If we are ever going to eliminate the home mortgage interest deduction the time is now. The deduction provides a discount of the interest rate resulting in a lower monthly payment in some cases. The elimination is just as if the rates went up a point or two. So with rates at record lows and home prices dropping, now it the time that the elimination would have the least impact.
This big factor in eligibility for a mortgage is the monthly payment which is based on the rate and the mortgage balance. Not only are rates low, prices have dropped dramatically in most markets so monthly payments have also. Anyone who is reasonably financially able to manage home ownership should be able to do it now.
As interest rate increases always eliminate potential buyers at the margins; this will too. But we know there is a risk with those who barely qualify so this will increase the margin and reduce that particular error. We are realizing that home ownership isn't a good idea for everyone.
In some cases, the deduction isn't such a great benefit anyway. For 2009, singles were eligible for $5700 standard deduction and couples for $11,400. Unless you have a pretty big mortgage and it's fairly new, you may be getting very little benefit, if any, over what you would get with a standard deduction, especially for a couple. The first few years of a mortgage, most of the payments are deductible interest but in the later years, the interest element diminishes rapidly.
Since this is one of the larger deductions for some people, it can't be overlooked in any review of the tax system. The real estate industry will fight it since it will reduce their market by a small amount and reduce what others can spend on houses but it's not nearly as big an issue as it was when interest rates and prices were much higher. It's now or never on this one.
