How The Mortgage Interest Tax Deduction Lowers Your Payment
When applying for a home loan, the mortgage underwriters don’t usually consider the mortgage interest tax deduction, simply because not all people take it. But, did you know that it would do you good if you consider it? It is because this mortgage interest tax deduction has a significant effect on the affordability of your home.
Mortgage Interest Tax Deduction: How Does It Work?
Every time you deduct your mortgage interest, you are actually saving around 10 to as much as 40% of the interest costs. Remember that you will not be calculating the deduction from the entire payment but only from the interest.
Since the costs of interest tend to be higher during the first few years of a mortgage, you will be able to deduct more initially, and most of the time, this is during those instances when you need it the most.
Short History of Mortgage Interest Tax Deduction
It was in 1894 when the first ever modern federal income tax law was initially passed but the United States Supreme Court struck it down. In 1913, upon the amendment of the Constitution and enactment of the new federal income tax, all forms of interest have become tax deductible. It is a bit strange to consider people as businesses yet the idea was that if the businesses were able to deduct some expenses from their income, this must also hold true even for individuals. Since interest is also a form of expense, it soon came to be that every interest, not only mortgage interest, was made deductible.
Back then, many homeowners didn’t really have mortgages, which mean that most people lack the interest to deduct. It was not until 1930s that mortgages on properties have become so widespread, thanks to the creation of the FHA or Federal Housing Administration as well as the FNMA or Federal National Mortgage Association, which allowed the insurance of loans that last to as much as 30 years.
Soon after, consumer debt was also made available. During the 1970s, credit cards rose to fame together with the increasing amount of deductions on interest. The Treasury felt it was about time to close this loophole. In 1986, the Congress finally put an end to the deductibility of interest. But, the mortgage interest tax deduction remained.
Mortgage Interest Tax Deduction in the Modern Day
Economists usually argue if the mortgage interest tax deduction is really effective when it comes to promoting home ownership. But, the mortgage interest tax deduction is regarded as among the most sacrosanct tax breaks of America, and it seems to be politically untouchable.
In general, the deductions decrease the amount of income for which you will be taxed. Every year upon filing your taxes, you can select to itemize the deductions, which include the mortgage interest, or you can claim what is referred to as standard deduction. When you claim the standard deduction, you will not be able to itemize the deductions. You will most likely go for the larger deduction. According to the current tax code, Americans can claim the standard deduction of $6,300 for individuals or as much as $12,6000 for those married couples who file jointly.