Image by Heavenbound via FlickrOwners of high end houses are the ones that benefit from the Mortgage Interest Deduction (MID). For example, someone with a mortgage of $800,000 at 5% interest will have monthly payments of $4,294.57. In the first year the tax deduction is $39,731.95. If this individual has a federal tax rate of 33%, then his tax benefit is $13,111.54 in the first year. This is more than 3 months of mortgage payments.
For the average Joe with a mortgage of $120,000, the first year mortgage interest deduction would be $5,959.79. Our average Joe makes about $34,000 which puts him at the federal tax rate of 15%. Joe is okay because his mortgage payments each month are only $644.19. In the first year the tax benefit to Joe is $893.96 because he is a 15% tax bracket. His benefit is a little over 1 month's mortgage payments.
But the game doesn't stop here. The tax benefits decline as the mortgage gets older. So the huge benefits are in the early years of the mortgage. To continue getting his 3 free months of mortgage payments each year, the wealthy homeowner has to refinance. He refinances the mortgage back to $800,000.
The mortgage broker makes additional commission. The bank makes more profits from fees, and the closing agent gets more business.
Some would say that the system is stacked against the average Joe. Poor hard working Joe cannot afford to refinance every 3 or 4 years. The fees and refinance costs are simply too high. In addition, the benefit of only 1 month's free mortgage payments isn't worth the trouble.
Related articles by House Refinance Center
Mortgage Interest Deduction: A Social Failure
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HARP Mortgages: Now Is The Time To Refinance
Aftermath Of Foreclosure - Taxes
Know Your Closing Costs And Be Prepared To Negotiate
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