Sometimes I like to think outside the box!
All of the publicity recently about getting rid of the mortgage interest deduction got me thinking. Suppose we replaced the mortgage interest tax deduction with a mortgage principal tax deduction!
In Phil's world, here is what this would look like. The down payment (which is principal, by the way), would be deducted over seven years. Why seven? Well, seven years, I am guessing, is somewhere around the average length of ownership of a primary residence (please correct me if I am wrong!). For example, a down payment of $70,000 would be a $10,000 deduction per year for seven years.
Next, the principal paid each year would also be a tax deduction!
The mortgage interest deduction rewards borrowing. A mortgage principal deduction, on the other hand, rewards saving. The home is the savings account!
Think of the effect this deduction would have on the real estate market. Rewarding principal payments means that homeowners will pay more principal. Increased principal balances means more equity. More equity means more funds available for a down payment on the next home!
Those who want smaller mortgages compared to the value of the home would be rewarded with a deduction for their large down payment.
Instead of rewarding debt, we would be rewarding equity.
What do you think? Stupid? Needs some work? Brilliant?
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Phil Caulfield NMLS #386911 has been helping people obtain mortgages since 1985. The views, articles, postings, and information listed at this website are personal and do not necessarily represent the opinion or the position of Cardinal Financial LLC.