Of all the changes made to the tax code this year, the one causing the most panic is probably the decrease in the mortgage interest deduction. It’s a worry that hits millennials particularly hard, as homeownership is often seen as the pinnacle of the American dream. It’s a dream that seems more and more out of reach for a generation defined by how much student debt we carry.
Before we get into the implications of the mortgage interest deduction, here’s a little background on what mortgages are, and how this deduction works.
WHAT’S A MORTGAGE?
A mortgage is a loan taken out to purchase property. As with any loan, you’re charged interest for borrowing the money. As you begin to pay back the loan, the bulk of your monthly payment goes toward paying off the interest first. Over time, more of your payment will go to paying off the principle.
WHAT’S THE MORTGAGE INTEREST DEDUCTION?
The mortgage interest deduction allows you to subtract your mortgage interest from your annual gross income (AGI). This can be especially helpful for first-home buyers as you can write off almost all of your mortgage payments for the first few years. This can mean knocking $10–20,000 off your AGI, possibly even bumping you down a tax bracket.
THE LOWERED MORTGAGE INTEREST TAX DEDUCTION PROBABLY DOESN’T AFFECT YOU.
With the new tax bill, the cap on how much mortgage interest you can deduct has decreased from $1 million to $750,000. The tax bill also capped the amount of property tax you can deduct at $10,000 (it used to be unlimited).
If you’re taking out a mortgage that’s less than $750,000, this change literally doesn’t affect you at all.
To put this in perspective, here’s an example of how pricey a home you’d need to purchase for the decreased deduction to negatively affect you:
Buying a $1 million dollar home with a 10% down payment requires $100,000 in cash. And another $30,000 or so for closing costs. You’d have taken out a $900,000 loan.
If you get a 30-year, fixed-rate loan at a 4.42% annual interest rate, you’ll pay about $4,517/month in principle and interest payments (not including property taxes and homeowners insurance!). Over the course of 30 years, you’ll pay $726,294 in interest alone, and $1,626,296 total. That’s a LOT of cash. For us 20 and 30-somethings, a home in this price range is likely not in the budget anyway.
Now, if you’re one of the people that this change may negatively affect (hi, all of you living in LA and NYC), don’t get discouraged. The lowered deduction amount only applys to new homeowners; if you already purchased your home, you’re in the clear. If you’re in the market to buy, this shouldn’t necessarily stop you—it may actually help you make smarter decisions about how expensive a home to purchase. And finally, homeownership ain’t always all it’s cracked up to be! There are a lot of compelling reasons for millennials to stick to renting for a little while longer.
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