As Congress tries to reach a deal to avoid the fiscal cliff, lawmakers are considering a cap on the mortgage interest deduction.
As Congress tries to reach a deal to avoid the fiscal cliff, lawmakers are considering a cap on the mortgage interest deduction. - 
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As Congress and the president try to reach a deal to address the federal deficit and avoid the harsh package of spending cuts and tax increases better known as the Fiscal Cliff,  they’re eyeing something once considered untouchable: The mortgage interest deduction. 

Republican senator John McCain is one lawmaker who mentioned the formerly unmentionable on Fox News Sunday, saying a budget deal should involve closing a lot of tax loopholes, including “a limit on the amount you can take on your home loan mortgage deduction.” 

An estimated 40 million homeowners take advantage of the mortgage interest deduction, which lets you write off a percentage of the interest you pay monthly on your home loan. For the average homeowner, that savings adds up to about $600 a year.

If the deduction were eliminated entirely, it would increase tax revenue by over $98 billion in 2013, according estimates by the congressional Joint Committee on Taxation. But eliminating the deduction entirely isn’t likely. What may be discussed is some sort of cap on how much high-income households can deduct, while attempting to leave most middle class families untouched by any changes to the deduction. 

Mark Fleming, chief economist for the housing data company CoreLogic, says any limits to the deduction would effectively make buying a house more expensive, which could make homebuyers more likely to purchase less expensive homes, and in turn push home prices lower. 

“The question we need to ask ourselves,” says Fleming, “and I don't know the answer to it: Is that something we want to do to a nascent housing recovery right now?”

Even with the risk, Fleming says putting limits on mortgage interest deductions is still an option worth considering, given the growing deficit. 

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