Go Read

The new tax code is going to make many individuals rethink a lot of things regarding their taxes that they used to take for granted.  Because of that everybody should go read the article from The Wall Street Journal, "Should You Pay Off Your Mortgage?  The New Tax Law Changes the Math."  That's because under the new provisions there has been a significant change in the code to the standard deduction.  Here's what the article says:

"For many people, two revisions to non-mortgage provisions will have the biggest effects on their mortgage-interest deductions.  One is the near-doubling of the “standard deduction” to $12,000 for most single filers and $24,000 for most married couples. As a result, millions of filers will no longer benefit from breaking out mortgage interest and other deductions on Schedule A.

The other key change is the cap on deducting more than $10,000 of state and local income or sales and property taxes, known as SALT. This limit is per tax return, not per person.  These changes will hit many married couples with mortgages harder than singles. Here’s why: For 2017, a couple needed write-offs greater than $12,700 to benefit from listing deductions on Schedule A. Now these write-offs have to exceed $24,000.Assuming a couple has maximum SALT deductions of $10,000, they’ll need more than $14,000 in other write-offs of mortgage interest, charity donations, and the like to benefit from using Schedule A. 

Many couples won’t make it over this new hurdle on mortgage interest and SALT alone. According to the Mortgage Bankers Association, the first-year interest on a 30-year mortgage of $320,000 (the average) at the current rate of 4.8% is about $15,250. Interest payments are smaller if the loan is older or the interest rate is lower."

In some cases, based on this math, probable rates of return and individual financial capability, it may make sense to pay off that mortgage faster than the normal payment you might make each month.  This is especially true if you've lived in your house for a longer period of time and are paying much less in interest now than you did when you first bought the place.   Remember you pay more in interest initially than you do 10 or 20 years into the loan.  

Personally I took out a small mortgage when I downsized from our old home into our new place and am accelerating the payments each month.

A few other things the article notes that I'll mention. 

-Most buyers can only deduct interest on total mortgage debt up to $750,000 for up to two homes.  

-Home equity loans can only get a deduction now if you use the debt to buy, build or improve a home.

It is too early to say whether the new limits on mortgage interest deduction impacts spending on homes or pricing.  I don't think it mattered to the young couple that recently bought my home.  They have two kids and a third on the way and needed more room.  That likely outweighed the more nebulous and further out concern on whether they can deduct the interest.  Then again it is likely that the new provisions are still poorly understood by those in the markets for homes.  One would think that it should at least have a dampening effect on housing prices but there is an entire generation of millennials out there starting to have kids and needing places to raise them.  Perhaps their demand needs will outstrip all other concerns.

Back Thursday.