There are only two things I like about April 15: occasional cherry blossoms and the fact that on April 16 I always write a contract with a certain type of buyer who, having just become a HENRY (high earner, not rich yet), has gotten terrible news from his or her accountant. Seems Uncle Sam wants a larger piece of their larger income, which first sparks the idea of shelter as tax-shelter.
One of the most lucrative tax deductions for homeowners is the mortgage interest deduction. The deduction is the government’s way of incentivizing people to become homeowners by offering them a significant tax break. The home mortgage interest deduction allows taxpayers who own their homes to reduce their taxable income by the amount of interest they paid on the loan, which is secured by their principal residence or, sometimes, a second home.
The National Association of Realtors strongly supports the mortgage interest deduction claiming, “Housing is the engine that drives the economy and to even mention reducing the tax benefits of home ownership could endanger property values. Home prices, particularly in high cost areas, could decline 15 percent if recommendations to convert the mortgage interest deduction to a tax credit are implemented.”
While it may not be true that buying is always smarter than renting, the buying and selling of homes is a massive job creator, and not just to those involved in the transactions, like realtors, appraisers and title attorneys. Roofers, plumbers, even the staff at Frager’s, (or mostly the staff at Frager’s in my case) all benefit from the transfer of real estate.
When I explain the mortgage interest deduction to first-time buyers, they often react with suspicion, but it’s real money, particularly for a HENRY with no kids and few other deductions. I’ve personally found that the mortgage interest deduction outperforms dependents (kids) as tax savers by a mile and a half.
So, buyers, before I fall asleep writing about this fascinating subject, here’s the deal from my friend Duke Walker at Guaranteed Rate:
“Nobody enjoys talking mortgages. Trust me, I would know — I approve people for them. Despite the hatred/confusion/boredom associated with these godforsaken things, you can actually save some serious coin if you listen up for another 40 seconds. Here’s the breakdown: say you get a $600,000 loan (20 percent down on a $750,000 home) with a rate of 3.875 percent over 30 years. That will cost you $2,821 in principal and interest per month. But don’t forget about property taxes ( about $350 per month) and homeowners insurance (about $75 per month). You’ll have to add those on top of the principal and interest, rounding out your total monthly payment (PITI: principal, interest, taxes and insurance) to nearly $3,500. Assuming that you’re in the 33 percent tax bracket, the savings from the mortgage interest deduction can save you more than $10,000 in the first year. That takes the adjusted total monthly payment from $3,500 to roughly $2,670 per month.”
Now compare that to what you can rent in D.C. for $3,000. “Mom and Dad, guess what? I just signed a lease for a one bedroom, almost full bath (it’s a shortened tub), 850 square foot condo for $2,950!” “Maybe now you’ll hand over some down payment money?
Paying tax on income is a certainty of life in America, renting is not. There’s money to be saved and equity to be gained out there. Pounce, HENRY.
The views and opinions expressed in the column are those of the author and do not necessarily reflect the views of HillNow.com.