November 20, 2017
Orion’s clients, and their clients, who are thinking of buying a new home, may have heard about a proposed change to something known as the “mortgage interest deduction.” Currently, homeowners can deduct interest they pay on mortgages of up to $1 million. House Republicans have proposed capping that at $500,000. Although a tax bill backed by both the Senate and the House of Representatives has a long way to go, we feel it is important for our clients to know what is happening so they can explain it to borrowers.
Economist Ben Lockwood from the University of Pennsylvania's Wharton School weighed in to aid in understanding the concept behind the mortgage interest deduction and what this change would do.
Typically, the arguments for its benefits is to encourage people to buy or own homes. There doesn't seem to be a strong systematic relationship, however, between the mortgage interest deduction and homeownership rates. A lot of the people who are benefiting from it are the ones who are likely going to buy houses regardless. And instead, you'd like to design it so that it's really people who are on the margin of whether to buy or not who would be seeing the largest incentive to go out and purchase a home.
On top of that, the benefit of the deduction basically scales with a borrower’s marginal tax rate. It's a larger benefit for people who have a very high marginal tax rate. And that tends to be very high- income earners.
The mortgage interest deduction itself is probably not an ideal policy. It's a tax expenditure that cost the government on the order of $70 billion a year - scaling it out immediately would probably cause a pretty big change in the real estate market. Although it should probably be phased out in the long run, doing it more gradually over time is probably a better approach than just capping it or eliminating it entirely all at once.
Analysts believe that there are other deductions that do a much better job of achieving their desired ends. Regardless, Orion’s AEs are familiar with the tax implications of a mortgage for borrowers, although our client’s borrowers will often seek the advice of an accountant. In addition, the Senate version has yet to be voted on. Look for this to occupy the press for a long time to come.