Saturday, December 28, 2002

The Home Interest Mortgage Deduction, Part 1

A paper by Edward L. Glaeser and Jesse M. Shapiro published by the National Bureau of Economic Research gives me pause today. This is hardly an unusual situation (and one of the primary reasons I need an affiliation with some college or university soon, or we’ll be going broke in $5.00 increments), but it melds well with the recent argument made by The Wall Street Journal editorial page that we need to get rid of the home interest mortgage deduction to pay for making corporate dividends deductible.

That latter is a dubious leap of faith, but let’s do a little work with the numbers. Per the paper, 1999 resulted in $773 billion in deductions by 40 million homeowners. If this is true, the average deduction was $19,325.

Does this strike anyone else as high? Fannie Mae, for instance, will increase its single-family house loan limit to $322,700 in 2003—four years after the study. If we assume a 7.5% 30-year fixed-rate mortgage, that means the total annual payment would be just over $27,000. (At the current national average of 5.93%, the total drops to just over $23,000.) And that’s at the Fannie Mae maximum. Are most homeowners paying anywhere from 71.4% to 83.9% of their mortgage in interest expense?

I suppose it’s possible they are (or that they’re buying houses for MUCH more than the Fannie Mae maximum loan). Checking my records for the year—our sixth full year of a 30-year mortgage, and a year in which we made no additional payments (due to my being laid off and other expenses)—I find that 78.5% of our payments on the year, roughly, are going to interest.

However, the Fannie Mae average for loans, from that same press release, was $139,300. At that amount, it would take a rate of just over 13 5/8% for the total annual payment—not just the interest—to reach the average declared by Glaeser and Shapiro.

More to come tomorrow…

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