First, people fail to understand that to obtain a debt subsidy, you must have debt. You must be making an interest payment on this debt in order to qualify, and they you get to reduce your tax burden by a small percentage of the interest amount. In short, you are paying a dollar to save a quarter. There are people who actually seek to maximize their interest payments in order to increase this subsidy. This is really, really foolish. Anyone out there who believes it is a good idea to spend $1 to receive $0.25 in return, please send me as much money as you wish, and I promise to send back 25% of it.
Realtors try to con people with the “throwing your money away on rent" argument. Homeowners buy into the fallacy. Interest is the rent on money. You throw away money on interest just like you throw it away on rent. In fact, people who overpay for housing throw away more money on interest than renters do to obtain the same property, even after the tax subsidy. The only argument one can make for paying extra interest is if you are receiving a return on that investment through property appreciation. We all see how that is turning out.
The main reason the benefits of the home mortgage interest deduction are overestimated is because people forget they must give up the standard deduction in order to obtain it. This is one area where tax policy can have hidden and indirect impact on housing. Changes in the standard deduction greatly impact the benefit of the home mortgage interest deduction. As the standard deduction is increased, the positive impact of the HMID is decreased. Basically, if you want to figure out your real tax benefit, take your highest marginal tax rate and subtract 10%. That will be a much closer estimate to reality. This reduction is caused by losing the standard deduction.
In fact, if the standard deduction were doubled, the average American holding a $150,000 mortgage probably would not bother itemizing to obtain the HMID because it would be of no tax benefit at all. This would certainly simplify people’s tax returns. A higher standard deduction is also a boon to renters who do not have the option of obtaining the HMID.
Another facet to the HMID is the cap level. Currently mortgages up to $1,000,000 are eligible for the deduction. Does anyone think this is right? Do you realize you as a taxpayer are subsidizing $1,000,000 mortgages? When the GSEs were set up, they established a conforming loan limit. The reason they did this is because they are mandated to subsidize mid and low income housing. Why is the limit on the HMID any higher than the conforming loan limit from the GSEs? Why are we subsidizing high income borrowers?
If we were to reduce the HMID cap level to $500,000 and adjust it by the CPI going forward, we are still subsidizing relatively high income borrowers ($500,000 is still almost triple the median home price in the US). A reduction in this cap would have the same impact as the lower GSE conforming limit is having: it would lower prices at the high end by eliminating the subsidies.
IMO, the government has no place in subsidizing house prices that are well above the median. One can argue that the government should not be subsidizing anything in housing, but the low and middle income subsidies are here to stay. If we raise the standard deduction and lower the HMID caps, we can greatly reduce the impact of the HMID and the cost we pay for it as taxpayers. This would have the effect of lowering prices on more expensive homes, but it would help stabilize the lower end of the market. That is what the market needs right now.
Owning your own home is something that is experienced by many people in this country and they are proud of. Having that home repossessed because you can’t afford to keep up with your mortgage payments is something you won’t be proud of. Yet this can happen, and often when you least expect it. Far too many people don’t think that mortgage protection is something that they need to consider, especially if they are in a good job, have good health and earn a reasonable amount of money. However in life things can change in the blink of an eye and your once idyllic lifestyle can be taken away from you in a flash.
This may seem quite dramatic, but it isn’t. Everyday when you read the newspapers or see the news there are tragic stories about people who are either involved in road accidents or simply drop down dead with no warning – and these are the type of situations that cause people to fall behind with mortgage payments. With mortgage protection families of the deceased can be helped with the cost of their repayments. Mortgage protection doesn’t just provide cover for the unexpected death of a mortgage holder, it can also help in other circumstances such as critical illness, redundancy and long term sickness. If you have a fully protected mortgage you will have peace of mind knowing that your mortgage will be covered if life does throw something at you that you are not prepared for. Take illness for example, no one can plan when and for how long they will be ill for, or the severity of the illness. Some people are lucky enough to be employed by a company that provides a sickness scheme that will allow them to be ill for up to six months and still receive their full salary each month – and for many people this will be enough for them to make a full recovery. Some people on the other hand will only receive statutory sickness pay which is usually not enough to provide enough income to pay a mortgage and the other bills associated with owning a home. This can be further worsened if you are the only wage earner in the house.
If you are in a job that will not pay you well if you become ill or have to leave work for some time then mortgage protection really is something that is worth seriously thinking about. As with any type of insurance there are different types of mortgage protection and different premiums that you should expect to pay. Here are a few of those types of mortgage protection that are available on the market right now:
•Fully protected mortgage – this is a type of plan that will cover you in the event of your death, critical illness, redundancy, long term sickness and it will usually cover your buildings insurance too. Mortgage providers do not consider mortgage protection to be compulsory, however it is compulsory to have buildings insurance for your property to protect it.
•Level critical illness insurance – this type of mortgage protection covers you if you contract a critical illness during the term of the plan. You will then be assisted in your mortgage repayments.
•Long term sickness – this is similar to the critical illness insurance, however you can claim on this is you are absent from work due to an illness that is not classed as critical. This is just a brief look at how mortgage protection can help you. If you would like to know more contact Go Direct who will be more than happy to help you.
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Alex Gwen Thomson has sinced written about articles on various topics from Home Management, Income Tax Return and Wrinkles. is the author of The Great Housing Bubble: Why Did House Prices Fall?Learn more and get FREE eBooks at:. Alex Gwen Thomson's top article generates over 673000 views. to your Favourites.
Search has sinced written about articles on various topics from Home Businesses, Investments and Home Businesses. If you would like to know more about Go Direct and speak to one of our highly skilled advisors who will be more than. Search's top article generates over 8100 views. to your Favourites.