How does the Mortgage Interest Deduction benefit homeowners?

First, the excess in total itemized deductions you have can be used to reduce your taxable income but it’s not a major factor to determine to buy a home. Actually, the major reason to buy a home is when someone’s marital status changes.

In my opinion and experience, it may be of no benefit.

Sometimes there are homeowners who have mortgage interest, but they don’t have enough itemized deductions to push them over the standard amount in the tax tables and therefore can’t deduct excess interest payments.

The benefit isn’t equally distributed but is more equally distributed to the wealthier homeowners by allowing them to borrow more money to buy bigger houses…Those earning >$100,000 annual income are several times more likely to exercise the deduction. For those with incomes >$200,000/yr get about a $1,800 benefit and those around $65,000/yr get about a $200 kick. (Note: I guess they have better lobbyists like Realtors and the Banking Industry.)

Even though 75% of all benefits from the mortgage interest deduction goes to the with incomes exceeding $65,000/year, those above $160,000/year get 75% of that benefit.

Investigative analysis by the R Street Institute revealed that the mortgage interest deduction contributed to increase the size of homes in wealthier areas. In fact, in just the Washington DC area, the study concluded that homes were approximately 1,400′ larger than what homes would have been without the deduction. Some believe that the deduction doesn’t have any meaningful cause of home ownership.

But I think most agree that home ownership is an integral part of most Americans’ equity and wealth and is therefore an important part of their financial strategy in addition to a place to live.

Interesting note: Estimates for lost Federal Tax Revenues from the deduction ranged from $70 – $175 Billion.

Sources: WSJ, 3-24-2014, Page A2 and WSJ, 3-17-2014, R4.

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