| Mortgage Interest Deduction |
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Avino
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| Mortgage Interest Deduction |
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Hi all,
I just had a thought and did some simple math to check it out. I was paying about $23K a year in interest on my x-mortgage. I could deduct that on my taxes. Assuming my tax rate is at 25% and an income of $70K, I would reduce my income by $23K and only pay taxes on $47K saving me about $6K.
But, I still would have paid about $17K in interest to the bank!! Now, I got rid of my mortgage so I can't deduct that from my taxes anymore, so my taxes will be more (by $6K) but bottom line is $6K is a hell of a lot less than $23K.
Can someone explain to me the advice of keeping a mortgage to get the deduction, if said deduction is far less than what you could save if you didn't have to pay the interest.
~A.
Also blogging @ avinos2cents.blogspot.com
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Fri Oct 02, 2009 4:11 pm |
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littleroc02us
Senior Member
Cash: $ 180.50
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You are right. I have written about this many a times on this forum. The myth that many financial and common people tell you is that the advantage of having a mortgage is to get a tax deduction. But like you said why do you want to pay the bank 17k only to get 25% of that back from the IRS. Think about this, why would the bank to you any different. They wouldn't get theirs if everyone paid off their mortgages. Now, on this forum you will hear lots of replies regarding leveraging of your homes equity and using the money to invest. That may sound all fine and dandy, but the difference in paying off the mortgage vs. not is that you eliminate risk. Plus you'll have a ton of money to invest anyways once the mortgage is gone and will be a millionaire within 15 years investing what was your mortgage payment. It's nice to hear wisdom these days.
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Fri Oct 02, 2009 7:00 pm |
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LottomagicZ4941
Senior Member
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THe gov should have never given breaks for the mortagage. People just ended up paying more for their homes cuz us guys can't say no when our gals want more home then we can actually afford.
Perhaps one day we will have a progressive flat tax.
10% on first 10K
20 percent on next 10K
30 percent on next 10K it would be fair cuz anyone making 100K taxed at the same rate.
Want to pay less taxes then just work less. If we end up with a shortage in an occupation they could get a tax break to get people say into a certain field.
If you want to call me a pinko commie go ahead. If wanting a fair and ethical system makes me a pinko commie then I am one.
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Sat Oct 03, 2009 1:33 pm |
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coaster
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| Re: Mortgage Interest Deduction |
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quote:
Originally posted by Avino
Can someone explain to me the advice of keeping a mortgage to get the deduction,.
That is incomplete. You don't get a mortgage FOR the deduction. You get a mortgage because you need the mortgage, and when you figure the cost of borrowing, you figure your cost of funds NET of the deduction. i.e. you get a mortgage at 5% instead of a personal loan at 5% because the net cost after deduction is 4% or less for the mortgage.
~Tim~
Eye Candy : Why Whimsy
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Sat Oct 03, 2009 3:55 pm |
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Avino
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Cash: $ 24.80
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Joined: 27 Mar 2006
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| Re: Mortgage Interest Deduction |
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quote:
Originally posted by coaster
quote:
Originally posted by Avino
Can someone explain to me the advice of keeping a mortgage to get the deduction,.
That is incomplete. You don't get a mortgage FOR the deduction. You get a mortgage because you need the mortgage, and when you figure the cost of borrowing, you figure your cost of funds NET of the deduction. i.e. you get a mortgage at 5% instead of a personal loan at 5% because the net cost after deduction is 4% or less for the mortgage.
Hi Coaster, I agree if my options were between a mortgage and a personal loan it makes more sense to go with the mortgage. Where I was headed with my question is if I had sitting in the bank the cash to pay off the mortgage, why keep it for a deduction when your paying the bank so much money in interest, and the deduction is far less than you are paying. Just for the record, I did pay off my mortgage, and I will be investing more money now on a monthly basis (not all into the stock market of course).
~A.
Also blogging @ avinos2cents.blogspot.com
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Mon Oct 05, 2009 3:18 pm |
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coaster
Senior Advisor
Cash: $ 1318.80
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Joined: 11 Oct 2005
Location: Wisconsin
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Generally you should put the money where the net is to your advantage. Say, for example, the long-term return on an investment, say a balanced fund at 8% net of tax is 6.5% roughly. Your mortgage at 5% costs you net 4% (all numbers very rough average) then the investment has an advantage of 2.5% and you should keep the mortgage and put the available funds into the investment. If you want to get really fussy you could also factor in the discount for the risk of the fund versus a "risk-free" return from a money-market fund, CD, or T-bills. You have to run some pretty fancy spreadsheet formulas because you have to compensate for the future value of the money discounted for inflation as well. It's easier to just re-evaluate your assumptions periodically and then re-distribute the funds accordingly.
I guess the point I was trying to make is that the tax deduction is one factor in your decision matrix. You don't keep a mortgage FOR the deduction, but the deduction might be enough to swing the decision one way or the other.
~Tim~
Eye Candy : Why Whimsy
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Mon Oct 05, 2009 5:13 pm |
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