Taking A Deduction Out Of Buyer Interest

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With the government flirting with the idea of eliminating the tax deduction for mortgage interest payments, buyers have begun to question where their motivation is to come from. One article does a fantastic job of clarifying some of the fears regarding the potential riddance of the deduction, as well as what it would mean for homeowners and the housing market.

To check it out, CLICK HERE.

First of all, the article astutely points out that eliminating the deduction is brought to the table every few years, yet is fiercely protected by two housing trade and lobbying groups – the National Association of Realtors (NAR) and the National Association of Home Builders (NAHB). For years they have managed to keep the deduction going, and safe money would say that they keep the deduction in place as the government moves forward with other means to increase tax revenues.

However, what would happen is the deduction were to cease? For now, let’s put aside the hypothetical damage to the housing market due to decreased buyer interest, and its subsequent negative effect across all other industries. Instead, let’s focus on whether or not John Q. Buyer would still find home ownership to be in his or her best interest.

Renters enjoy the flexibility to relocate on a whim, and can find housing that works for an ever-changing lifestyle. Buyers, on the other hand, are saddled with large outlays of up-front cash in order to buy, as well as high maintenance costs. Yet on the other hand, buyers have a chance to build equity, avoid rent hikes, and can essentially control their own housing destiny, being free from anything a landlord can throw at them.

In terms of cost, here’s how Ginnie Mae sees it. Without the deduction, takes approximately six years for a homeowner with a fixed-rate mortgage to be paying less per month than someone who rented the same property and had a 5% annual rent increase. With the deduction, this time frame is cut to three years, with the homeowner coming out ahead, and building up equity at the same time.

The mortgage interest tax deduction is without-a-doubt a motivator, but it isn’t the primary one. That would be the chance to gain overall wealth through equity, be it from market behavior or from dutifully paying down the debt. Unfortunately, they are looking to tax more of that money as well, a topic that has already been addressed in this blog. Yet in the end, if much of our economy’s recovery is to be though a housing market headed in the proper direction, diminishing the potential for buyers to be motivated into action doesn’t seem like the fastest way to get on the road to recovery.