyers will have bought their house at a higher price than they can sell it once the deduction is gone.

This is not something that should be compromised on. The mortgage interest rate deduction should only be available for one house per head of household tax return. That would make sense. It should not be available for additional houses.

The mortgage interest deduction helps people pay for their houses. It promotes home ownership by working people. As a general rule houses that are owned by the occupant are better cared for than rented houses. Homeownership means stable neighborhoods, better schools and better communities.

To abandon incentives for buying and owning your own house would really hurt our country. We should definitely keep the mortgage interest deduction. And by the way, I do not say this out of self-interest. We don't get it any more. But I am in favor of it anyway because of what home ownership means to my community and how the deduction helps young families who want to move here.

[Myrina]

44. I'm in the same boat as you ...

Sigh.

[Filibuster Harry]

13. in my case, I no longer have a mortgage so it doesn't save me anything now. But it used to.

I see where you are coming from but if I had the same mortgage as you it would save me more since I am single. And in your situation you don't have any state taxes, donations, or medical deductions but I do.

If anything should be considered for elimination when it comes to mortgage interest it could be on all multi homes but your primary residence (excluding rentals of course) and of course anything over $ 1 million or possibly $ 500 thousand.

[bornskeptic]

14. We should get rid of it and replace it with a 15% credit.

TheVirtually all of the benefit from the home mortgage interest deduction currently goes to people in the top 40% of the income spectrum. My wife and I make about $60,000 a year and have been paying over $5000 a year in mortgage interest for the last four years. We've never gotten one dime out of the mortgage interest deduction because we've neer had enough deductions to itemize. We're about at the average in income, so how do you think people making less than us are making out? Replace the deduction with a credit and everyone buying a home would benefit, and everyone would get back 15 cents on the dollar spent, whereas now the wealthy get back 35 cents on the dollar, while people in the 15% bracket, if they benefit at all, only get back 15 cents on the dollar for the amount that exceeds the standard deduction. The wealthy cover the standard deduction from state and local taxes, so they get paid on every bit of their mortgage interest.

[xxxsdesdexxx]

17. Excellent idea

I like your idea because it levels the playing field. There is no reason that those at the top should save .35 cents per dollar by using the mortgage interest deduction while those at the bottom are only saving .15 cents on the dollar.

[Filibuster Harry]

38. sounds good for leveling the playing field but c'mon; if my tax rate is

35% and yours is 15% why shouldn't I save 35% for say donations compared to you at 15%. If you believe the current dividend tax rate (at 15%) is unfair (i do) then
limiting deductions to a certain % is unfair as well.

[AndyTiedye]

19. No State Income Tax Where You Live?

For most homeowners, the combination of mortgage interest, real estate taxes, and state income taxes exceeds the standard deduction by quite a bit.

[bornskeptic]

28. We paid about $2200 in state income tax last year.

Add that to $5500 in mortgage interest and $1500 in real estate and personal property taxes and we still end up a couple thousand short of the standard deduction, which was $11,600 for 2011.

[lasttrip]

18. you are forgetting those of us who live in high income tax states

or give to charity. i live in New York. i pay an additional $6,000 in NYS income tax. that would be added to the total amount you calculated i could use as a tax deduction. without the interest deduction we would lose the $6,000, not just $490.

[xxxsdesdexxx]

20. I pay about $2,265.00 in state income tax to the state of California

I know this is deductible as well, but I was over simplifying in my original analysis. My point was to see how much in dollars one was saving just from the Mortgage interest deduction. I know it depends on whether one is itemizing or taking the standard deduction. At 15%, $2,265.00 comes to about $340.00

[OhioworkingDem]

21. I think your example is self serving and restrictive and does not ask the right question. I for one

am middle income (about 160 K) but have about 25 K interest on mortgage. All together my deductions are 35 K. Clearly, I would be penalized in your example. The mortgage deduction is particularly helpful to the middle class. Caps on much higher deductions, on the other hand, may cast a tax net for the upper 1 to 2 percent and may be more fair.

[zipplewrath]

40. Not middle

I'm not sure how you're defining "middle" but 160K almost assuredly doesn't qualify. You're probably in the top 15% nationally, in terms of household income. If you split the country in to three classes, upper, lower, and middle, you'd have to be in the 33-67 % range to be "middle". You're probably thinking in terms of you community. In that case almost everyone is "middle" since they are living close to people in similar income categories. If you split the country up into 4 categories, "low, lower middle, upper middle, and high" you still would have to be lower than 25% to get into a "middle" category. About the only way you get into the "middle" category is to suggest that anyone inside of the 15% margins on each end are "middle".

[Myrina]

45. LOL that caught my eye too!

$160k is MIDDLE?

I thought I was doing damn good at $55k!!!

[mary195149]

22. Once you overcome your standard deduction,

you start seeing greater savings on your Schedule A.
It's true, without a mortgage interest and property tax deduction, most people do not have enough to itemize, but if you are able to overcome your standard deduction, you get more write offs such as state income tax, medical expenses, charity donations, 2nd home mortgage interest deduction and more. So, it could add up big time.

[question everything]

24. Medical expenses you can deduct only the expenses that exceed 10% of your AGI

Used to be 7.5%.

You have to be paying your own way - which I have done for 15 years - and/or have high expenses which were not reimbursed.

Frankly, I think that paying for medical insurance should be the same regardless of who is paying for it.

Either tax the benefits provided by the employer, or let the one with individual policies take credit for the premiums.

[question everything]

23. 83.7 Billions

http://www.democraticunderground.com/111626484

[Gargoyle22]

25. Saves me alot

I was horrified at the prospect of its elimination.

[Meshuga]

29. It saves me a lot too

And it would be pretty devastating if we lost it. My wife and I live within our means trying to save for our retirement and college for our kid so the loss of this deduction would be a huge set back.

[Iggy]

26. I Don't Have Kids; What Other Tax Break

do I get without this deduction?

The answer is NO; this deduction cannot be eliminated. Not just because I'd like a tax break but because eliminating it will have a severe impact on the housing industry-- typically a strong part of our economy-- which is just starting to recover.

Interest rates will not stay this low forever.

[exboyfil]

27. Would we be willing to eliminate the deduction for future mortgages?

Home values would take an immediate hit, but current homeowners will have nothing change on their taxes. Another possibility is to cap the home mortgage value at $300,000 to $500,000 for deductability (not sure how much additional tax revenue would be generated though). You could also have deductability reside in different buckets (all charitable is deductible and could be combined with a lower standard deduction). Medical expenses should definitely go into a different bucket anyway. It is shameful that some of the most vulnerable have the least access to this deduction.

For me giving it up is not a big deal. I am at 2.75% now on my mortgage and, at $100,000, my marginal tax rate it does not represent that much money. Since I take full advantage of my state's 529 (exempting $11K of my income from state taxes) my state income tax burden is high but still combined with property taxes and charitable leaves an amount lower than the standard deduction. That means that only a portion of the $2,750 that can be deducted is effective (figure approx. 30% tax rate savings is probably around $600).

I remember doing this calculation several years ago when I calculating the full value of the mortgage deduction. It turned out that very little savings was had from having it in place (I earned alot less back then). I have always lived in relatively low housing expense states though (Iowa and Tennessee). Since Tennessee did not have a state income tax (and this was before you could use the sales tax as a deduction), the mortgage interest deduction met little to me. I noticed realtors did not consider this when they tried to sell homes (of course they would not).

[Progressive dog]

30. It saves many of us a lot.

Our mortgage has been zero for a few years, but was 8.5% in the late 70's, when we bought. Income tax rates were also substantially higher then. We would not have been able to afford to buy then without the deduction, especially in NY where state income tax and real estate taxes are high.

[peace13]

31. Recalculate that with 7percent interest and pretend that you...

are one of the many people who can not refinance at that nifty rate.

[DemocratSinceBirth]

32. I Didn't Even Look At The Numbers. Most Everybody Likes It. Taking It Away Is A Political LOSER

Let the Republicans do it.

[Jeff In Milwaukee]

37. Agreed

Bear in mind that itemized deductions are ALREADY limited for higher-income taxpayers. So any further limits would be limits reaching down into the ranks of the middle class voters.

I can't think of any reason why a member of the Democratic Party would even consider a tax policy that would increase taxes on the middle class.

[Hoyt]

33. Don't think it is worth as much as folks think. But it's not going away. Everyone wants a loophole.

[Texin]

34. With mortgage interest at all time lows, it doesn't amount to a lot; however....

historically and statistically it's probably safe to assume that mortgage interest will increase over time - and maybe even precipitately when the economy begins to come back. This deduction, along with deductions for state and local property and personal taxes, are about the only significant deductions that true middle income earners can avail themselves to. It's an incentive, albeit not that great a one, for first-time homebuyers to get into ownership. The wealthy don't benefit that much by it because it's capped at a certain level (can't recall the amount off the top of my head), but it's way below that which average wealthy buyers would pay for a residential investment.

[taught_me_patience]

35. good post

Most overestimate the mortgage interest deduction because it needs to be calculated above and beyond the standard deduction. One thing you forgot is that you can deduct state income taxes from federal taxes.

[Jeff In Milwaukee]

36. The answer to every tax question: It Depends

It depends on how they plan to limit the deduction. I've heard overall limitations on itemized deductions, which would be a different matter altogether.

Remember that there's your Mortgage Interest + Your Property taxes. But being able to itemize your deductions allows you to write off state and local income taxes, medical expenses, casualty losses, expenses related to your employment, in addition to your charitable contributions.

I've heard some argue that we should limit itemized deductions to $17,000. That would be a significant problem.

It's not uncommon for an otherwise middle class taxpayer to have up to $30,000 in itemized deductions. Think of a $2000 mortgage payment in the first few years of the mortgage -- it's all interest and property taxes (and deductible). That's $24,000 right there. Throw in state income taxes and contributions, and you can get to $30,000 pretty quick.

A $17K limit could increase a person's taxes by $2-3,000 per year.

[Bake]

39. Since my home was foreclosed on, it doesn't save me ANYTHING.

And since it's likely to be some time before I own another home, well, let's say my sympathies lie elsewhere.

Bake

[DAVEDCHICAGO]

41. Where's my renters deduction

I have Rented For the past 15 years. Never owned a home due to moving a lot.
Never have I got a federal deduction FOr renting my apartments. Have got it in a few states/municipalities (Indiana for one) due to their rules. Where's the Renter's Deduction? Shouldn't the renter get to share in Some of the mortgage deductions that the landlord/property owner are taking?!//?

[djean111]

43. If you rent you do not have to pay property taxes or carry insurance on the dwelling itself.

You are not on the hook for maintenance or the mortgage payment.
You are not stuck with a high mortgage even though property values have plummeted.
You do not own a property which loses intrinsic value and rental value due to new construction or worsening neighborhoods.
You can walk away free and clear.
You are not left to fix damage done by careless or vindictive renters.
You do not risk losing your property because a renter is dealing drugs.
As a renter, do you want to share in those those things?
The owner takes on the responsibility. You just need to pay the rent, and call the owner if something gets broken.
Seems fair to me.

edited to add - as a renter, you don't have to worry about paying the mortgage if rent just doesn't get paid.
As a renter, you don't risk possibly getting stuck with some renter's unpaid utility bills.
You don't have to field complaints about noise or whatever at all hours.
You are not risking getting sued if someone trips or whatever.
You just pay your rent, with none of the responsibilities, liabilities, or headaches.
If you were renting and your dwelling was ruined or washed away by Hurricane Sandy - you can go and rent somewhere else.
The person who owns the property is stuck.

[DAVEDCHICAGO]

48. I'M also paying a Premium to them to cover those items..

[djean111]

49. No, sorry - you have no real skin in the game.

You did not make the initial investment, you have none of the responsibilities, you really just bought a product, albeit for a finite amount of time.
If you feel you are overpaying, move somewhere else or negotiate, but you are not entitled to any of the deduction for mortgage interest. As it is, you choose to let someone else have all the responsibilities of property ownership, whether because of moving around or whatever.
If everyone moves out of a building and no one new signs a lease, the owner still has to pay the same amount to the bank.
What you are proposing is self-serving and illogical.

[DAVEDCHICAGO]

50. read this

this:
http://www.cbpp.org/cms/index.cfm?fa=view&id=3802

and this:

http://assets.newamerica.net/blogposts/2012/the_inefficiency_of_the_mortgage_interest_deduction-69646

the Mortgage Interest deduction is going to a majority of high earners. There should be an income gap or a maximum amount allowed to deduct.

[JDPriestly]

53. If your landlord doesn't get the deduction, your rent goes up.

Still, I think that the purpose of the deduction should be to encourage home ownership because home ownership makes a community.

I understand how you feel. We rented for many years because we had to move a lot. Of course, we did not get the deduction.

But the fact is that as renters we did not contribute nearly as much to the stability and well-being of our community as we do now that we are homeowners.

Sorry about your situation, but we encourage home ownership for good reasons and they aren't only just to benefit the homeowner. The deduction and home ownership benefit the entire community.

[smorkingapple]

42. The interest deduction helps offset the lack of equity paid off in the opening years..

That's what's never reported. You only really start paying down your mortgage after year 15, the first few years are all interest which you can deduct..

If you get rid of it, you're still only paying interest, building little equity in the home and get no tax break on top... Double whammy

[Myrina]

46. +100

I was shocked to get my statement after the first year in my home and realize that every mortgage payment I made - $12,800 worth - went toward interest.

Without that deduction, being single, my only other adjustments are student loan interest & 401k contribution, and that amounts to a pittance.

[qwlauren35]

47. I'm married too.

So I understand where you're coming from. But when I think about all the single people who are homeowners, I feel for them. THEY need the tax break. Also, unmarried gay couples need the tax break. Even head of household need the tax break.

[JDPriestly]

51. At today's interest rates, the deduction may not make that much difference for families

who buy, say, a house in the Middle West for $228,000.

But, when we bought a house many years ago (in the late 1980s), the interest rates was 9.5% (or 10%. Been a long time and I'm not sure which.) The deduction for our mortgage interest meant we could qualify for our house. It meant we could pay for our house.

You cannot rely on mortgage interest rates remaining as low as they are. In fact, I would bet that should we give up the deduction for mortgage interest, the rates will go up. They are bound to go up as soon as the economy warms up a bit. 3.75% is incredibly low. It means that people (like seniors) who save their money in a bank get next to no income from their savings.

Don't count on these low interest rates. When it comes time for you to sell your house, buyers may be scarce because they may not qualify due to the interest rates.