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Home Interest Deduction Doesn’t Encourage Home Ownership

April 10, 2013

It encourages home borrowership. If you own your own home, how much can you get for the home interest deduction? Nothing. Not a cent. You get a tax deduction for paying interest on a mortgage, not for owning a home. Over the years, the deduction gets smaller and smaller as the more of the monthly payment goes to paying off principal rather than interest.

Interest percent on amortizing loan

Rather than encouraging financially savvy people to own a home and stay there, the law encourages a continuous churning as people move from house to house continually maximizing their deduction. That is not to say that is what all people actually do, although some certainly do. Rhetorically, it would be harder for a politician to stand up and say “I dream of a society where no one actually owns their home, but instead moves every 5 years to a slightly bigger house and is continually highly leveraged so that if housing prices ever drop, even by a tiny amount, many people will be underwater on their mortgages and be foreclosed on in a painful and slow process throwing their lives into disarray”. They say “I want homeownership”. But that’s nonsense. If you want homeownership, have a system where principal payments are deductible, not the interest part. Or better yet, use voluntary persuasion instead of government coercion. Maybe that’s too crazy an idea to even try…

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