Most homeowners know that the US government encourages people to buy homes through various means. One of the most beneficial for homeowners is tax policy. Most homeowners can deduct the interest that they pay on their mortgage from taxes they owe each year.
With the election of Donald Trump as the next president, there is the possibility that the mortgage interest deduction could be changed. Whether it could be done away with entirely is doubtful, but any changes to the current system would bring with it many uncertainties for homeowners.
While it is possible to change the mortgage interest deduction and other taxes in ways that could end up being a net positive for many homeowners, we would like to point out the advantages of the current mortgage interest deduction below.
Note: One Trump proposal that was touted during the 2016 campaign was putting in a limit on itemized deductions for single filers and $200,000 for joint filers.
It is possible that some high net worth tax payers could end up having a limit on the mortgage interest deduction. However, we think that because of current caps ($100,000 cap on interest in a year, and $1 million loan limit) and because of low interest rates, mortgage interest would not make up a major part of the total deductions that go over the $100k or $200k caps.
Advantages of the current mortgage interest deduction are:
#1 Writing Off Mortgage Interest Saves on Taxes
Most homeowners have mortgages for 30 years and pay thousands of dollars in interest every year. Most homeowners can write off up to $100,000 in mortgage interest every year and save considerably on their tax bill.
Eventually, people do pay off their mortgages and their tax savings will be reduced, but the mortgage interest deduction results in major tax savings for many people in their prime earning and child rearing years. Learn more about a refinance tax deduction versus a home equity deduction.
#2 More than Monthly Interest Is Deductible
Most people only think about the monthly amount of interest they pay on their mortgage as being deductible. But other things can be deducted too. For example, if you pay any points to get a mortgage, you can deduct it in many cases.
If the points that you paid is reasonable for your area and type of home, you usually can deduct the points in the tax year you paid them. However, if you refinance and pay points, you have to amortize the deduction over the loan’s life.
Also, at this time, private mortgage insurance premiums are tax deductible as well. This could change in 2017 under a Trump administration, but we will need to wait and see.
#3 The Deduction Encourages Homeownership
This is the bottom line of the current US government policy and the reason for the mortgage interest deduction. Owning a home is the American Dream, and generally, more people owning homes is a net positive for the American economy. It means that people spend money on things for the home and fixing it up, which stimulates economic growth.
Many Americans are motivated to buy a home because they know that they will be able to reduce their overall tax bill. How much would people continue to buy homes if they knew they did not get as much of a tax benefit? People still would buy, but perhaps fewer people would and that could affect the economy.
#4 Mortgage Write Off Encourages More Home Loans
The home building industry is not the only one that benefits from the mortgage interest deduction.
The mortgage industry also gets a big boost because people are encouraged to buy their own homes. Also, many homeowners decide to get a second mortgage so that they can tap their equity to pay for things that they want, such as a home renovation or a college education.
#5 Second Mortgage Interest Also Deductible
The first mortgage on your primary residence is not the only loan that is tax deductible. Homeowners also can write off the interest that they pay on their second mortgage.
Some homeowners also use equity via their second mortgage to pay for college education or other important expenses, which also is a benefit to American society.
The Bottom Line
The current state of the mortgage interest deduction has many benefits for homeowners and the US economy. In the past, Congress and various presidents have looked at changing the mortgage interest deduction, but it is a politically toxic thing to do. Trump will likely be aware that changing this very popular tax deduction could be fraught with risk for his new administration.
Even if a partial elimination of the mortgage interest deduction were accompanied by offsets in other parts of the tax code, it probably would be a difficult sale for many American homeowners.
We expect that the Trump administration will leave the mortgage interest deduction largely intact, if not entirely intact, and will probably pursue tax code reform in other areas. Keeping the mortgage interest deduction mostly the same is a good idea, in our opinion and will continue to give strength to the US housing market.