Homeowners currently are allowed to take an itemized deduction for the interest they pay on their home mortgages. With conventional loans, most of the payments in early years go to pay the interest on the loan with a tiny fraction that goes toward principal. Depending on the individual’s tax bracket, the deduction can result in significant savings in taxes owed and therefore the affordability of a home.
At the time of this writing, the President’s debt commission is proposing changes to limit interest deductibility for mortgage interest and eliminate it for home equity loans. The proposal to limit or eliminate mortgage deductability is nothing new. This idea was considered and dropped during President Reagan’s 1985 tax overhaul and has been brought up from time to time ever since.