Is the Mortgage Tax Deduction Worth Dragging Out Your Mortgage?

Is the Mortgage Tax Deduction Worth Dragging Out Your Mortgage?

Are you holding on to your mortgage so you can take the interest deduction on your taxes? That may not be the best idea and it is possibly one of the things that contributed to the mortgage debacle in recent years.

The US government has for decades incentivized home ownership through allowing a tax deduction for mortgage interest.  As a result, many who are wealthy enough to pay off their mortgages or not to need a mortgage in the first place, chose to maintain a mortgage to take advantage of the mortgage interest deduction.  The longer they have a mortgage, the longer they can deduct the interest on their taxes.

Many have raised an issue about whether the mortgage interest deduction contributed to our housing bubble and housing collapse.  In Canada, for example, mortgage borrowers are not allowed to deduct the interest on their mortgages. Banks in Canada also hold about 75 percent of the loans in the country and only about one percent of all mortgages in Canada are in default. Compare that to 14 percent in the United States.   However, in the UK, mortgage interest is also not deductible, and home ownership rates and prices outpaced the US dramatically during the 1990s and early 2000s.  Default rates are believed to be approximately the same as in the US.

An additional question is whether the numbers of people who could pay off their mortgage and are not because of the mortgage interest deduction is impairing bank's balance sheets and preventing them from loaning more to new homeowners so that the market can recover.  Many who believe this are now suggesting that the government should allow mortgage borrowers an extra incentive to pay down their mortgage balances with a deduction for their principal balance rather than on their interest. 

What do you think?

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