I live in a pleasant 9,000 sq ft, 8 bedroom house in Northern Virginia, about 10 miles from the White House and my work. Recently I refinanced the mortgage on this house. Let's look at the economic implications.
The interest rate on my new thirty-year fixed-rate mortgage is 3.75%. The current rate on a 30-year federal bond is 3.69%. The current rate on a 30-year TIPS inflation-protected federal bond is 0.625%. That means that the market expected inflation rate over that period is 3.69%-0.625% or 3.065%. That means that my real interest (after inflation) is only 3.75%-3.065% or 0.685%.
That is pretty good. But once you account for the tax effects, it gets even better. Let's take my marginal income tax rate to be 40%.1 As you can deduct the nominal, not the real, interest rate on a home mortgage, this means that my after-tax interest rate is only 3.75%*(1-40%) or 2.25%.2
If you combine these two effects, my expected real, after-tax interest rate is only 2.25%-3.065% or -0.815%. Thanks to this negative rate, the federal government and the bank effectively pay me several thousand dollars a year to thank me for living in my house. I think that is sweet of them. Don't you?
1Given my marginal state and federal income tax rates, that is roughly accurate. It is a good number to use in any case because—as my sainted tax law professor once explained—one shouldn't be in the business of tax planning for people paying less than 40%.
2One might object that inflationary gains are on-sale taxed as capital gains. But as long-term capital gains are (1) deferred, (2) at a preferential rate, and (3) generally entirely forgiven on sale of principal residencies, this can be ignored.
