Since announcing his intent to run for office, President Donald Trump has been an advocate of overhauling the U.S. tax code. The Trump tax plan is one of the hottest topics in Washington D.C. — as Republicans in both the House of Representatives and the Senate released separate proposals for tax reform. And because it will have a major financial impact across the country, Americans will no doubt be talking about Trump’s tax plan for a long time.
Here are seven ways that Trump’s tax plan will affect the mortgage interest deduction.
Seven Ways the Trump Tax Plan Affects the Mortgage Interest Deduction
Trump’s new tax plan will feature a dramatic overhaul of corporate and personal tax rates. The tax plan brackets could decline from seven brackets to four if the House of Representative’s plan passes. Americans would also see the corporate tax rate decline from 35 percent to as little as 20 percent, while the standard deduction on personal income taxes would change dramatically. The president advocated for a 15 percent corporate rate, according to the Los Angeles Times. The top tax rate for high earners might be reduced from 39.6 percent to 38.5 percent, according to the recently passed the Tax Cuts and Jobs Act.
An overhauled tax code would have an effect on the mortgage interest deduction for homeowners. What is mortgage interest? Mortgage interest is money charged on a loan that is used to purchase a residence. Banks and other lending institutions charge interest on primary and secondary loans, home equity loans and other lines of credit. Whoever is taking out the loan will typically pay a combination of principal and interest each month that is displayed in a mortgage amortization table covering the life of the loan.
Not all homebuyers have the cash to put a 20 percent down payment when securing a loan for a house. Those who put down less are charged private mortgage insurance on top of their interest payments until they have paid 20 percent of their principle. Federal law allows homeowners to write off their mortgage interest and private mortgage insurance on their taxes through the mortgage interest deduction when they itemize their expenses.
Here are the ways that the Trump tax plan would affect mortgage interest deduction:
1. Reduces the Amount That Home Owners Can Deduct
The GOP tax plan would set a hard cap on the amount of money that Americans can take off on their taxes using the mortgage interest deductions. Right now, Americans can deduct mortgage interest on loans valued up to $1 million. The GOP plan could reduce this law to a cap of $500,000.
The Senate plan would not reduce the cap; however, many tax analysts expect that the House of Representative’s provision would advance because Americans are expected to deduct $357 billion in mortgage interest between 2016 and 2020. Just 5.4 percent of all loans obtained this year were valued at more than $500,000, according to ATTOM Data Solutions.
2. Eliminates Mortgage Interest Deductions on Second Homes
The House of Representatives not only want to cap loan benefits, but they are also taking aim at individuals who own more than one house. The House bill would eliminate mortgage interest deduction for individuals who have a second home. If you own a vacation home in Florida, for example, you would no longer be able to write off interest in that residence. This could affect investment in states where seasonal residences are popular.
3. Removes a Home Loan Tax Benefit
The Trump tax plan would dramatically reduce the number of people who claim the mortgage interest deduction as a home loan tax benefit. The Tax Policy Center forecasts that the number of people who use this benefit would decline from 21 percent of Americans to just 4 percent. Given that the standard deduction would rise, fewer Americans would be likely to itemize their deductions. The Tax Policy Center projects that only 4.5 percent of Americans would itemize deductions in the future. Currently, a little more than 26.6 percent of Americans itemize their tax deductions.
4. Could Possibly Scrap Interest on Home Equity Loans
Many Americans purchase homes and then borrow against their equity over time in order to make improvements and update their living spaces. The Senate plan could eliminate any deductions tied to home equity loans. Right now, Americans can borrow up to $100,000 against the value of their home and deduct a portion of the interest that they pay the lender.
5. Reduces the Value of Reverse Mortgages
Reverse mortgages have become a popular way for older Americans to get capital later in life by capturing the value of their home equity. This year, the lending limit for a reverse mortgage is $636,150. That figure is 27 percent higher than the $500,000 cap limit for mortgage debt for a married couple in the Republicans’ tax proposal.
6. Reduces the Attractiveness of Interest-Only Mortgages
If you’re a homeowner, you likely didn’t know that an interest-only mortgage was an option. These mortgages require that the customer only pays interest that arises from the borrowed principal. But paying only interest forever isn’t an option as these loans typically last just five to seven years. By significantly reducing the amount of interest that can be taken off, the Trump tax plan makes these mortgages less attractive, particularly on homes in excess of $1 million.
7. Cuts the Benefit of the Middle Class in the Blue States
The Trump tax plan does more than just cap mortgage interest deductions. It will also slash the so-called SALT deduction that includes state and local income taxes, general sales taxes and property taxes. Homeowners in blue states like Maryland, New York, California and Illinois will pay the most under the president’s plan. Moving forward, look for Democratic politicians to make these policy changes a center part of their economic message. They will argue that Republicans cut taxes for the richest Americans by eliminating popular tax credits utilized by the middle class.