Tuesday, November 16, 2010

Thoughts on the Mortgage Interest Deduction

After reading an article at The Atlantic website this morning on this issue, I thought it might be worth it to talk a little bit about this deduction myself.  Pertinent background information on me includes the fact that I am a renter and I am also an accounting student currently taking an income tax class.  Neither of these things qualifies me to be an expert on this issue, but a stakeholder nonetheless.

A few points from The Atlantic:
  •  Canada does not have this deduction and has the same home-ownership rates as America
  • Three out of four dollars from this handout goes to people with incomes over $100,000
  • Only one in seven homeowners in North Dakota take the deduction
As a renter I view this as one of the issues that makes homeowner-ship a round-about investment.  Their are obvious advantages when it comes to exclusion of capital gains and the like, but the hassles involved with this "investment" are never-ending.  I was studying for a test last night, and was shocked by the number of fees mortgage holders pay to service their loan.  By the way,  in order to pay off one's loan early it is necessary to pay a fee for this privilege (an otherwise prudent decision).  For a rental there is one fixed payment a month (even if only for a year), and the hassle of paying the tax bill, various utility bills, and maintenance costs do not exist as separate bits and pieces floating around in your life.

As a renter who would potentially buy a home from $100,000-150,000, the mortgage interest deduction would hover around the standard married filing jointly deduction for my husband and I.  Because of this, I don't necessarily have a vested interest in the deduction sticking around, and I also wouldn't necessarily want an incentive to pay my mortgage off over the longest period of time possible either. 

Another article I read today was that it doesn't pay to remodel a house. No surprise here, but I do have a real life example of this truism in my parents.  My parents hit the home-owning lottery and sit on a piece of lakeshore that has appreciated in value substantially since they bought it at a steal.  Their house is an ordinary 50's ranch house, but they have never been deluded that their house has any intrinsic value, because they have always known that it would be a tear-down for any potential buyer. As a result of this reality, my parents have only made a few improvements over twenty years of living where they live.  This has only included replacing some linoleum, recently replacing the carpet in their room, and the biggest splurge of all--new siding.

On the other hand, my husband and I know more than a few people who live in the suburbs, and because they can't afford to upgrade to a new house, have updated their current homes like crazy.  The intrinsic value of these houses has probably remained the same even after the remodeling (primarily the land, and location, etc), and hopefully have made these homes more livable for their inhabitants, and perhaps more sell-able.  In the end the neighborhood and school district probably dictates the future selling price more than upgraded faucet fixtures and granite counter-tops.

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