Tax Time Preparation
The Mortgage Interest Deduction
It's that time again when Uncle Sam picks your pocket for taxes and, if you are writing out a check this year, you might want to ask yourself if a nice, fat mortgage interest deduction would come in handy next year.
For many people it certainly will. Mortgage interest is tax deductible. This means it is one of the expenses that reduces the amount of income on which you pay taxes.
Many, if not most, people who do not own houses, also do not itemize their deductions. That makes sense because if they added up all their potential deductions, the deductions would not be greater than the standard deduction. In 2011, the standard deduction for single people is $5,800. The standard deduction for married people is $11,600.
The beauty of the mortgage interest deduction is that it allows you to deduct all the interest you pay on your home loan. During the first years you pay on a home loan, nearly everything you pay is interest -- up to 75 percent of your payment.
That nice deduction can reduce the taxes you owe, while allowing you to live in the house you want.
In this economy, owning a home also offers you some subtle protection from inflation. Inflation is an increase in the general level of prices for goods and services over time. When you notice that your grocery bill is going up and your dollars buy less, that is inflation, according to investopedia.com.
According to inflationdata.com, in 2011 inflation was trending well over 3 percent while mortgage interest rates were the lowest in history at about 4.3 percent (30-year fixed.)
If you buy a home this year, and inflation continues to increase, you'll soon be paying off your home with cheaper dollars. Your food will cost more; your luxuries will cost more; rent will cost more. But your mortgage is going to stay the same.
Meanwhile, inflation will also have some effect on home prices, forcing prices up. Right now, in most parts of the country, home prices are low because there are a lot of houses on the market and fewer buyers than five years ago. That means, right now you can get a lot of house for fewer dollars. In coming years, however, as the supply of houses for sale decreases, the pressure of inflation plus a reduced supply of houses, will force home prices up. In 10 years, your home purchase today will be a bargain and you will be living in a home you love while paying prices locked in the past!
It's like being a financial time traveler!