Maggie's Farm

I have mixed thoughts about the good ol' mortgage interest tax deduction. And the property tax deduction.

Is it a government subsidy, via tax deduction, encouraging home ownership or debt. Well... Idunno.

Back in the old days when me and My Better Two-Thirds was yutes, the rule of thumb for entry into home ownership was to put at least 10% down and finance the rest. In fact, first time buyers like us were required to put at least 10% down. Stashing away the 10% was an exercise in figuring out how much you might be able to afford in mortgage payments each month (presuming it wasn't arriving in the form of gifts from parents and/or grandparents; it most definitely wasn't in our case).

So we set off on our quest for homeownership with step 1 being to the determine approximate price of homes we'd be OK with. Back in those stone ages one could purchase an OK "stater home" (couple three bedrooms, bath or bath and a half, in need of some sweat equity) for roughly $40-50K give or take).

Step two was to figure out the approximate mortgage payments on 90% of that amount – and don’t forget the property taxes which are generally very high in the northeast corridor.

Step three was economic hunkering down - no luxuries or any other unnecessary spending, every spare penny went into the savings account. And when we thought we’d pushed it to just the essentials, we’d turn the crank a little smidgen more. Put My Darlin’ on a mission like that and near miracles start happening. We figured we’d keep that up for a year and we'd know if could manage a mortgage payment of the appropriate size or not. And, of course, we'd have our down payment tucked away. One of my pet peeves with the current crop of yutes is that I have heard, a hundred times or more, that “they have the income to manage the mortgage but they can’t save the down payment”. What?!?! Does not compute.

It all started simply enough but we were pushed to make the terrifying leap before we otherwise might have, and to accept much less home than we'd anticipated, because the housing market where we were went into a frenzy. Not to mention that My Bride was With Child and we wanted to get a mortgage approved while we still had two full incomes.

The market was nothing short of insane. In a mere day or two of being put on the market a house's price would be bid up beyond original asking price 5, 10, even 20% if the location and condition were prime. A house would hit the market in the morning, the agent would call ASAP, one or both of us would run out at lunch and look, maybe make and offer at or even above asking, and be outbid that very day. Prices were rising faster than we could save to match them. We wound up jumping into a house that was less than we’d imagined we could accept and half again beyond what we’d imagined we’d pay. We barely scraped together the 10% and the escrow for taxes and insurance (surprise!) and signed the mortgage with VERY serious trepidation. We’d gone from the comfort of being able to save enough monthly to think we could handle a mortgage and have a bit left to seriously wondering how we’d make the payments. We just made a leap of faith that we’d figure out how to work enough to manage it. In all honesty, however, I was shaking with fear when I left the closing ‘cause they’d drained every penny of savings and I’d signed on for a monthly payment I didn’t know how I’d make. I’d planned to grab a bottle of champagne for us to celebrate but all I could manage financially was a six-pack of beer.

Which brings me back to the mortgage deduction. In retrospect what made it possible for us was the mortgage interest and property tax deductions - at least in the beginning. I wasn’t sophisticated enough to try and bring that into my financial planning which is a good thing. Minimizing withholding and then being “saved” from a bit tax bill by the deductions was the difference between frugality and penury for the first three or four years. Fortunately we were also in a market that was bidding up the tech skills I possessed and over the 6+ years we were in that house both home prices and my income rose considerably (I had to change jobs every three years to cash in on it but so be it – they were substantially different jobs and not only paid better but pushed me in new directions). By the time our first born was reaching school age we had seriously outgrown the first home and began looking for something a little larger. We were nearing the tail end of another housing boom and got a darned good price, rolled the profits into a new place with 20% down (that magic number allowed us to escape the tax and insurance escrow and manage that for ourselves). Once again, of course, I was glad to have the interest and property tax deductions. But I almost certainly would have managed even without them.

I’d prefer that our government not subsidize things through the tax code – especially not the income tax code. The mortgage interest and property tax deductions, however, address an issue that goes beyond subsidy. There is nothing in our tax code that addresses the fact that there are high income, high cost of living areas of the nation. If one lives in the northeast corridor or any of the Great Blue Metro areas, wages and costs (especially for home ownership and property taxes) are numbers that are often staggering to my fellow citizens in flyover country. The higher income, while providing no higher standard of living, particularly in terms or housing, pushes the recipient into significantly higher tax brackets. The mortgage interest and property tax deductions at least reduce the impact of this disparity in regional income and cost differences.

So, what value, other than helping me, does the mortgage interest deduction provide? Or, conversely, what pain will ending it cause?

I believe it still provides a value similar to what I extracted from it. I don’t currently extract that value since I am very nearly paid off. I still realize the property tax deduction but that does not seem to be within the crosshairs at the moment.

During the housing bubble the “traditional” notion of down-payments and “affordability” seem to have disappeared, perhaps to never return.

I would gladly trade both of these deductions for a reasonable rate flat tax. 13% sounds reasonable to me - I'd even accept income graduated 13%, 15%, 18% brackets. I'd accept a stepped "flat tax" - something that slightly raises the rate for higher incomes. All I want is sanity of tax rates that doesn't force people (me!) to make basic decisions based on income tax rates when those decisions should not be driven by taxes.