For a long time the mortgage interest tax deduction has been a trendy topic when it comes to tax reform and ways to subtlety tweak the tax code in order to better balance our nation’s finances. Obviously, this topic stirs a lot of emotion, tough talk and heavy lobbying.
The debate has recently been re-stirred, as the assumptive Repubican nominee for President, Mitt Romney has suggested doing away with the deduction for second-home mortgages and potentially for high-income taxpayers although vague on specifics.
Let me be the first to break the news: The Mortgage Interest Tax Deduction is disappearing for many high-income taxpayers.
First the variables:
1) Current Record Low Rates 3.72% for a 30-year mortgage from Zillow. 2.98% for a 15-year.
2) Documented Trend toward downsizing away from McMansions via Baby Boomer generation.
3) Lower levels of mortgage debt outstanding (albeit not as brisk as one might think)
4) Compounding in reverse. Not a popular concept due to financial companies profiteering from interest charges on your outstanding balance, but as mortgage debt declines you will have a smaller balance of which to levy % charges which can lead to a mirrored image of dollar cost averaging into investments. This “compounding” will lead to increasingly lower interest amounts paid over time.
I would argue for many high-income taxpayers who have the wherewithal to achieve a re-financing of debt, the amount of mortgage interest to deduct has declined dramatically over the past 5-6 years. Your taxes are probably still fresh in your mind – take a look at your Schedule A, line 10 and compare to previous amounts. This tax deduction has already been slashed – you’d wonder if Washington would still be debating the issue at a 0.00% 30-year rate!
Sadly, if there is a reduction, or outright elimination of the tax deduction, it would likely hit those hardest who need it the most. Homeowners with mortgage debt they cannot refinance due to credit or job issues and lower-income taxpayers where the deduction has a more profound effect. Its elimination may also deter home buyers on the fringe from making a purchase.
All in all, a debate about the mortgage interest deduction in a time of 3.0% mortgage rates is a complete waste of time. There are much bigger fish to fry.