Mortgage Interest Deduction vs Standard Deduction

The president’s tax proposal released last month has caused some worry among home owners. DISCLAIMER: This article is based on my opinion and not fact, you should always consult a tax professional for advice before making any big financial decisions. The proposal would double the standard deduction. This would threaten to nullify the mortgage interest deductions enjoyed by some home owners currently. While this may be true, in my opinion the increase in standard deduction is a good thing for most tax payers.

The increase in the standard deduction can go one of two ways for any given tax payer or family. In the first and more advantageous scenario, the increased deduction would reduce your taxable income, resulting in a decrease in what you owe in taxes. This would be the case if your itemized deductions were now less than the new standard. On the other hand, if your itemized deductions were still more than the new standard deduction, it would have no affect on your taxable income.

This brings up the question, would decreasing the usefulness of the mortgage interest deduction negatively impact home values? In my opinion, it won’t have any noticeable impact and tax deduction of mortgage interest is one of many advantages of home ownership. I believe there are other equally (if not more) important reasons to purchase a home, such as financial gains, pride in ownership, and the security owning offers versus renting.

In addition, if a buyer of a typical house in Sunnyvale were to use conventional financing, they would most likely still be writing off more than the increased standard deduction in interest alone.

AB71 Tax Bill

AB71 is a bill proposed by the head of The Assembly Housing and Community Development Committee, David Chiu. The bill would eliminate mortgage interest deductions on second homes. The increased revenue would help provide more low income housing tax credits. While this is a good thing for low income housing, it does pose a problem in other areas.

It is estimated, that if the MID were eliminated on second homes, sales would drop by 2,152 homes in the first year. Because of this the state would lose an approximate $180.2 million in the first year. Many owners of second homes say they wouldn’t have bought a second home in the first place if they knew their interest deductions would disappear.

Keep in mind that not every second home is a vacation home. Someone with a one way commute of an hour or more may choose to purchase a small condo or townhouse to live in during the week. This could eliminate that option all together and force more traffic on the roads further slowing commute times.

The problem could be taken even further, people have made significant financial decisions based on the fact that the mortgage interest deduction would be there to make the property affordable. This could force the sale of second homes or other financial problems for the people who own them. In a vacation home areas of the state, homeowners are going to be hard pressed to find a buyer if the mortgage interest deduction on second homes is eliminated.

Where Is Mortgage Money Coming From?

More and more people are turning to nonbank lenders for their mortgages when buying a house. A nonbank lender is a financial institution that does not offer both lending and depositing services, such as checking and savings accounts. Home Services Lending and Quicken Loans are examples of nonbank lenders.

Since the housing crisis, banks are more heavily regulated in terms of loan conditions. This naturally caused them to do less mortgage lending over time and allowed nonbank lenders to focus on less than perfect lending situations.

Back in 2011, 50% of all new home loan money came from the three big banks. As of 2016 that number has dropped to 21%. Banks are required to follow strict lending guidelines on what and who they can lend to. Their lending approach has changed from “risk management” to “perfect loan”. Meanwhile, nonbank lenders have a little more wiggle room in what they can offer.

Of course borrowers should pay more attention to things like mortgage rates and loan terms  than what type of lending institution they choose for their mortgage.

Silicon Valley Clean Energy

In December of last year Sunnyvale voted 6-0 to implement Silicon Valley Clean Energy’s new GreenPrime 100% renewable energy program. Starting in April of this year all of the city’s energy will come from renewable energy produced by sources like wind and solar. Campbell, Cupertino, Morgan Hill, Mountain View, and Saratoga have committed to the program along with Sunnyvale.

Beginning in April customers in SVCE’s service area will automatically be enrolled in a program called GreenStart which will be 100% carbon free and consist energy produced by hydroelectric, wind, and solar. You will also be able to opt in to the GreenPrime program which they state is 100% renewable and 100% carbon free for a small added cost.

All this will still be delivered through PG&E existing infrastructure and will still be billed through PG&E as well. GreenStart’s electricity will supposedly cost about 1% less than PG&E’s generation rates. Instead of PG&E’s current 30% renewable and 60% carbon free you would be 100% renewable and carbon free.

GreenPrime will cost between 5% and 15% more than GreenStart. The average residential customer using approximately 460kWh per month would pay an approximate $3.22 premium for the GreenPrime Service.

By switching to the GreenPrime program the City of Sunnyvale will be spending around $141,000 more per year on the 15.7 million kWh of energy used for streetlights, parks, government run buildings, and utility operations. This money would come mostly from the city’s general fund and the rest would come from the sewer and water funds.