Could Fiscal Cliff Be the End for Mortgage Interest Deduction?

by on Mortgage

Fiscal Cliff Sign

If you have been paying attention to the news lately, then you have more than likely heard more than your share of information on the looming fiscal cliff. However, very few people have talked about what the fiscal cliff could potentially mean for the real estate market. Specifically, little has been discussed about whether or not the fiscal cliff could be the end of mortgage interest deduction.

Before we get into the specifics of the importance of mortgage interest deductions, it is important for you to have an understanding of what “fiscal cliff” even means. At the end of the year the Bush tax cuts are set to expire and Budget Control Act of 2011 (automatic spending cuts) will go into effect.

Basically, Democrats and Republicans had over 2 years to come up with an agreement on these issues, but due to ideological differences (and petty drama) they simply have failed to do so. As a result, if these issues are not resolved (and quickly) we could very well go back into a recession, which nobody wants.

What, exactly, does all of this have to do with real estate? Right now Americans receive a mortgage interest deduction for the interest paid on their home loans. This mortgage interest deduction is among one of the many things that has been brought up in budget cut talks.

What are Mortgage Interest Deductions and Why Do they Matter?

Every year, millions of middle-class homeowners depend on the considerable tax savings from the mortgage interest deduction (which allows homeowners to write off their interest payments for their home loans). Therefore, individuals that are already struggling in a weak economy with a high unemployment rate will face even more financial stress by having this deduction removed.

Furthermore, these deductions contribute significantly to the economy by lowering consumers’ tax liability, which means that these individuals have more to spend. With the real estate market just now making strides toward recovery and the unemployment rate finally seeing some signs of progress, removing spending money from these consumers could be detrimental to the American economy.

How Could Removing the Mortgage Interest Deduction Affect Homeownership?

Not only would removing the mortgage interest deduction be burdensome to current homeowners, but it could also be detrimental to the overall real estate market. Eliminating the deduction would hurt the real estate market by removing an incentive to buy a home – and inevitably will make homeownership more expensive.

With a still rocky real estate market that has yet to reach solid ground – and is still very much in the recovery phase – removing this incentive and homeownership affordability could be detrimental.

Although there is nothing definitely on the table, lawmakers have taken aim at the deduction over the past few months when as talks about the looming fiscal cliff and budget cuts have surfaced.