Proposals floating on Capitol Hill to curb the mortgage interest deduction (http://www.houselogic.com/articles/mortgage-interest-deduction-vital-housing-market/) gloss over all the ways home owners, and even renters, would be hurt by the change. Let's set the record straight.
Myth #1: The mortgage deduction is just for rich people.
Â Â Â â€¢The mortgage interest deduction helps mostly middle- and lower-income families.
Â Â Â â€¢65% of families who use it earn less than $100,000 per year.
Â Â Â â€¢91% earn less than $200,000 per year (that's where most economists draw the line between rich and middle-class).
Â Â Â â€¢Only 9% earn more than $200,000 per year.
This myth may have arisen because of a related fact: If you buy a house, you're much more likely to accumulate wealth by the end of your life. Home owners have an average net worth of $200,000, while the average renter's net worth is $5,000, according to the Federal Reserve's Survey of Consumer Finances (http://www.federalreserve.gov/pubs/oss/oss2/scfindex.html).
Myth #2: I'm not affected by the mortgage deduction because I don't own a home.
Â If the mortgage interest deduction (http://www.houselogic.com/articles/mortgage-interest-deduction-vital-housing-market/) goes away, home values would fall by 15%, the NATIONAL ASSOCIATION OF REALTORSÂ® estimates. When home values fall, tax revenues follow suit, giving your local government two choices:
Â Â Â â€¢Raise property taxes. Not only will home owners pay more in taxes, renters won't escape unscathed either as landlords raise rents to cover their costs.
Â Â Â â€¢Cut services that everyone-renters and owners-enjoys.
Myth #3: Switching to a 12% mortgage interest credit would be a wash for most.
Â One proposal floating around Congress is to replace the mortgage interest deduction with a 12% nonrefundable mortgage interest tax credit. (Deductions reduce your taxable income; credits reduce your tax liability.) This plan would increase taxes for many home owners.
Example: If you paid $10,000 in mortgage interest, and you're in the 25% bracket, you'd pay $1,300 in extra taxes.
Â Â Â â€¢The $10,000 deduction you have now saves you $2,500 on your taxes (25% x 10,000).
Â Â Â â€¢The 12% credit would save you only $1,200 (12% x 10,000) on your taxes.
Â Â Â â€¢In this scenario, if the mortgage interest deduction (http://www.houselogic.com/articles/deduct-mortgage-interest-home-equity-loans/) is changed to a 12% credit, you'd lose $1,300 (the current $2,500 savings minus the $1,200 you'll save under the 12% plan).
Myth #4: Not that many people take the mortgage interest deduction.
Â There are 75 million American home owners, and 38.5 million of them take the mortgage interest deduction. The average mortgage interest tax deduction is $12,200, and a typical benefit for home owners is $3,050 a year.
The mortgage deduction is a key benefit to first-time home owners (http://buyandsell.houselogic.com/articles/4-tips-determine-how-much-mortgage-you-can-afford/) and trade-up buyers because you pay the most mortgage interest when you first take out a mortgage. (You won't pay equal amounts of principal and interest until year 13 or later, depending on your interest rate.)
People with large families also get a lot of bang from mortgage interest deductibility-they buy relatively big houses for their big families.
Myth #5: Getting rid of the deduction won't affect me or my housing market.
Â It will mean lower property values for all American home owners, including the one-third who own their homes outright and the 12 million who take the standard deduction.
Even if you don't have a mortgage, getting rid of the MID will affect how much home you can afford to buy (http://buyandsell.houselogic.com/articles/negotiate-best-house-buy/) -and how much a buyer will pay for your home.
Myth #6: People will still buy my house without the mortgage interest deduction.
Â Yes, people will still value home ownership, but it will be harder for them to buy your house. The mortgage interest deduction makes it cheaper to buy a home because it saves real money at tax time.
If you bought a home last year with a $200,000, 30-year, 5% fixed-rate mortgage and you're in a 25% tax bracket, you'd save about $2,500 from the mortgage interest deduction alone (http://www.bankrate.com/calculators/mortgages/loan-tax-deduction-calculator.aspx) in the first year you own your home. That's money you can use to pay down other debts, save for your children's college education, or put away to buy a move-up house.
Myth #7: Solving the U.S. budget problems requires everyone to sacrifice.
Â Home owners already pay 80% to 90% of the federal income tax collected. If mortgage interest deductibility (http://www.houselogic.com/articles/mortgage-interest-deduction-vital-housing-market/) disappears, you and your fellow home owners could foot 95% of federal income tax.
If you're at the beginning of your mortgage, losing the mortgage deduction will cost you a bundle:
Â Â Â â€¢$26,685-a 15% drop in value for the median home valued at $177,900.
Â Â Â â€¢A proportionally smaller gain in overall home equity over your lifetime, because your home now starts from a lower value.
Article From HouseLogic.com