Americans are often criticized (primarily by Europeans) for having relatively huge mortgages compared to the purchase price of their houses. Why is that?
Here is your answer Why do people take such big mortgages in the US to buy houses?
It’s partly because they like large houses, but it’s also because there are certain tax benefits in the USA for people who buy houses. Put simply, if you take out a big mortgage and then sell your home, you won’t be taxed on the difference between the sales price and what you originally paid for it – instead, only the equity or value of your home after it has been mortgaged will be taken into account. So if you bought a $500 000 house with a $100 000 down payment and $400 000 mortgages, then you could sell it at any time for $600 000, pay off the $400 000 mortgages, and pocket $200 000 tax-free.
This is not the case in most other countries, where if you sell your house for more than you paid, then you have to pay capital gains tax on the difference. In the United Kingdom, there are no such allowances, so this causes Americans with homes in Britain to try and keep their US mortgages as low as possible – that means borrowing only a small percentage of the price of a property when they buy it.
On top of that, there are sometimes also fairly hefty fees involved with taking out a loan for large amounts, so many people prefer to take smaller ones. If they were taxed on all sales profits plus interest repayments, some would be worse off by trading up to a bigger home.
Another factor is that Americans are allowed to deduct interest repayments for the first $1 million of their mortgages. This means people can become liable for huge liabilities without actually having to sell any assets at all – which means they don’t have to pay capital gains tax. So it’s the combination of these factors that cause Americans to take out big mortgages on their houses. To find out more about mortgages, see How mortgage loan works.
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