Seeing how the government got us into this, let’s note that they are willing to carry some of the burden of higher mortgage rates. At today’s rates, buyers can write off twice as much mortgage interest!
Signed in 2017, the Tax Cuts and Jobs Act (TCJA) changed individual income tax by lowering the mortgage deduction limit to loans of $750,000 and under.
Let’s compare the amount of interest that is deductible in the first year:
$750,000 @ 3% = $22,285.85
$750,000 @ 6% = $44,749.47
The 30-year fixed-rate mortgage payment for $750,000 @ 6% is $4,496.63. To qualify, a buyer would have to earn approximately $200,000 per year, which would put them in the 32% tax bracket.
It means today’s buyer would pay about $7,188 less in federal tax in the first year, or ~$600 per month.
The difference between the 3% and 6% mortgage payments is $1,334 per month. With the additional $600 per month in tax savings, it means Uncle Sam picks up about 45% of the difference!
It is rare for me to vehemently disagree but Jim, this time you are using bad math. The SALT (State And Local Tax) cap means there is no savings in this and most scenarios.
Yeah? I should have checked with an accountant!
It looked pretty good here:
https://www.irs.gov/publications/p936
I’m checking.
From a CPA – I’m ok with oversimplified:
Mortgage interest and the SALT cap are both itemized deductions but subject to different limitations. You are correct in the $750,000 mortgage limits (unless it is a refi under the old rules). The SALT cap is strictly based on taxes and is maxed at $10,000 a year (unless you have a pass through entity that is taking advantage of the PTET). Your example may be a little oversimplified as many other factors come into play. In summary, of course you will get a larger interest deduction with higher rates and the tax benefit will depend on your individual tax situation.
Seems like SALT and mtg. interest are independent deductions, if so I’m not sure why the SALT cap would neutralize a higher mtg. interest deduction based on a higher interest rate as RobDawg alludes.
In any event the standard deduction for joint filers is $25,900, so i guess the actual tax break on itemized deductions would not begin until you exceed that amount?
“the tax benefit will depend on your individual tax situation.” Yeah, that about sums it up.
In any event the standard deduction for joint filers is $25,900
Thanks TheFalcon!
I should compare the higher write-off to the standard deduction, instead of the 3% interest. Even at $500 per month, instead of $600, it is still something for buyers to consider.
Dawg – your 7.25% is in the bag!
Federal Reserve officials rolled out strong language Friday to describe their approach to inflation, promising a full-fledged effort to restore price stability.
In its annual report on monetary policy – a precursor to Chairman Jerome Powell’s appearance before Congress next week – the central bank promised it would launch a full effort to bring down inflation pressures running at their fastest pace in more than 40 years.
“The Committee’s commitment to restoring price stability — which is necessary for sustaining a strong labor market — is unconditional,” the Fed said in a report to Congress.
That marks the Fed’s strongest statement yet, affirming its commitment to continue raising interest rates and otherwise tightening policy to solve the economy’s paramount issue.
The statement did not elaborate on what “unconditional” means.
Earlier this week, the Fed raised its benchmark interest rate three quarters of a percentage point in a further effort to slow demand. Market participants worry that the Fed tightening could bring on a recession, though Powell said he still thinks that can be avoided.
That rate hike came after a move in May to raise rates by half a point. This week’s move was the most aggressive since 1994.
Along with rate hikes, the Fed also is reducing assets from its $9 trillion balance sheet by allowing some proceeds from bonds it holds to roll off.
Earlier in the day, Powell himself made a similar vow, saying he and the rest of the Fed are “acutely focused” on bringing down inflation.