Mortgage Intrest Tax Writeoff ?

MonarchDon · #1 08-03-2005, 12:24 PM

Can someone please explain in simple terms how the mortgage intrest tax writeoff works and how it may be beneficial to carry a mortgage and pay intrest. For some reason I am not grasping the theory that it is better to have a mortgage on my house than not. Isn't the tax deduction only a percentage of the intrest that you actually pay? If I paid $10,000.00 in intrest I don't get to write off 100% of that do I ?

eggzz · #2 08-03-2005, 01:48 PM

Yes you do, undoubtedly someone with more tax experience will give you better information than I will, but yes, 10k in mortgage interest will be 100% tax deductible from your gross earnings.

In order for this to be realistically beneficial for you, the combination of the mortgage interest along with your other deductions such as state income taxes and childcare expenses and -- what is the third major deduction people take? I'm drawing a blank.

Those deductions need to be larger than the standard deduction the IRS gives you, whether you are single, HOH, or married. If you paid 10k in interest, then it will likely work out for you, as this amount is larger than the Standard deduction for any type of filer.

p.s. Property taxes is the other deduction I think is applicable here.

snowbank · #3 08-03-2005, 01:51 PM

There are many more benefits than that though. You can't write off 100% of your interest, but you can't use any of the equity in your property if you don't take the equity out. If you invest at all, you should be able to make more on your money than you would have to pay to borrow your equity. It is much better to have a mortgage, but only if you were going to use the money for something. If you were just going to put the money in a safe, obviously your better off not having a mortgage, but basically anyone who's even partially an investor wants to have a mortgage. Leverage is key.

MrMon · #4 08-03-2005, 02:03 PM

If you pay $10,000 in interest, you get to write $10,000 of your income. The value of that write-off is $10,000 x your marginal rate, probably 25%, plus any state taxes you may eliminate, but for simplicity, let's say it's worth $2500 in less taxes. Unless you've got a whopping mortgage, it's that simple.

Now, why would you want to carry a mortgage vs. not carrying one? It's all about opportunity cost. To have to pay $10000 in interest, let's say you're carrying a $200,000 mortgage at 5%. The choice is to have or not have the mortgage. With the tax deduction, your effective interest rate is 3.75%. Can you find an investment that pays, after taxes, better than 3.75%? Credit cards payoff, stocks, college funds, retirement accounts, other real estate, etc. Lots of possibilities. It all depends on what you will do with the money. (I'll leave out the appreciation of your house, because it will appreciate the same regardless of whether or not you have a mortgage. Appreciation of a second property is a different matter.)

MonarchDon · #5 08-05-2005, 12:59 AM

[ QUOTE ]
If you pay $10,000 in interest, you get to write $10,000 of your income. The value of that write-off is $10,000 x your marginal rate, probably 25%, plus any state taxes you may eliminate, but for simplicity, let's say it's worth $2500 in less taxes. Unless you've got a whopping mortgage, it's that simple.

Now, why would you want to carry a mortgage vs. not carrying one? It's all about opportunity cost. To have to pay $10000 in interest, let's say you're carrying a $200,000 mortgage at 5%. The choice is to have or not have the mortgage. With the tax deduction, your effective interest rate is 3.75%. Can you find an investment that pays, after taxes, better than 3.75%? Credit cards payoff, stocks, college funds, retirement accounts, other real estate, etc. Lots of possibilities. It all depends on what you will do with the money. (I'll leave out the appreciation of your house, because it will appreciate the same regardless of whether or not you have a mortgage. Appreciation of a second property is a different matter.) [/quote

If I paid $10,000.00 in intrest I only get a tax benefit of $ 2,500.00 ? Why would I not pay off my house if I had the money in the bank ? Also why do people always say "it's a tax write off" ?

snowbank · #6 08-05-2005, 03:13 AM

Why would I not pay off my house if I had the money in the bank ?

If I needed a dollar and said I would give you $2 in return if I could borrow it from you, you would do it all day long. If you had no money you would not be able to even though this was a great deal. If your investments pay you more than the cost of borrowing money, it does not make sense to pay down borrowed money.