Many Real Estate Professionals, have witnessed a repeated theme, when they hear troubled homeowners stories these past several years. It is the overwhelming number of homes with either a second mortgage added, or a total refinance at some point during the duration of ownership. Essentially homeowners came to believe their house was a ATM or a bank.
Reasons for these refinances and second mortgages vary. There are those who simply wished to take advantage of available lower interest rates at one point or another. But, an over-whelming majority of folks currently in hot water with mortgages are those who added considerable debt to their homes by purchasing cars, boats, home additions, pools, vacations, and even airplanes to a refinance or a second mortgage.
In the last couple of decades there has been a trend for homeowners to think the lower mortgage interest rates available for homes and the ability to spread out the debt over more years had been an enticement for financing these other assets into the home mortgage debt. There was another important reason, as well - the mortgage interest tax deduction.
So, here's the question of the day:
(1) Should the tax deduction on mortgage interest be calculated on a base amount calculated on the home purchase price?
(2) Should the tax deduction on mortgage interest be calculated on base purchase price plus any home improvements, which would increase the value of the home?
(3) Should the tax deduction on mortgage interest be eliminated outright?
(4) Should the tax deduction on mortgage interest remain intact as it is?
My own perspective after hearing troubled homeowner experiences, is that the public needs to become more informed about the risk of adding debt to the home mortgage. After all should homeowners get into hot water with their mortgages, they risk losing their mortgage tax deduction - when they lose their home.
By having outside debt added to the mortgages, homeowners often harm their opportunity to refinance to lower interest rates - especially if home values decline because of market conditions, and they are left upside down in home value. When coupled with job loss, they are looking at potential disaster.
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