The principal residence mortgage interest tax deduction in its present form rewards homeowners with low equity in their homes. Homeowners with little or no debt are paying a disproportionate share of taxes because they are acting responsibly. Tax policy should be adjusted to give all homeowners a credit, not just those who have incurred debt. We are somehow deluding ourselves into thinking that tax policy that encourages debt somehow encourages home ownership. Actually, it just helps banks.
My proposal is that a tax credit of 1% of the purchase price of the home be given to all homeowners, annually, for as long as they own their home. In a year when a homeowner sells and buys, credit could be claimed for both homes, an incentive to move up/down. A credit of this type would be an incentive to buy, to trade, and to own. It would eliminate cash-out tax advantages that probably shouldn’t exist anyway.