DEAR MR. MYERS: Is it true that President Trump wants to eliminate deductions for state and local taxes? That would be terrible for me and my neighbors because our annual real estate property taxes are already sky-high, and the deductions that we can take for them save us a lot of money when we file our federal returns!
ANSWER: Yes, it’s true. In a tax-reform outline that Trump recently provided to Congress, the president suggested that he wants to keep the current deduction for mortgage-interest payments but would like to eliminate write-offs for most types of local and state taxes. That, presumably, would include those for property taxes.
Whether Trump gets his wish is uncertain, at best. Lawmakers in high-tax states, including those from many Northeast states and California, are already complaining that dumping such deductions would unfairly punish their constituents.
“I am not on board with that aspect of it, no,” influential Rep. Peter King (R-N.Y.) told CNN. “In my district in particular, Long Island, almost the main asset that most people have is their home,” King explained. “These are modest homes, but their property taxes are very high. The state income tax is [also] very high. And so, to them, it would be a net loss in this new tax plan.”
Trump’s tax-reform proposal faces an uphill battle for other reasons, as well. Even if a tax plan makes it through the Republican-controlled House – where members such as King are already voicing concerns – it would then go to the Senate, where the support of at least eight Democrats would be needed.
The bottom line: It’s unlikely that any major tax-overhaul bill will be approved this year. But it wouldn’t hurt for you to call or write your local congressional representative and your pair of U.S. senators to insist that they protect your longtime right to deduct state and local taxes on your annual federal tax return.
REAL ESTATE TRIVIA: There are 132 rooms, 35 bathrooms and six stories in the residential portion of the White House, according to the official White House website. There are also 412 doors, 147 windows, 28 fireplaces, eight staircases and three elevators.
DEAR MR. MYERS: I know that the Federal Reserve Board raised interest rates by one-quarter of one percent in March. Do you think that will be the only rate hike this year?
ANSWER: Probably not. Most economists say another quarter-point rate increase could come soon, perhaps as early as June, and many experts believe an additional quarter-point hike could come in late fall or early winter if the economy keeps growing.
The Federal Reserve sets the Federal Funds Rate, which is the interest rate that banks pay for overnight loans from other financial institutions to meet government guidelines. It raises rates to discourage more borrowing, which in turn keeps inflation in check by limiting business expansion and (yes) even home-price increases.
It’s important to understand that most mortgage lenders don’t set the interest rates they charge to homebuyers and refinancers based on the Federal Funds Rate. Instead, they track the rates that the government pays on seven- or 10-year Treasury bonds, because most homeowners move every decade or so.
Now, here’s the bad news: Some financial experts, including economist David Payne of the respected Kiplinger’s Personal Finance magazine, believes the rate on 10-year Treasury notes will hit 3 percent by the end of 2017. Currently, it’s 2.5 percent.
After mortgage lenders slap on their normal profit margin for new loans, Payne says, expect the average 30-year mortgage rate to climb to 4.6 percent by the end of this year. That would be up from about 4.03 percent today, adding roughly $67 to the monthly cost of a $200,000 mortgage and a staggering $24,119 in interest over the course of three decades.
DEAR MR. MYERS: We refinanced our $155,000 mortgage at a 4 percent interest rate in early April, and got a $4,700 tax refund last week thanks to our deductions for mortgage-interest payments and property taxes. If we use that $4,700 refund to make a one-time prepayment toward the balance of our loan, how much would we save in interest charges over the life of the mortgage and how much sooner would we pay it off?
ANSWER: I have always been a big proponent of prepaying a mortgage, either through modest additional monthly payments – or larger, lump-sum payments at occasional intervals – directly to the loan’s outstanding balance. Your new interest rate of 4 percent, though, is fairly low, so it’s best to concentrate on reducing any credit card or other higher-interest debt you may have before turning your attention to prepaying the mortgage.
That said, you would pay a total of $111,398 in interest charges if you kept your new 30-year loan for its entire term. Adding a one-time payment of $4,700 toward the outstanding principal balance today would reduce your overall finance charges to $101,070 and allow you to pay the loan off in 28 years, four months.
In other words, the lump-sum payment would allow you to own the home one year, eight months sooner and thus trim $10,328 off your long-term interest charges.
David W. Myers’ column is distributed by Cowles Syndicate Inc.