The current United States Federal tax code affords the mortgage interest deduction to home owners as a way of encouraging consumers to invest in purchasing a house of their own. When mortgage payments are made, part of that payment is classified as principal and part of it is classified as interest. The principal portion lowers the total amount of money still outstanding while the interest portion is essentially the price paid for borrowing money. With the mortgage interest deduction, taxpayers can reduce their total taxable income by the total dollar amount of interest they paid on their mortgage that year. Uncle Sam is keen on subsidizing the cost of home ownership because a strong housing market is a significant building block for a strong overall economy. By creating tax deductions associated with the purchase of a house, governments can incentivize many consumers to make the biggest single investment of their lives.
