Should I worry about losing my mortgage interest tax break?
December 02, 2016
Q: There is talk about eliminating the mortgage interest tax deduction. Won't that hurt the housing market? If I'm thinking of buying a house for the first time, should I hold off and wait to see if prices go down once they do eliminate the deduction?
A: Interestingly, the head of the Mortgage Bankers Association came out and said there are circumstances under which his organization would support eliminating the mortgage interest deduction. Understandably, mortgage bankers have traditionally been among the staunchest defenders of that deduction. Even if they are open to discussing it, there is a possibility it might happen.
The question is, would this discourage home ownership enough to depress home prices? Conditions today suggest that it might not, for the following reasons:
1. Low interest rates diminished importance of mortgage interest tax breaks
Millions of people have already benefited by buying homes at or near record-low mortgage rates, and millions more have benefited from low refinance rates. Seeing mortgage rates drop from a normal level of around 8 percent to below 4 percent is more valuable to home owners than the deduction on mortgage interest. Furthermore, the lower mortgage rates go, the less the deduction on that interest is worth.
2. Entry-level home owners often don't itemize deductions anyway
Home buyers with relatively low incomes who are buying less expensive homes typically benefit more from the standard deduction than by itemizing. Thus, eliminating the mortgage interest deduction should have little impact on entry-level buyers. You mention planning on buying your first house. If you are buying at the lower end of the price range, you are less likely to see elimination of the mortgage interest deduction affect prices than if you were buying a more expensive house.
3. A broader tax reform effort could be stimulative to the economy
One factor that has lowered resistance to eliminating the mortgage interest deduction is that low purchase and refinance rates have helped shore up the housing market.
Another factor is that eliminating the deduction is being discussed in the context of a broader tax reform effort. Broader tax reform is the context in which the Mortgage Bankers Association has said it might be receptive to eliminating the deduction. A trade-off between eliminating specific deductions and lowering overall tax rates could be positive for the economy, and thus positive for the housing market.
In short, keep in mind that between people who don't itemize deductions and those who have paid off their mortgages, many home owners don't benefit from the mortgage interest deduction anyway. Add to that the fact that mortgage rates are extraordinary low right now, and the housing market may be less dependent on that tax break than ever.
Trying to guess the future of home prices is an exercise in speculating on the unknown. What you do know at this point is that mortgage rates are very much in your favor. You may want to act on what you know rather than trying to guess correctly about what no one knows.
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