Author Topic: Need explanation about "writing off" mortgage interest...  (Read 6136 times)

FuckRx

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Need explanation about "writing off" mortgage interest...
« on: August 22, 2013, 04:47:38 PM »

what does it exactly mean...
i know it should be basic but if someone can explain it that would help....
let's say i pay $2,000/mo for my mortgage and $1300 is interest and $700 goes towards the principle....
does that mean that i'm actually only paying $700/mo?

my exact situation...
i take home between $150-200,000/yr depending on the year....
i have a condo with a mortgage of $450k....principal+interest is $2,069 ($1,394 interest + $675 principal) and then there is HOA/PMI
let's say I make $150,000 this year and pay $24,840 in mortgage payments, would I be able to write off $16,728 for the year?

Lans Holman

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Re: Need explanation about "writing off" mortgage interest...
« Reply #1 on: August 22, 2013, 05:17:37 PM »
No, it's a deduction, not a credit.  Assuming you itemize deductions, you can use mortgage interest as one of them.  So your savings will be the interest times your tax rate.

FuckRx

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Re: Need explanation about "writing off" mortgage interest...
« Reply #2 on: August 22, 2013, 05:47:01 PM »

my tax rate is 33% or something near that since I get paid in form of K-1 (it's a partnership pay)...
would that mean that I will only save $5,520 out of the $16,728 that I pay?

that means I would still pay:
$11,208 for interest....
$8,100 for principal....
$6,600 for HOA dues...
$5,688 for taxes...
$5,928 for PMI....

a total of $37,524 for the year!? that's really hard to believe....i don't care how stupid that makes me sound but that's a lot!!...
the mortgage balance would go down by $8,100 so from $445,000 to $436,900...
there is no way my condo is gonna go up by 30K a year for the next 5 years to make this justifiable purchase!!...
it would have to go up by $150,000 to $595,000.... it's possible but not likely....

dragoncar

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Re: Need explanation about "writing off" mortgage interest...
« Reply #3 on: August 22, 2013, 06:05:35 PM »

what does it exactly mean...
i know it should be basic but if someone can explain it that would help....
let's say i pay $2,000/mo for my mortgage and $1300 is interest and $700 goes towards the principle....
does that mean that i'm actually only paying $700/mo?

my exact situation...
i take home between $150-200,000/yr depending on the year....
i have a condo with a mortgage of $450k....principal+interest is $2,069 ($1,394 interest + $675 principal) and then there is HOA/PMI
let's say I make $150,000 this year and pay $24,840 in mortgage payments, would I be able to write off $16,728 for the year?

Basically.  Lets say you are single in CA and therefore your marginal tax rate is 37.3%.  You write off 16728 per year, saving 6239 in taxes. 

So your effective housing "expense" is 874 adjusted interest+HOA+taxes (also deductible and this effectively multiplied by .627). 

The 700 principal affects your cash flow, but is net worth neutral so I would call it an expense per se (this is the "is principal savings" debate).

Number change depending on state of course.  In CA your state income taxes would be more than the standard deduction, so all of this is fully deductible.  If instead you have no state income taxes, the first five thousand or so don't help you compared to the standard deduction.

Does that help?

Undecided

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Re: Need explanation about "writing off" mortgage interest...
« Reply #4 on: August 22, 2013, 06:09:18 PM »

my tax rate is 33% or something near that since I get paid in form of K-1 (it's a partnership pay)...
would that mean that I will only save $5,520 out of the $16,728 that I pay?

that means I would still pay:
$11,208 for interest....
$8,100 for principal....
$6,600 for HOA dues...
$5,688 for taxes...
$5,928 for PMI....

a total of $37,524 for the year!? that's really hard to believe....i don't care how stupid that makes me sound but that's a lot!!...
the mortgage balance would go down by $8,100 so from $445,000 to $436,900...
there is no way my condo is gonna go up by 30K a year for the next 5 years to make this justifiable purchase!!...
it would have to go up by $150,000 to $595,000.... it's possible but not likely....

Is it going to be your home? If so, you might want to consider that without you'd be paying rent ... If it won't be your home, hopefully someone is paying you rent to live in it, but I agree that if you intended to just let it sit vacant, it's probably not going to make money.

dragoncar

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Re: Need explanation about "writing off" mortgage interest...
« Reply #5 on: August 22, 2013, 06:14:27 PM »

my tax rate is 33% or something near that since I get paid in form of K-1 (it's a partnership pay)...
would that mean that I will only save $5,520 out of the $16,728 that I pay?

that means I would still pay:
$11,208 for interest....
$8,100 for principal....
$6,600 for HOA dues...
$5,688 for taxes...
$5,928 for PMI....

a total of $37,524 for the year!? that's really hard to believe....i don't care how stupid that makes me sound but that's a lot!!...
the mortgage balance would go down by $8,100 so from $445,000 to $436,900...
there is no way my condo is gonna go up by 30K a year for the next 5 years to make this justifiable purchase!!...
it would have to go up by $150,000 to $595,000.... it's possible but not likely....

Prettymuch.  Taxes are also deductible (not sure if you adjusted that one).  save up a bigger down payment and avoid PMI.  As stated I consider principal payment savings, but you can consider the "opportunity cost" of your equity if you like.

Why does the condo have to go up 30k/ year?  According to the numbers you posted, you are putting NEGATIVE 5k down??  So ANY amount the property appreciates is an insane return on investment.  Infinite really. 

Lets say you put a more reasonable 20% down.  Then if the property appreciates at 2% per year (basically inflation, no real appreciation), you will be earning 10% return on equity.  Plus you get to live in a house for (hopefully, of you did it right) less than rent.  Not too shabby.


dragoncar

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Re: Need explanation about "writing off" mortgage interest...
« Reply #6 on: August 22, 2013, 06:19:25 PM »
Based on your numbers, the "carrying cost" looks to be $2215/mo.  How does that compare to renting an equivalent place?  As a mustachian living in a condo with HOA, repairs/maint should be negligible.

It's good that you are asking these questions.  No offense, but you should probably read some books on real estate before jumping into this (or should have?  not sure if hypothetical situation) given your apparent level of knowledge.

FuckRx

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Re: Need explanation about "writing off" mortgage interest...
« Reply #7 on: August 22, 2013, 09:04:07 PM »
thank you for that advice dragoncar, i had no idea i knew this little about it...
your first explanation took a few reads to finally grasp but i believe i get it ....

i do live in CA...
renting i can do for about $850/mo with low utilities (don't use A/C)...
if my carrying cost is 2215/mo that's a good deal more than the $850/mo...

i suppose what i'm trying to figure out is whether as an investment this condo will be worth all the money i put into it...
selling it is an easy option, i'll get my money back...
if i rented it it would go for maybe 2,700/mo...

dragoncar

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Re: Need explanation about "writing off" mortgage interest...
« Reply #8 on: August 22, 2013, 09:31:38 PM »
thank you for that advice dragoncar, i had no idea i knew this little about it...
your first explanation took a few reads to finally grasp but i believe i get it ....

i do live in CA...
renting i can do for about $850/mo with low utilities (don't use A/C)...
if my carrying cost is 2215/mo that's a good deal more than the $850/mo...

i suppose what i'm trying to figure out is whether as an investment this condo will be worth all the money i put into it...
selling it is an easy option, i'll get my money back...
if i rented it it would go for maybe 2,700/mo...

That's a pretty steep difference, but it sounds like you are saying you could rent the equivalent place for $2700, but you bought more than you need so you could make do renting a smaller/less nice place for $850?  Have you tried the NY times rent vs buy calculator? (Just google it if not).  My guess is that you'd come out far ahead renting -- but that assumes "normal" housing appreciation and stock market returns.  The details really depend on whether you think the local housing market will outperform alternative investments.

Out of curiosity, what factors did you use when deciding to buy this place?
« Last Edit: August 22, 2013, 11:52:27 PM by dragoncar »

arebelspy

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Re: Need explanation about "writing off" mortgage interest...
« Reply #9 on: August 22, 2013, 09:35:22 PM »
The New York Times Buy vs. Rent Calculator will let you compare the scenarios based on various assumptions (appreciation rate, opportunity cost of down payment, etc.).  Check it out, playing around with it for awhile may help you understand when it is and isn't better to own or rent.
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FuckRx

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Re: Need explanation about "writing off" mortgage interest...
« Reply #10 on: August 23, 2013, 01:34:19 AM »

That's a pretty steep difference, but it sounds like you are saying you could rent the equivalent place for $2700, but you bought more than you need so you could make do renting a smaller/less nice place for $850?  Have you tried the NY times rent vs buy calculator? (Just google it if not).  My guess is that you'd come out far ahead renting -- but that assumes "normal" housing appreciation and stock market returns.  The details really depend on whether you think the local housing market will outperform alternative investments.

Out of curiosity, what factors did you use when deciding to buy this place?

the unit became available...
it's a penthouse unit....so top floor in a building with only 77 units...gym and security and parking in the heart of downtown...
desirable and the place had some functional upgrades...
was planning on moving in there with significant other but now trying to mustache it would before i make that move...
the unit at some point was worth 600k...it was up for sale at 450k...i offered 455k...

FuckRx

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Re: Need explanation about "writing off" mortgage interest...
« Reply #11 on: August 23, 2013, 09:01:01 AM »
It's a great little calculator...
been playing around with it...
in the details section it asks what they expect my private investments will return...what's a good percentage? i should ask, what does a wise money manager generally get a far as returns for their clients?...
as for the appreciation...what should i put in as the annual home price change?

FuckRx

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Re: Need explanation about "writing off" mortgage interest...
« Reply #12 on: August 23, 2013, 09:19:33 AM »


I've already purchased the condo...
I suppose I could show that on the numbers better...
I owe 445,000 on the mortgage...
there wasn't a way to show PMI...

Undecided

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Re: Need explanation about "writing off" mortgage interest...
« Reply #13 on: August 23, 2013, 11:50:54 AM »
You're using that calculator to "compare" buying a place that would rent for $2,700 vs. renting a place for $900, so it's not surprising it tells you it's always cheaper to rent. But the calculator doesn't capture the factors that make one place command a higher rent than the other; it's really meant to offer a financial comparison between buying and renting equivalent places. Its fair use would be to compatr buying vs. renting the same type of place.

arebelspy

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Re: Need explanation about "writing off" mortgage interest...
« Reply #14 on: August 23, 2013, 11:56:16 AM »
You're using that calculator to "compare" buying a place that would rent for $2,700 vs. renting a place for $900, so it's not surprising it tells you it's always cheaper to rent. But the calculator doesn't capture the factors that make one place command a higher rent than the other; it's really meant to offer a financial comparison between buying and renting equivalent places. Its fair use would be to compatr buying vs. renting the same type of place.

Good point.

On the other hand, if he's willing to downgrade from a place that rents for $2700 to one that rents for $900, maybe he should sell to do so.
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FuckRx

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Re: Need explanation about "writing off" mortgage interest...
« Reply #15 on: August 23, 2013, 12:25:08 PM »

The place I would rent for $825 is 200sqft and has no kitchen but has a microwave and fridge.
So it's a big step down.

If I did the numbers again, fixed some of the details and this is what it comes up with.
Apparently the first 5 years renting is better then it flips around, I guess because of the increase in the value of the condo?


NumberCruncher

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Re: Need explanation about "writing off" mortgage interest...
« Reply #16 on: August 23, 2013, 12:42:28 PM »
6% for expected home price increase is pretty high -> how did you arrive at that number?

FuckRx

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Re: Need explanation about "writing off" mortgage interest...
« Reply #17 on: August 23, 2013, 01:02:27 PM »

I think that number sort of popped up there, I looked it up and didn't know which direction to change it in.
Any suggestions on a more realistic value?

Undecided

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Re: Need explanation about "writing off" mortgage interest...
« Reply #18 on: August 23, 2013, 01:33:19 PM »
You're using that calculator to "compare" buying a place that would rent for $2,700 vs. renting a place for $900, so it's not surprising it tells you it's always cheaper to rent. But the calculator doesn't capture the factors that make one place command a higher rent than the other; it's really meant to offer a financial comparison between buying and renting equivalent places. Its fair use would be to compatr buying vs. renting the same type of place.

Good point.

On the other hand, if he's willing to downgrade from a place that rents for $2700 to one that rents for $900, maybe he should sell to do so.

Agreed. Not sure that needs a calculator, though, more like just the question "Do I need this fancy place?" But I don't think I'd get a lot of web hits for a "housing decision maker" tool that just asked that question and then returned the answer "Don't buy it or rent it" whenever someones answered "no."

FuckRx

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Re: Need explanation about "writing off" mortgage interest...
« Reply #19 on: August 23, 2013, 02:23:51 PM »
very obvious point... didn't think about it that way, thanks...
i did that comparison only because i already own this condo ....
but yes, i could definitely sell this and buy a cheaper condo, that's the logical thing to do...

arebelspy

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Re: Need explanation about "writing off" mortgage interest...
« Reply #20 on: August 23, 2013, 06:40:22 PM »
very obvious point... didn't think about it that way, thanks...
i did that comparison only because i already own this condo ....
but yes, i could definitely sell this and buy a cheaper condo, that's the logical thing to do...

Okay, so selling the current place (that seems to be way more than you need) is step 1.

Step 2 is now doing the buy vs. rent calculation on the smaller one, and comparing the buy versus rent scenarios on a place that is a cheaper, better fit.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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