Is the federal income tax mortgage interest deduction really a useful tool by which the government can promote homeownership? Homebuyers, particularly those on the verge of making the transition from renting to owning, but also those in the trade-up market, frequently seek information about how the mortgage deduction actually works.
The information presented below gives an easily understood example of what a big difference that deduction does make. The chart--which is for general illustration purposes only because individual circumstances vary--was prepared by The Gooder Group Inc., a company based in Fairfax, Virginia, that produces prospecting brochures.
How the Mortgage Interest Deduction Helps Homebuyers:
John and Jane have a combined income of $50,000 a year. They purchased a home for $150,000, putting 10% down and financing the remaining $135,000 with a 30-year, 10% mortgage. Their monthly principal and interest payments amount to $1,185 a month. Here's how the value of tax deductions will save them cash in their first year and years to come. (Figures are for illustration only).
Their income is $50,000
Itemized Deductions:
State income tax(6%)$400 as renters & $400 as buyers
Contributions 0 as renters & $13,470 as buyers
Interest points 0 as renters & $13,470 as buyers
Points (3) 0 as renters & $4,050 as buyers
Real estate taxes 0 as renters & $1,800 as buyers
Total Itemized Deductions:
$ 2,900 as renters & $21,420 as buyers
Deduction used: $5,200 as renters & $21,420 as buyers
Exemptions (2): $4,000 as renters & $4,000 as buyers
Taxable Income:$40,800 as renters & $24,580 as buyers
Federal Income Taxes would be:
$7,401 AS RENTERS & $3,687 AS BUYERS
Tax Savings:
Federal Income tax savings would be $3,714
State Income tax savings would be $800
Total Tax Savings 1st year as a buyer -- $4,514
Annual Savings thereafter as an owner -- $3,700
 |
Charlotte Laws,
Ph.D. |
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