Debbie,
There is no question that if a person buys a house for say $700K and it falls to $300K, they won't do very good. That being said, there are some areas where further price drops would seem unlikely. For example, I own some in the midwest where you can buy a 3+2+2 house for about $100K - and the prices there have held up through all that has happened in recent years (and in fact inched up a bit).
Now, in my case I rent these out, because my job is elsewhere, but if I lived there, yes, you can deduct the entire interest (at least up to certain levels and certain income restrictions) from your earnings. You get the deduction even if the value of the house actually goes up (which admittedly seems to be rarer at this point in time). Also, I forgot at first - you can deduct your property taxes as well.
So the savings can be quite large. Of course, like you said if the house goes down, it won't be as good in the long run, but here is a comparison - let's assume a 3+2+2 1500 Square feet in the midwest - it is for sale for $100K or rent for $800/month.
If you rent it out and stay for 10 years, you will have paid $96,000 and when you leave have nothing to show for it.
If you buy it using standard financing, you will put about $20,000 down (yes that is hard for alot of people). Your payments would probably be about $600/month with the low rates even with insurance (I know because I do this and my payments are maybe $650 using slightly higher rates - I haven't refied). Even if you had to pay the full $800/month though you could still do OK. Everything else is equal - in other words, the renters pay electricity, gas, cable, whatever. I don't fix their washer/dryer/fridge or anything.
In the first years, the buyer would pay about $400-500/month interest or lets just say $5000/year. That would directly reduce their "taxable" income - So figure they would save maybe $1500 / year on taxes (and that could go from they owe $500 to they get $1000 or they get $500 to they get $2000 refund, etc.)
OK, assuming the house stays the same in value for 10 years and then they move out - we have:
Value = 100K
They owe = $80K minus probably about ~$20K they would have paid off so $60-$65K range owed.
Over the 10 years, they saved maybe $12K-$15K in taxes.
Sell the house, pay the comm. get $90ish minus what they owe they get their down payment money back and saved the tax money.
Where the real debate comes in then is what if the house went up? What if it went down? Obviously that would affect these results. If the house was just $150K they would be in much better shape then shown - or if it fell to $50K they would not do well. Also, if they stayed for shorter then 10 years, renting might be better - if they stayed longer, buying would look better, etc.
JJacksET4
