Gains Exceed Mortgage Cost for Many

Ever fantasized about living someplace rent-free? Or better yet, getting paid to own a home? And if you're a lender, did you ever imagine you might be giving away free mortgage money?

It may be you already are, according to Freddie Mac economist Amy Crews Cutts. The combined effect of low interest rate home loans and strong home price appreciation may mean that more wealth is flowing into a homeowner's portfolio than is leaving his or her checkbook in the form of mortgage payments.

Just consider the math. Supposing you bought a house with a 100% loan-to-value ratio. Assume a mortgage coupon rate of 6%, and a marginal income tax rate of 33%.

Because of the interest deduction on home mortgages, the consumer has an effective mortgage interest rate of 4% on an after-tax basis.

Right there, an annual appreciation rate of 4% would match the annual cost of the mortgage loan. But appreciation has exceeded 4% in much of the country in recent years.

Even if you include typical property taxes and maintenance costs, each at about 1% on average, the consumer's cost of living in the home would be 6% annually. That's equal to the before-tax 6% mortgage rate.

"Anything above that, and you are getting paid to live there," Ms. Crews Cutts said.

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