The Home Mortgage Interest Deduction: Who Benefits?

Dreaming house ?

Photo by Nguyen Dai

By Jackie Stein

When Chris and his wife decided to buy a house, the Home Mortgage Interest Deduction (HMID) allowed them to buy their dream home. “It was a deciding factor in how much we thought we could afford to borrow,” he said. Chris’ story is the story of many Americans who dream about and finally become owners of their own homes. And for a long time, the HMID has been considered key to encouraging home ownership among those who might not otherwise buy.

The HMID is one of the largest tax breaks in the tax code; the White House estimates that it will cost the federal government $101 billion this year. For comparison, all federal spending on education programs this year will total around $70 billion.

As Congress begins to consider tax reform, they are re-evaluating the effectiveness of the HMID in promoting homeownership. One problem raised by analysts is that the main beneficiaries of the HMID are upper-middle-income households (making $75,000-$500,000 a year). They get 77 percent of the tax savings, but are already the most likely group to buy a home without a tax break. Consequently, according to the Tax Policy Center, the HMID mainly provides an incentive “for those who would own a home without a subsidy to purchase larger or more expensive homes.”

Chris' experience confirmed this. He said that the HMID made the difference in terms of which home he would buy, not whether or not he would buy a home. “Is it a luxury thing?” he asks, “Sure, yes, absolutely.” He would likely have bought a home anyway, he said, “just maybe not this one.”

Other people we talked with as part of the Faces of the Budget project expressed concern that the HMID seemed to benefit primarily higher-income households. For instance, John from New Mexico has claimed the HMID in the past. He worried that the deduction creates the wrong incentives. “We’re not trying to promote the ownership of mansions,” he said.

Becky from Massachusetts argued that lower-income taxpayers often cannot claim the HMID because they are less likely to itemize their deductions, something the Tax Policy Center confirms. “This isn’t necessarily helping Regular Joe achieve the American Dream of homeownership,” said Becky.

What do you think? How has the Home Mortgage Interest Deduction affected your life? Weigh in on our Share your Story page.