Jonathan from Escondido, CA

Faces of the Federal Budget

I sold real estate for several years and it has become obvious to me that the big beneficiaries of the home loan interest deduction are the banks. Everybody who bought a house from me did the tax savings calculation to determine whether or not it made economic sense to purchase and how much they could afford. Essentially without lowering the price tag of the house (and therefore the amount of the loan), it makes homes more affordable at higher prices and therefore pushes the price up. Since the people can afford what the people can afford, if there were no home loan interest deduction, the price of real estate would be lower. The deduction does not really benefit the working class.

Meanwhile, almost every real estate loan that went through our offices had to meet the FHA and/or VA standards. The reason for that was that the banks wanted government guarantees on the loans so that they would not be at risk if the loan defaulted and could sell the loan on the secondary market. Essentially the government (via the Federal Reserve Bank) lends money to the banks at a low rate. The banks turn around and lend the money to the homeowners at a high rate. However, since the government guarentees the loan, the banks have no risk. The banks get the interest and the government puts up the money and takes the risk. So the real beneficiary of the home loan interest deduction is the banking sector.

Everybody I know pays more in home loan interest than in taxes. So here is an interesting statistic one in the National Priorities Project could check. If the home loan interest were paid to the government instead of the banks, would we need an income tax?

Jonathan from Escondido, CA | Map

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