Congress is getting serious about cutting deductions for mortgage-interest payments. Some experts say it would cause a double-digit drop in home values.
Q-I have heard that there are a couple of proposals in Congress that would eliminate the tax deduction for mortgage-interest payments. That would be terrible for me, because it’s the only big deduction I have.
What are the chances of those bills passing, and what will happen if they do?
A-Proposals to eliminate or reduce the tax deduction that homeowners can take for their mortgage-interest payments have been introduced in Congress over each of the past several years, and most of them were killed. However, experts say that defeating this year’s crop of proposals will be especially difficult, in part because taking away some of the deductions homeowners get would help close the budget deficit.
One measure that is generating a lot of controversy would prevent homeowners from writing off their mortgage-interest charges on loan amounts above $250,000. People who borrow less than $250,000 could still deduct all their interest charges, but buyers who borrow more wouldn’t be able to deduct the interest paid on the amount that is over the limit. This plan would hit homeowners in high-cost areas such as California and the Northeast the hardest because $250,000 won’t even purchase a small “starter” home in many of their communities.
Lobbyists for trade groups ranging from the National Association of Realtors to the National Association of Home Builders are even more concerned about some of the “flat-tax” proposals that are gathering steam on Capitol Hill. One plan that has wide congressional support would require taxpayers to give up most of their deductions-including those for mortgage-interest payments-in exchange for a system that would supposedly be much simpler to understand and would allegedly tax all Americans more fairly.
Experts are particularly worried about how the elimination of interest write-offs would affect home values. After all, one of the main reasons why people buy homes instead of rent an apartment is because they know that homeownership will lighten their tax burden. Since most taxpayers are in the 28 percent federal-tax bracket, there’s some concern that values could plunge 28 percent or even more because buyers would insist on paying less if those deductions disappeared.
“Prices would not drop a full 28 percent right away because tax-law changes take a little while to work their way through the real estate market and into the rest of the economy,” explained John Tuccillo, chief economist for the National Association of Realtors. “However, I wouldn’t be surprised if home values fell 15 percent or 20 percent the moment that a flat-tax was passed because a flat-tax system would remove most of the tax incentives for buying or owning a home.”
Such a dramatic drop in values would take out a good chunk of many Americans’ net worth, wiping out part of their retirement nest egg and forcing them to cut back on spending. Millions of construction and related jobs could also be lost, Tuccillo added, “because there simply would not be as much demand for new homes if Congress takes away all the tax advantages of homeownership.”
Q-How can I locate the nearest office of the Federal Housing Administration? It is not listed in my phone book, and even a directory assistance operator couldn’t find its phone number.
A-You and the operator were probably looking under the wrong heading in the phone book. Since the FHA is part of HUD, most telephone companies list the number under the heading of “Housing and Urban Development Department” in the federal section of their directories. If you still can’t find it, you can call HUD’s toll-free anti-discrimination hotline at 800-669-9777 and a representative can direct your call to the proper department.
Q-I recently took out a $137,000, 30-year mortgage. Monthly payments are $1,053 and are due on the 15th of each month. If I instead make my payments on the first of each month, will I pay the loan off sooner and save on finance charges?
A-No. If you don’t make additional “principal-only” payments to reduce your loan balance faster, the only thing that you will accomplish by paying at the start of each month will be to retire the debt 29 years, 11 1/2 months from now instead of 30 years.
Since the loan is brand new, this is a great time for you to get in the habit of adding a little extra money to each of your payments. Based on the information you provided, you will pay about $242,217 in future finance charges if you simply keep your $1,053-a-month repayment schedule for the full 30-year term. But if you add a mere $25 principal-only payment each month, you would trim two years and nine months of the length of the loan and save $27,643 in interest at the same time. By adding $50 each month, you’d knock exactly five years of the life of the loan and save nearly $48,500 in interest.
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Write to David Myers at David Myers, P.O. Box 2960, Culver City, Calif. 90231-2960.
