Is Home Mortgage Interest Deduction A Good Idea?
This is one of the most frequently asked questions at our live events. Below is my answer.
If you have a mortgage and are paying interest, it is ABSOLUTELY very important to take the mortgage interest deduction. BUT there is a few key facts to consider as well.
One thing I have heard commonly stated is “I am not going to pay off my mortgage early because I do not want to lose the mortgage interest deduction.” I believe this saying was initiated by banks because it is much more costly to keep the mortgage than to pay the taxes owed without the interest deduction. See the example illustrated below.
The Mortgage Interest Deduction
Let’s say you paid $5,000 in interest on your mortgage last year. By taking the deduction, you effectively reduce your taxable income by $5,000. You receive back the tax rate on that home mortgage interest deduction. If your tax rate is 30%, you will receive a refund of $1,500 because of the home mortgage interest deduction (30% of $5,000). Of course, the bank keeps the $5,000 you paid in interest. Uncle Sam receives 30% of your taxable income which is now $40,000 because you were able to reduce your taxable income by the $5,000 interest you paid. The total net OUTGO from your bank accounts to Uncle Sam and the bank is $17,000!
The Paid-Off House Scenario
Well, you are living life pretty good in your debt-free condition! You have paid off your house, so now you no longer pay interest to the bank (yay!). This means you will be taxed on your full income of $45,000. If your tax rate is 30%, the total net OUTGO paid to Uncle Sam is $13,500!
NET RESULT: By eliminating your mortgage, you have $3,500 LESS OUTGO from your bank account to someone else.
4 comments:
Whenever you experience something that will change your financial state it is best to communicate with your bank. If you have a good record and an updated account with your bank for a long period of time it is good to bring the matter to the bank. *Melbourne home loans information
Great post! american home mortgage servicing inc out business
Even with that, this home mortgage interest deduction has clearly fueled house buying. And taxpayers, personally, do get benefits from it. It entitles every homeowner who pays taxes a reduction in their taxable income through the amount of interest they pay. So, I guess this is a good idea.
Javier Bonnell
Well, with it, people can have a higher chance of reducing their payments if the span of the mortgage is more long-term. In the end, I think it all depends on how people use the mortgage interest deduction. It has its pros and cons that people should consider.
@Drew Andrews
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