The Future of Mortgage

With the passage of last year’s tax cuts America is mortgaging its future to the hilt, literally: To pay for the marvelous, amazing, simply unbelievable tax cuts, the greatest tax cuts in the history of the world, we are borrowing the money from the future. This loan takes the form of Treasury bills, in a process known colloquially as printing money.

Meanwhile the future of actual mortgages–the kind we buy our houses with–is up for grabs. The new standard deductions are so high that itemizing for mortgage insurance, property taxes, and charitable deductions may be a thing of the past for all but the most wealthy.

To see how this works, let’s consider a fictional client of mine, a composite of several. Jim and his wife Evelyn want to buy the mid-level house in which they live, about to be offered for sale on the open market. The asking price is $395,000 and they may be able to get it down to $350K, but in any event the new tax law offers them no comfort. If they pay 20% down on $395K, at the median of today’s interest rates they are looking at a monthly payment of around $1,450.

Two-thirds of that will go towards interest in the beginning, but even so there will be no tax benefit: The annual interest payments will start at $11,000 and slowly decline. Since the standard deduction for a couple filing jointly is now $24,000, they will see no benefit from itemizing and deducting the interest.

It stands to reason that a larger purchase, a bit more than twice this one, might achieve enough interest payout that it would exceed the standard deduction, but even so only by a little. In such cases the deduction is still useful only if additional deductions, such as state/local taxes and charitable donations, bring it up a bit more. And as incomes rise, such deductions are discounted to smaller and smaller amounts.

Will this hurt the mortgage industry? Another way of asking this is, are most Americans economists enough to figure out this change in the financial order? If you read this blog, then yes you are. The rest will learn of it only if the mortgage banks find it worthwhile to tell them, which makes it not very likely.

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