A tax break that has long been untouchable could soon be in for some serious scrutiny. Many home buyers deduct their mortgage interest when assessing their tax bill, a perk that has helped bolster the income of millions of families and the broader housing market. But as President Obama and Congress try to hash out a deal to reduce the budget deficit, the mortgage interest deduction will likely be part of the discussion. Limits on a broad array of deductions could emerge in any budget deal. It is likely that any caps would be structured to aim at high-income households,...
House mortgage deduction no longer "off limits"
By tovarichpeter Follow Mon, 26 Nov 2012, 4:50pm 1,721 views 28 comments
In South San Francisco CA 94080
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Scottsdale, AZ
robertoaribas's website
let it die! Bad policy in that:
1. most of the benefit goes to wealthy who would buy anyways.
2. encourages debt, not ownership. why is a mortgaged owner better than a free and clear owner?
3. encourages getting a bigger loan and a more expensive home, when the opposite may be better advice.
4. misused in marketing constantly. It isn't a deduction, unless you itemize, and if you don't have anything else to itemize, you might get none, or much less benefit than anyone in the housing industry will ever tell you.
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I don't think it will happen because it will hit the fragile RE market too hard. After Ben has lowered the interest rate to prop up the RE market, they will not withdraw the mortgage deduction. Wouldn't make sense.
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robertoaribas's website
they could faze it out based on income...
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Mountain View, CA
bmwman91's website
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robertoaribas says
Spend $10 to SAVE $2.49!!!!! Hurry in now before the deal ends!
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Simi Valley, CA
bmwman91 says
don't forget. when your monthly rent is the same as your monthly housing expenses, you spend $0 and save $2.49.
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Mountain View, CA
bmwman91's website
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Mark D says
My rent is 45% of my monthly cost to buy the kind of house I want. Rent is still 25% less than all the throw-away costs of ownership (interest, insurance, property tax) in my case, and I can save cash faster than I can pay-off principal. Then again, I am fine living in a relatively cheap apartment, and many people aren't.
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Simi Valley, CA
bmwman91 says
in your case maybe it's better to live in an apt and save money. my point is that for many family it is a very good time to buy. this is one example i posted a few days ago:
"http://www.redfin.com/CA/Valencia/28630-Pietro-Dr-91354/unit-33/home/17232164
with 20% down, the monthly payment is $2225 including property tax, homeowner insurance and HOA.
estimated rent is $2275 plus you get $3.5K in tax refund at the end of the year."
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Bellingham, WA
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$370,000 on a 3.25% FHA loan pencils out to an $1100/mo average cost of ownership over 30 years.
This is PITI less the P; basic ownership costs included.
Holding cost after the mtg is paid off would be ~$600/mo.
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robertoaribas's website
I am buying one more home, 2500 square feet, 3 car garage, pool, for $150K. It will rent for 1350. Taxes are 1600 a year, insurance maybe 900...
with 25% down, and an investor rate of 4.5% for 30 years, you figure out my mortgage compared to rent...
AND there is no way in hell any new build will ever compete with this. Foreclosures in this zip code are dropping at such speed, they would hit zero in 5 or 6 months...
Another year for the short sales to end?
Another year for prices and appraisals to pick up?
Another year just for good luck? it's fine, I can wait.
I'll sell it one day, when price to rent turns the other way.
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Simi Valley, CA
Bellingham Bill says
i think you are right. my number is actually higher than the actual cost.
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Bellingham, WA
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War says
actually I use a spreadsheet and didn't forget anything AFAICT.
War says
Renters pay that too.
War says
Maybe in your world, not in ours.
$370,000 loan at 3.5% down has a $1200/mo interest, PMI, and tax carrying cost starting out (net Schedule A benefits that return ~$500/mo in California).
After year 10 I model that the PMI goes away, and of course interest goes to $0 as the loan is paid down.
Fixed, non-deductible costs are $200/mo for utilities and insurance, plus a $150/mo maintenance budget.
Plus ~$20/mo lost interest on the down payment.
So, starting out, the TCO is ~$1500/mo in year 1 and this declines to $600 after the loan is paid off, for an average monthly TCO of $1100/mo.
And that's how math works in the reality-based world.
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robertoaribas's website
$370K for a home that rents for $2200 is about a fair price given today's rates. Over the long run, that will likely work out just fine for an owner, though I'd hesitate as an investor.
For example, my home I live in cost me $230K + $15K in rehab. 20% down and 30 year fixed at 4.25% last year, my mortgage with everything is $1147 a month. This home would rent for $1800 a month, so as anyone with half a brain can see, buying is much more likely to be a good deal than renting is. (not to mention $250 a month is principal pay down)
Obviously, people have realized that, and the value of this home has jumped up closer to $300K over the past year. (not to mention, I bought it in less than show perfect shape, and since I remodel homes, my $15K went a hell of a long ways to making it very nice!)
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Another way to analyze that $370,000 condo is look at all outgo other than principal repayment. This assumes depreciation of the fixed improvement is slower than maintenance and overall price inflation, which is a rather bullet-proof assumption if the past 100-odd years is anything to go on.
Over 30 years:
Total interest and PMI $172,187.11
Property tax $89,910.00
Insurance & Maintenance $120,525.00
TCO over 30 years $382,622.11
Average monthly TCO $1062.84
So if you can rent that for $531.42 from now through 2042, don't buy it . . . I guess
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Bellingham, WA
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I forgot to compare the rent case.
So we have $380,000 in TCO + $370,000 in principal repayment for a total cash expense of ~$750,000 over 30 years.
Renting 30 years at $2000/mo is $720,000.
So in 2042 if you can sell the condo for $30,000 + realtard fees you'll be breaking even.
And that assumes rents stay at $2000 until 2042. Chances of that happening: ZERO
http://research.stlouisfed.org/fred2/series/CUUR0000SEHA
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Los Angeles, CA
Bellingham Bill doesn't include principal in his calculations, and almost always assumes the buyer will live there 30 years in his scenarios.
If that works for you, fine.
If you are like most of the rest of us and don't know where you might be working a few years from now, let alone when you will kick the bucket, the scenario better plays out for you if your total payment is less than renting.
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Simi Valley, CA
dodgerfanjohn says
what about renting it out?
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San Jose, CA
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robertoaribas says
2500 sqft in some areas around here sell for 10x or more but the same house MIGHT rent for only 3-4x what you are asking. Clearly your market is currently more favorable for land lording.
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Bellingham, WA
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dodgerfanjohn says
there's a significant transaction cost in moving, but any equity gains are transferable.
Comparing principal paydown vs the rent was why I rented like an idiot in 2001 when I should have bought a nice condo for $350,000.
Interest rates had fallen from 8% of 2000 to 7% in 2001.
All-in PITI etc was $2500/mo but PITI less the P was $2200 starting out and would fall to $600/mo as principal was paid down, for an average TCO of $1500/mo over the life of the loan.
My rent hit exceeded that in 2007, and of course I could have refi'd down to ~6% in 2005 and ~3% now, sigh.
Had I bought 10 years ago I'd be looking at $2000/mo payments on a 15 year with 10 years left. That's what rents on crappy one bedrooms are now pushing towards.
Now, this is Silicon Valley and Apple and Google weren't on the radar in 2001, quite the opposite, it looked like another 1970s or 1980s crash-boom.
But now I realize that real estate law is written to incentivize people gambling with the bank's money. If the bet moves the wrong way on you, Just Walk Away!
Hell, $40B a month -- that's 160,000 $250,000 loans, 2 M a year -- of mortgage money is being PRINTED OUT OF NOTHING. A person with that funding can walk way with more than a clear conscience, as they were serving as the critical role of inflating the money supply that the System wants to have happen now!
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Why should America subsidize a suicidal investment scheme?
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The mortgage interest deduction would be political suicide unless they also eliminate AMT.
Amongst white-collar professionals and small business owners making $250-500k a year, mortgage interest is one of the few deductions available. These people overwhelmingly vote (something like 99% turnout), and contribute significantly to both parties.
Now, if they eliminate the AMT, getting rid of the mortgage deduction would probably go over easily. The thing is, I don't think they can eliminate the AMT without raising rates, and that seems to be off limits at this point.
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Danville, CA
gregpfielding's website
I wrote a very detailed article on the MID back in 2010, breaking down the actual costs and savings and perspectives of each side. For anyone who wants to learn more about it and it's history:
http://bayarearealestatetrends.com/2010/12/02/scrap-the-mortgage-interest-deduction/
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gregpfielding's website
LiarWatch says
Read it before you attack.
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Fort Lauderdale, FL
robertoaribas says
It's just a selling feature. In sales every little feature you pile on helps no matter how miniscule it is in practice. If indeed the Government still wants people to buy homes they're fools for cutting it.
Maybe they figure all people need to know anymore is that they don't have to pay the mortgage if they don't want to. That's a GRRRRRRRREAT selling feature! Throw in for free the underground books Ninja Credit Repair and How to Screw the Landlord and they're all set.
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gregpfielding says
greg, Liarwaltz's rudeness is only exceeded by his stupidity. don't take his criticism seriously, he couldn't read your article and understand it with a helper.
I was quite surprised by it. 99.9% of Realtor's get so pissed whenever I say the MID should go away, you are the first other sales agent I've met who agrees with me.
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San Francisco, CA
ELC says
No kidding. As soon as you can get people to use a phrase like "effective tax rate," they're like clay in your hands. What a great thing to believe! If I borrow a bunch of money, it lowers my taxes and I end up making more money than I borrowed anyway! No downside! Everybody wins! Greatest society ever!
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Fort Lauderdale, FL
FunTime says
And your kids will do better in school...
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San Francisco, CA
ELC says
And you'll be socially accepted instead of viewed as an obvious incompetent.
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Fort Lauderdale, FL
I rent and this is my view. Yacht owners pay $2 per foot per day to dock here. Sometimes renting is the only way to be where you want to be. It would cost a fortune to own a home in this area.
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