How will mortgage loan law changes affect me?
Mar 2011 10

It seems as though there are about to be major changes in the home loan industry, changes that may affect how much you have to put down in order to buy a home and how much you end up paying, monthly and in fees upfront and ongoing.

One of the big changes being proposed is reducing or eliminating the mortgage loan interest deduction enjoyed by just about everyone who owns a home and owes on a mortgage.

If you own a home and have a loan, you can add up all the interest you’ve paid during the year and put it on your Schedule A – Itemized Deductions when you fill out your 1040 income tax return. This reduces your income for the year so you end up paying less taxes – often, a lot less (especially during the first several years of your loan, when you’re paying almost 100% interest and little principal).

The US Congress and President are considering changes to that deduction which, understandably, is making a lot of people nervous. The deduction can reduce your tax bill by thousands of dollars, each year. If you don’t get that money back, would you consider the cost of your housing higher, would you therefore be willing to pay less for another home? That’s the fear – that future homebuyers will take the lack of a deduction into consideration when making any offers on properties. So, if you currently own, your home might immediately be worth less.

Well, good news for those wondering about the affect of the changes on your income tax obligations. Forbes is reporting that a tax company has done an analysis of the numbers and found that few people would end up paying more income tax.

[A] new analysis by my Tax Policy Center colleagues Ridathi Chakravarti and Dan Baneman finds that most taxpayers would barely notice the change in their tax bill even if Congress dramatically restructured the subsidy. And with some changes, many of us would end up paying lower taxes than we do today.

In the unlikely event Congress simply repeals the mortgage deduction, the average tax bill would increase by $710. But those who earn between $30,000 and $40,000 would pay an average of about $70 more while those making more than $1 million would pay an additional $4,000.

But, as the author writes, there’s little chance that the government will completely eliminate the deduction. Most likely, they will reduce it for high-income earners while leaving it partially or completely in place for “working families”. This means that the net effect might be nominal.

… [T]hose making $50,000 to $75,000 would pay on average $80 less. Only those making more than $100,000 would pay significantly more. Households in the $100,000 to $200,000 range would pay about $650 more on average, although interestingly only half would face any tax hike at all.

Good stuff in the article. Check it out for more details.

More: If Congress Revamped Mortgage Interest Deduction, Most Taxpayers Would Come Out Ahead – Howard Gleckman, Forbes.com

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