Finance and Economics Discussion Series (FEDS)
September 2024
More Tax, Less Refi? The Mortgage Interest Deduction and Monetary Policy Pass-Through
Tess Scharlemann and Eileen van Straelen
Abstract:
We study how the mortgage interest deduction (MID) affects refinancing. Households who deduct mortgage interest from their taxes face a lower post-tax mortgage rate, reducing the interest savings from refinancing net of taxes. We estimate the effect of the MID on refinancing using the Tax Cuts and Jobs Act (TCJA) of 2017 as a natural experiment. The TCJA doubled the standard deduction, reducing MID uptake and value. We show that, following the TCJA, the refinancing rate amongst households who lose the MID increased by 25%. Our results suggest that reducing the MID may improve the pass-through of monetary policy when rates fall.
Keywords: Consumption, Household Finance, Monetary policy, Mortgages
DOI: https://doi.org/10.17016/FEDS.2024.082
PDF: Full Paper
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