Author Topic: Is the Mortgage interest deduction all it is cracked to be?  (Read 6293 times)

bluecollarmusician

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Is the Mortgage interest deduction all it is cracked to be?
« on: April 16, 2013, 02:00:35 PM »
I have a question for everyone at large- or more a challenge, I guess.

I would like for someone to explain to me why the mortgage interest deduction is such a good deal.  I fail to see how this is a real benefit to anyone unless their earned income is very high or their house is very expensive... and even then, it seems like there are far better alternatives available to them if they need a good tax write off.

My thoughts on this stem from the fact that people suggest you take into account the tax savings as a result of this deduction, but no one (or at least in my experience) nobody points out that you get the standard deduction without having to pay any interest to anybody.

So, I understand that for some high income individuals, with expensive homes (over 300,000) they may get a net positive benefit - but it is limited, and they STILL had to pay the interest in the 1st place.  They would be much better off paying interest on investment property - which they can make money, write off the interest, and still get the standard deduction....  I also understand that it may benefit someone who has some other expenses (health care etc.) that are not high enough to justify itemizing on their own, but in conjunction with a high mortgage interest makes it worthwhile.

Outside of these specific scenarios, I don't see how anyone really benefits from this, and the benefit is significantly less than touted - (i.e. " i was able to write off the 12000 I paid in interest this year= wrong answer, you already had that in the standard deduction.)  Why is this seemingly so obscure to people?

dragoncar

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Re: Is the Mortgage interest deduction all it is cracked to be?
« Reply #1 on: April 16, 2013, 02:17:11 PM »
I agree that it's an individual calculation and everyone should run their own numbers.  It is EXTREMELY Advantageous for upper middle class incomes and beyond.

Look at a single someone in California.  If they make over $100k, their state taxes surpass the standard deduction, leaving mortgage interest and property tax fully deductible.  Their marginal tax rate is 38%, changing a 3.5% rate to 2.17% effective.  That's a very spicy meatball.

Look at a single someone in Texas.  If their house is over $330k, property taxes surpass the standard deduction leaving mortgage interest fully deductible.




destron

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Re: Is the Mortgage interest deduction all it is cracked to be?
« Reply #2 on: April 16, 2013, 02:17:51 PM »
Housing costs vary greatly over the country. I read today about someone who paid off their $58,000 home in the midwest. On the west coast, housing is significantly more expensive. Every house is over $300,000 here in L.A., even a beat down house in gang-infested South Central.

"it seems like there are far better alternatives available to them if they need a good tax write off."

What better alternatives are there? The mortgage interest deduction helps me greatly, but on top of that I also pay into my 401k for tax deferral. I don't have kids, so... what else is there?

arebelspy

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Re: Is the Mortgage interest deduction all it is cracked to be?
« Reply #3 on: April 16, 2013, 02:22:09 PM »
It's not the be all, end all (in fact I basically ignore it in Real Estate calculations), but it sure doesn't hurt.

I'd be doing everything the same even if it didn't exist (i.e. I'm not paying the interest just to get that deduction, I'm paying to get very cheap leverage).
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Reepekg

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Re: Is the Mortgage interest deduction all it is cracked to be?
« Reply #4 on: April 16, 2013, 02:33:40 PM »
:::high fives Meoates1:::

Even with all the healthcare, gifts to charity, and moving expenses added in, I've never exceeded the standard deduction.

Plus deducting mortgage interest only lowers your taxable income. The way people rant and rave about how awesome it is to "write off" their interest, you'd think they were getting the interest back from the government for free or something. News flash: you're still paying a crap-ton of interest to finance that house!
« Last Edit: April 16, 2013, 02:36:42 PM by Reepekg »

Another Reader

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Re: Is the Mortgage interest deduction all it is cracked to be?
« Reply #5 on: April 16, 2013, 03:09:04 PM »
+1 for Arebelspy's comments.  Interest is the price you pay to leverage an asset you cannot afford to buy outright or so you can make more on the borrowed finds (arbitrage).  I love my $400k 3.125 percent mortgage and will keep it as long as it makes sense to do so.  That "crap-ton of interest" is financing a number of rentals at the owner-occupied interest rate.  The leverage is quite positive, and the net income very good.

In addition, where I live, you cannot buy a one bedroom condo in a marginal area for $300k, so the only way a middle class family can live here is with the mortgage interest deduction.  If you took the mortgage interest deduction away from homeowners in high cost areas, investors would likely come in and take advantage of the resulting price drops.  In expensive locations you would have a mix of renters and high end owner-occupants, which we already seem to have in SF and on the Peninsula.  That sort of "social engineering" always ends badly.

GreenGuava

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Re: Is the Mortgage interest deduction all it is cracked to be?
« Reply #6 on: April 16, 2013, 08:33:38 PM »
I live in Los Angeles and am currently in the 28% federal bracket and 9.3% state bracket.   My mortgage payment is $2100/month (I realize this would be far cheaper if I lived elsewhere, but for other reasons, mostly family related, I'm going to be living in So Cal for the next many years, and know that I'm trading the extra work time to do so).   I get about $400 of that "back" per month (my taxes are $400/month less than they'd be if I didn't have this, all other things being equal).  So that's pretty neat.

(For those that want the rest of the number: about $700 is principal payments, so the money I'm not getting back per month comes out to about $1000/month - far less than rent would be for a comparable unit)

destron

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Re: Is the Mortgage interest deduction all it is cracked to be?
« Reply #7 on: April 16, 2013, 08:49:31 PM »
Even with all the healthcare, gifts to charity, and moving expenses added in, I've never exceeded the standard deduction.

To write off healthcare it has to be more than 7.5% of your income. I'm sorry you are in such a position (unless your position is FI and your income is very low because of it, in which case congratulations!). Also, how often can you write off moving for work in your life? I'd hope not too many times.

Even witPlus deducting mortgage interest only lowers your taxable income. The way people rant and rave about how awesome it is to "write off" their interest, you'd think they were getting the interest back from the government for free or something. News flash: you're still paying a crap-ton of interest to finance that house!

News flash: You are attacking the people and not addressing the issue. Just because there are dumb-asses who will spend more money "for the write-off", this does not mean that having a mortgage interest deduction is not a big deal if you live in an expensive part of the country. My mortgage interest + property tax alone (before any other deductions) comes out to around $20,500. Less the standard deduction, that's about $14,500. Take my top tax bracket of 28% and I saved around $4000 MORE than the standard deduction.

Could I pay down my mortgage faster? Sure, but since the rate is so low it does not make sense for me to do so because it would cut into my investments. Could I just save money until I bought a house with cash? Maybe, but it would take more than 30 years because the real cost of owning this house for me after factoring in principal, tax advantages while working and a renter are around $300/month for me. Renting a one-bedroom apartment would cost $800 absolute minimum.

I am still moving quite handily towards FI, thank you, even while paying all that mortgage interest, saving around 60% of my income. Not too shabby.

Ego

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Re: Is the Mortgage interest deduction all it is cracked to be?
« Reply #8 on: April 16, 2013, 08:52:09 PM »
GreenGuava, the standard deduction is $11,900 for a married couple filing jointly.  You are writing off $14,000 in interest annually.  Assuming you are married, you are getting an additional $2,100 a year as a write-off.  At the 28% tax rate that's $49 per month.  If you are single then the write off is more.
« Last Edit: April 16, 2013, 08:53:58 PM by Ego »

Ego

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Re: Is the Mortgage interest deduction all it is cracked to be?
« Reply #9 on: April 16, 2013, 09:00:55 PM »
It does beg the question.... why is the government giving money in the form of discounted taxes to those who buy an expensive house with a mortgage?  What intrinsic value does a mortgaged home have over a paid-for-in-cash-home?  Why would we favor one over the other. 

Moreover, why favor buying over renting?  I'd argue that the flexibility of renting makes for easier transitions in times of great flux.  It is cheaper for everyone (the government) when an unemployed person can quickly shift to a new location where the jobs are.  Those who are stuck in mortgaged-to-the-hilt homes cannot afford to move.  Seems silly to encourage that inflexibility.
« Last Edit: April 16, 2013, 09:02:54 PM by Ego »

GreenGuava

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Re: Is the Mortgage interest deduction all it is cracked to be?
« Reply #10 on: April 16, 2013, 10:05:34 PM »
GreenGuava, the standard deduction is $11,900 for a married couple filing jointly.  You are writing off $14,000 in interest annually.  Assuming you are married, you are getting an additional $2,100 a year as a write-off.  At the 28% tax rate that's $49 per month.  If you are single then the write off is more.

Single.  It also isn't my only deduction.  But it's an important point to compare the write-off to what one could get without the mortgage.

tomsang

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Re: Is the Mortgage interest deduction all it is cracked to be?
« Reply #11 on: April 16, 2013, 10:47:57 PM »
The mortgage interest deduction is the icing on the cake for those living in the US. The fact that the government is giving us free money is the windfall. At 3.5% for a 30 year loan is ridiculous. That has to be at inflation. If you can't beat that through investing then you won't be retiring until you get your safe withdrawal rate lower than 1%. You can see some simple math at http://www.mrmoneymustache.com/forum/throw-down-the-gauntlet/mortgage-payoff-club!!/

For me the government pays 35% of the interest on my mortgage plus they created an environment where a mortgage is almost free after inflation. Amazing times!!

arebelspy

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Re: Is the Mortgage interest deduction all it is cracked to be?
« Reply #12 on: April 17, 2013, 07:00:04 AM »
It does beg the question.... why is the government giving money in the form of discounted taxes to those who buy an expensive house with a mortgage?  What intrinsic value does a mortgaged home have over a paid-for-in-cash-home?  Why would we favor one over the other. 

Moreover, why favor buying over renting?  I'd argue that the flexibility of renting makes for easier transitions in times of great flux.  It is cheaper for everyone (the government) when an unemployed person can quickly shift to a new location where the jobs are.  Those who are stuck in mortgaged-to-the-hilt homes cannot afford to move.  Seems silly to encourage that inflexibility.

Surely if you're smart enough to think of reasons why they might encourage renting (reasons that seem reasonable to me), you can come up with a few reasons why they might promote home ownership, and promote having a mortgage.

If not, Google can probably help.  It's a bit off topic for this thread, but if you still have no idea and want to discuss more, feel free to start a new thread and I'll offer some ideas.
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Reepekg

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Re: Is the Mortgage interest deduction all it is cracked to be?
« Reply #13 on: April 17, 2013, 09:10:47 AM »
You are attacking the people and not addressing the issue. Just because there are dumb-asses who will spend more money "for the write-off", this does not mean that having a mortgage interest deduction is not a big deal if you live in an expensive part of the country.

The deduction can certainly be helpful in a number of ways pointed out in this thread, and I salute all of the Mustachians who are using sound financial approaches to pocket a nice bit of stash from it.

The original question was is the deduction all it is cracked up to be. I contend no, because this deduction has been used to enthusiastically advertise to me that I should a) buy a bigger house than I would otherwise consider or b) buy rather than rent in my area. Doing the math on a) and b) shows that neither are in my best interest.

Spork

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Re: Is the Mortgage interest deduction all it is cracked to be?
« Reply #14 on: April 17, 2013, 09:21:33 AM »

I think the issue I have with this is that it's a housing subsidy (and usually for folks that don't need one).  I'm of the "if you want it, you should pay for it yourself" mind set.  Forcing others to pay for my cheaper housing just seems wrong.

More often than not it also falls into the "spend a dollar to save a quarter" mindset, as people have already pointed out.  Folks spend more so they can save on their taxes -- all the while not realizing they were spending more.

freelancerNfulltimer

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Re: Is the Mortgage interest deduction all it is cracked to be?
« Reply #15 on: April 17, 2013, 11:43:36 AM »

I think the issue I have with this is that it's a housing subsidy (and usually for folks that don't need one).  I'm of the "if you want it, you should pay for it yourself" mind set.  Forcing others to pay for my cheaper housing just seems wrong.

More often than not it also falls into the "spend a dollar to save a quarter" mindset, as people have already pointed out.  Folks spend more so they can save on their taxes -- all the while not realizing they were spending more.

Didn't it used to be you could write off any interest you paid, even your credit card interest? If my memory serves me, there were a lot more deductions you could make back in the early 80s but the tax rates were higher. So they brought down the tax rates but eliminated a lot of deductions including interest on loans. I'm guessing the Real Estate industry probably lobbied to keep the home interest deduction in tact.

Spork

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Re: Is the Mortgage interest deduction all it is cracked to be?
« Reply #16 on: April 17, 2013, 12:12:57 PM »

I think the issue I have with this is that it's a housing subsidy (and usually for folks that don't need one).  I'm of the "if you want it, you should pay for it yourself" mind set.  Forcing others to pay for my cheaper housing just seems wrong.

More often than not it also falls into the "spend a dollar to save a quarter" mindset, as people have already pointed out.  Folks spend more so they can save on their taxes -- all the while not realizing they were spending more.

Didn't it used to be you could write off any interest you paid, even your credit card interest? If my memory serves me, there were a lot more deductions you could make back in the early 80s but the tax rates were higher. So they brought down the tax rates but eliminated a lot of deductions including interest on loans. I'm guessing the Real Estate industry probably lobbied to keep the home interest deduction in tact.

There is actually talk of tossing the mortgage interest deduction going on right now.  I don't think it will fly as too many people will scream bloody murder... but its on the table.

dragoncar

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Re: Is the Mortgage interest deduction all it is cracked to be?
« Reply #17 on: April 17, 2013, 01:27:10 PM »

Moreover, why favor buying over renting?  I'd argue that the flexibility of renting makes for easier transitions in times of great flux.  It is cheaper for everyone (the government) when an unemployed person can quickly shift to a new location where the jobs are.  Those who are stuck in mortgaged-to-the-hilt homes cannot afford to move.  Seems silly to encourage that inflexibility.

The home mortgage deduction does not favor buying over renting any more than, for example, a property tax deduction does.  Mortgage interest paid on a rental property is deductible as a business expense, ultimately lowering rental rates by incentivizing landlords.