An article from the Wall Street Journal writes about a study where the authors concluded that mortgages that are more than $1M have lower interest rates than smaller mortgages. The reason- the inability for the borrower to deduct all of the interest. The mortgage interest deduction is limited to your first $1,000,000 in loan balance (plus $100,000 in home equity lines/2nd loans). The authors suggest that lenders know this and are essentially charging a higher rate below $1M to capture some of the taxpayer subsidy themselves.
Therefore, does it pay to apply for a larger than $1M loan and then pay down the balance immediately to get the balance down to $1M so your interest is fully deductible? We'll run the numbers and let you know, but this is an interesting bit of information.
Link to the WSJ/Smart Money article here.
Link to the actual study here (we haven't read it yet).