Let's face it. Mortgages are beasts.
A mortgage is the largest loan that people are likely to take out in their lifetimes. They're also very expensive to acquire. Most of the closing costs that are paid by the borrower are largely for the benefit of the lender. The appraisal fee protects the lender's judgment that the property is worth at least the amount of the contract price. Title insurance purchased by the borrower protects the lender's interest in the property should there be problems with title to the property. Private mortgage insurance paid by the borrower protects the lender against default by the borrower — and allows the lender to lend more money for the privilege!
A ray of sunshine piercing the dark mortgage cloud
Most of it is very one-sided against the borrower. But there is a small reprieve: the federal mortgage interest tax deduction. It's a favorite deduction for homeowners, especially during the first years of a long, long mortgage when the interest part is far larger than the principal part of the payments. For mortgages totaling $1 million or less (for married couples) on up to two homes (with some caveats) the interest paid on those debts can be itemized on Schedule A of Form 1040. For a 30-year fixed mortgage on $1 million at 5%, this mortgage interest deduction would offset almost $50,000 in income during just the first year. Even for a more modest $200,000 loan, it's still almost a five-figure deduction.
But hidden inside lies some craziness …
“Elle” over at Couple Money revealed this craziness in her post on saving a ton of money on your mortgage:
As many of you know, my husband and I are working towards paying off our own mortgage early. I mentioned before that keeping a mortgage just for the interest deduction on your taxes is crazy. You’re just sending over more money to your lender to reduce your interest rate by a fraction.
Don't get me wrong. I dearly love my deduction. It's about the only thing good about having a mortgage. But that's all that it is: a deduction. It's not a one-to-one reduction in taxes. It only results in a partial reimbursement. It's like paying a dollar for a quarter.
But the mortgage interest deduction sure is a big selling point, isn't it? Especially with people who either want to lend you money or sell you a house! The mortgage interest deduction is the sizzle that comes with the decades-long bondage steak.
What's more, even though the mortgage interest deduction has been around for almost 100 years, it's not an inalienable right. As the ink gets redder, the pressure to increase inflows will increase, and the mortgage interest deduction could be reduced, or eliminated. The rules can change at any time, really, so it's not wise to plan for it to be there forever.
In other words, take the mortgage interest deduction for the gift that it is, but don't go crazy and take it for anything more than that. 🙂
Mortgage deductions are political. It is quite ridiculous for the government to be subsidising the increase in personal debt in the USA.
I would be more than happy to give up my mortgage interest deduction if it meant I no longer had to pay my mortgage!
The passion for the mortgage deduction is something I’ve never been able to understand. This spring my son took the whole mortgage deduction on the house we’re copurchasing. This came to a grandiose $1500. We paid about $12,000 in 2010, most of it in interest, because the mortgage was temporarily modified to 40-year terms.
How does this make sense? You pony up 12 grand in interest to get $1500 back????? If I had the cash and the accursed house were EVER likely to regain anything near the value of what we paid for it, I’d pay it off.
Obviously, we can’t do that now, because we simply will never get that money back–certainly not in my lifetime, and probably not in my son’s.
Americans were sold a bill of goods about the mortgage deduction — at least where middle- and working-class taxpayers are concerned — and that came home to roost, big-time, in the recession. [mix that metaphor!!! Or think of the bill of goods as like one of those dollar bills with wings on it, flying a way from your wallet.]
The personal deduction for people who don’t itemize is so large now, the mortgage deduction is almost worthless. I have paid down my morgtgage, so I haven’t been able to itemize in years.