Why Your Mortgage Interest Tax Deduction Doesn t Really Help Much – The Motley Fool


#mortgage tax deduction

#

Why Your Mortgage Interest Tax Deduction Doesn t Really Help Much

Jan 11, 2015 at 9:33AM

No tax deduction is more misunderstood than the mortgage interest tax deduction. By law, taxpayers can deduct interest paid on their mortgage, but most middle-class taxpayers save little or nothing at all from the mortgage interest tax deduction.

In fact, the mortgage interest tax deduction is more for the benefit of millionaires than it is the average American.

How the mortgage interest deduction works
You can deduct all of your mortgage interest on up to $1 million in principal on the home in which you live. Thus, if you pay interest on a $100,000 mortgage, all of it is deductible. If you pay interest on a $1.5 million mortgage, only the interest on the first $1 million of principal is tax deductible.

But there are limitations. To qualify for the mortgage interest tax deduction, you have to itemize when you file your taxes. By itemizing, you forgo the standard deduction, which starts at $6,200 for singles and $12,400 for couples.

The standard deduction is a baseline. You can opt for the standard deduction, and not itemize, at your discretion. Thus, whether or not the mortgage interest deduction helps your financial being rests on whether or not it pushes you over the standard deduction.

Consider this scenario
You and your spouse paid $10,000 of mortgage interest on your $200,000 home this year. You also had $3,000 in other tax deductions.

When you itemize, you’ll be able to claim $13,000 in tax deductions. If instead you choose not to itemize, you’ll get $12,400 just by virtue of being a married taxpayer.

Thus, the net effect is that only $600 of your mortgage interest is tax deductible, because your deductions exceed the standard deduction for your situation by only $600. If you end up in a marginal tax bracket of 25%, you’ll save about $150 in taxes for paying $10,000 in mortgage interest — not much more than a rounding error.

Tax savings for high earners
All in all, the mortgage tax deduction is a (small-f) fool’s game for middle-class earners in low-cost areas, and a boon for high-income earners in high-cost areas.

Someone who owns a million-dollar home and who pays interest on a $1 million mortgage will inevitably be able to deduct more of their mortgage interest than someone who pays interest on a $100,000 mortgage.

So, while the mortgage interest tax deduction is touted as one of the best reasons to buy a home, it often provides little help to people who don’t live in a modern day McMansion. Buyer beware.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .


Why Your Mortgage Interest Tax Deduction Doesn t Really Help Much – The Motley Fool


#mortgage tax deduction

#

Why Your Mortgage Interest Tax Deduction Doesn t Really Help Much

Jan 11, 2015 at 9:33AM

No tax deduction is more misunderstood than the mortgage interest tax deduction. By law, taxpayers can deduct interest paid on their mortgage, but most middle-class taxpayers save little or nothing at all from the mortgage interest tax deduction.

In fact, the mortgage interest tax deduction is more for the benefit of millionaires than it is the average American.

How the mortgage interest deduction works
You can deduct all of your mortgage interest on up to $1 million in principal on the home in which you live. Thus, if you pay interest on a $100,000 mortgage, all of it is deductible. If you pay interest on a $1.5 million mortgage, only the interest on the first $1 million of principal is tax deductible.

But there are limitations. To qualify for the mortgage interest tax deduction, you have to itemize when you file your taxes. By itemizing, you forgo the standard deduction, which starts at $6,200 for singles and $12,400 for couples.

The standard deduction is a baseline. You can opt for the standard deduction, and not itemize, at your discretion. Thus, whether or not the mortgage interest deduction helps your financial being rests on whether or not it pushes you over the standard deduction.

Consider this scenario
You and your spouse paid $10,000 of mortgage interest on your $200,000 home this year. You also had $3,000 in other tax deductions.

When you itemize, you’ll be able to claim $13,000 in tax deductions. If instead you choose not to itemize, you’ll get $12,400 just by virtue of being a married taxpayer.

Thus, the net effect is that only $600 of your mortgage interest is tax deductible, because your deductions exceed the standard deduction for your situation by only $600. If you end up in a marginal tax bracket of 25%, you’ll save about $150 in taxes for paying $10,000 in mortgage interest — not much more than a rounding error.

Tax savings for high earners
All in all, the mortgage tax deduction is a (small-f) fool’s game for middle-class earners in low-cost areas, and a boon for high-income earners in high-cost areas.

Someone who owns a million-dollar home and who pays interest on a $1 million mortgage will inevitably be able to deduct more of their mortgage interest than someone who pays interest on a $100,000 mortgage.

So, while the mortgage interest tax deduction is touted as one of the best reasons to buy a home, it often provides little help to people who don’t live in a modern day McMansion. Buyer beware.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .


Should You Pay Off a Mortgage Early? The Answer May Surprise You! The Motley Fool


#pay off mortgage early

#

Should You Pay Off a Mortgage Early? The Answer May Surprise You!

Sep 14, 2014 at 7:00AM

Imagine a married couple — let’s call them Matt and Donna Smith — bought their dream house two years ago. The house was $250,000, and they paid $50,000 as a down payment. Since then, both have gotten raises, and with the extra cash, they are now asking themselves a crucial question: Should we pay off the mortgage early?

The math on this is clear: You should absolutely not pay off a mortgage early. You could lose money by doing this. But it’s funny how math is much less absolute when it’s dropped into the real world. There are hidden variables at play that make the decision to pay off a mortgage early the best option for the vast majority of Americans.

Couldn’t I make more by paying the mortgage on schedule?
Mortgage rates are still at historical lows right now — that’s an important factor in the math. Back when Matt and Donna bought their house, they took out a 30-year, $200,000 mortgage with a 4% interest rate. That equates to monthly payments of roughly $950. But after getting their raises, they can throw $1,200 at the mortgage.

A quick Internet search showed that the stock market averages roughly a 9% return per year over long periods of time. “Even if it’s only 6%,” Donna thinks, “it makes more sense to invest our extra cash instead of putting it toward a home. The stock market can give us a higher return.”

And, on paper, she’s right. Here’s how the two scenarios would play out in terms of the overall value, assuming the home’s value continues to appreciate at roughly 3% per year, while the stock market returns its average 9%.

Source: Author’s calculations. Home equity values calculated using amortization tables

Like any chart trying to predict the future, this isn’t perfect. The family could move, wages could rise, or any other number of variables could change. But the bottom line is clear: Using this simple math, not paying off a mortgage early means more money in your pocket (and house) at the end of 30 years.

Who wouldn’t want more money when all is said and done?

Can you really expect returns like that?
Here’s where the first lurking variable rears its ugly head. It is true that the S P 500 — since as far back as 1871 (though it wasn’t technically the S P 500 then) — has returned an annualized gain of 9.07% per year after dividends are reinvested. If every investor like Matt and Donna got returns like that, that would be phenomenal.

The problem is that the average investor does far, far worse than 9.07%. In fact, a recent release by JPMorgan Funds shows just how poorly the average investor has done over the last 20 years: 2.5% per year.

Why does this happen?

In a nutshell, the average person is not a good investor. They buy high, sell low, and generally shoot themselves in the foot over and over again by paying high fees. Because of this painful truth, paying off a mortgage early looks like a much better decision.

Of course, if you have a track record of successfully controlling your emotions and holding stocks for the long run, this might not apply to you.

But another key variable might.

What’s your goal: money or financial independence?
Earlier, I wrote: “Who wouldn’t want more money when all is said and done?”

Admittedly, that was a loaded question; there’s a caveat to it. What if you have less money but also a greater sense of financial independence? Would that change things? There’s nothing that can match the feeling of knowing you own your home outright and the bank can’t take it away. There’s also nothing like knowing you never have to make a rent or mortgage payment again for the rest of your life.

Wes Moss, author of You Can Retire Sooner Than You Think. has found — in his own surveys — that the psychological benefits of paying off a mortgage early are undeniable: “There’s a world of happiness and freedom out there just waiting for you once your biggest monthly expense is eliminated. Happiness levels rise undeniably as mortgages vanish.”

So, even if you have more money by not paying off the mortgage early, is it worth sacrificing the happiness you’ll experience by shedding the payment years — even decades — in advance?

The Smiths are a fictional couple used to illustrate the bigger points in this article. Try any of our newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .


Here s the Average American s Mortgage Payment, by Age and Income – How Do


#monthly mortgage payment

#

Here s the Average American s Mortgage Payment, by Age and Income — How Do You Compare?

How much money does your family pay every month in mortgage-related expenses? Source: Mark Moz. via Flickr.

There is, perhaps, no bigger expense you will ever have than the purchase of your house. Along with saving for retirement, and a college education for your children, paying a mortgage has become one of the “Big Three” financial events in one’s life.

But how much are we actually spending on our mortgages, and does it make sense for the type of lives we lead?

Last month, the Bureau of Labor Statistics (BLS) released its Consumer Expenditure Survey for 2013. If you’ve ever bought a house, you know the monthly payment you make is actually more than just your mortgage. The regular price of being a homeowner also includes property taxes, the interest on your mortgage, several different types of insurance and — for the purposes of the data collected by the BLS — regular maintenance.

So, how much are average Americans paying for their mortgages? When we break it down by household income, here’s what the data says.

There are two important things to note, here.

The first is the percentage of pre-tax income that a household devotes to mortgage-related payments. With the exception of those earning between $80,000 and $100,000, each successive group — though it spends more on housing — is spending a smaller percentage of their income on their mortgage.

Second, it’s clear that this data isn’t perfect. Many may be wondering how a household earning under $40,000 per year could afford a home. While it’s certainly possible to own a home with that salary, the data is skewed, because it also includes retirees that already own their homes, and are able to live comfortably on far less than they may have been earning in their prime years.

To help get a little clarity, I also broke out the Average American’s mortgage payment by age as well.

There are, again, two key takeaways here. First, the bulk of first-time homebuyers are between the ages of 25 and 44. Once we eclipse the 44-year-old barrier, we starting seeing a reduction in mortgage payments.

That is due to a number of factors. First, some homeowners select a 15-year mortgage instead of a fixed, 30-year. Second, many who start with a 30-year fixed mortgage refinance to a 15-year mortgage once their salaries go up. And third, 30-year fixed mortgages allow for principal to be paid back early without a penalty.

More importantly, however, is what we see in the percent of income being devoted to mortgage payments. Although this percentage falls significantly from 25-year-olds all the way to 64-year-olds, it picks up again once folks enter their golden years.

This may go against conventional wisdom, as many have paid off their mortgages once they retire. But we often forget that property taxes and insurance still have to be paid indefinitely. Additionally, many of the fixes you may have made yourself in your younger years are now being contracted out to younger hands — and often at a premium.

At the same time, largely because of the poor record we Americans have at saving for retirement, the amount of income we have to fall back on in retirement is far less than we were earning during our working years.

The point is that it’s crucial for homeowners to take such costs — those that go beyond the mortgage principal and interest payments — into account when (1) buying their home, and (2) deciding whether or not to stay put when retirement time comes.

If you did a good job saving up in your younger years, this likely won’t be an issue. But for many Americans, there could sticker shock involved when taxes, insurance, and maintenance bills need to be paid on a house you own outright, while you’re bringing in less than you have since you were in your 20s.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .


Should You Pay Off a Mortgage Early? The Answer May Surprise You! The Motley Fool


#pay off mortgage early

#

Should You Pay Off a Mortgage Early? The Answer May Surprise You!

Sep 14, 2014 at 7:00AM

Imagine a married couple — let’s call them Matt and Donna Smith — bought their dream house two years ago. The house was $250,000, and they paid $50,000 as a down payment. Since then, both have gotten raises, and with the extra cash, they are now asking themselves a crucial question: Should we pay off the mortgage early?

The math on this is clear: You should absolutely not pay off a mortgage early. You could lose money by doing this. But it’s funny how math is much less absolute when it’s dropped into the real world. There are hidden variables at play that make the decision to pay off a mortgage early the best option for the vast majority of Americans.

Couldn’t I make more by paying the mortgage on schedule?
Mortgage rates are still at historical lows right now — that’s an important factor in the math. Back when Matt and Donna bought their house, they took out a 30-year, $200,000 mortgage with a 4% interest rate. That equates to monthly payments of roughly $950. But after getting their raises, they can throw $1,200 at the mortgage.

A quick Internet search showed that the stock market averages roughly a 9% return per year over long periods of time. “Even if it’s only 6%,” Donna thinks, “it makes more sense to invest our extra cash instead of putting it toward a home. The stock market can give us a higher return.”

And, on paper, she’s right. Here’s how the two scenarios would play out in terms of the overall value, assuming the home’s value continues to appreciate at roughly 3% per year, while the stock market returns its average 9%.

Source: Author’s calculations. Home equity values calculated using amortization tables

Like any chart trying to predict the future, this isn’t perfect. The family could move, wages could rise, or any other number of variables could change. But the bottom line is clear: Using this simple math, not paying off a mortgage early means more money in your pocket (and house) at the end of 30 years.

Who wouldn’t want more money when all is said and done?

Can you really expect returns like that?
Here’s where the first lurking variable rears its ugly head. It is true that the S P 500 — since as far back as 1871 (though it wasn’t technically the S P 500 then) — has returned an annualized gain of 9.07% per year after dividends are reinvested. If every investor like Matt and Donna got returns like that, that would be phenomenal.

The problem is that the average investor does far, far worse than 9.07%. In fact, a recent release by JPMorgan Funds shows just how poorly the average investor has done over the last 20 years: 2.5% per year.

Why does this happen?

In a nutshell, the average person is not a good investor. They buy high, sell low, and generally shoot themselves in the foot over and over again by paying high fees. Because of this painful truth, paying off a mortgage early looks like a much better decision.

Of course, if you have a track record of successfully controlling your emotions and holding stocks for the long run, this might not apply to you.

But another key variable might.

What’s your goal: money or financial independence?
Earlier, I wrote: “Who wouldn’t want more money when all is said and done?”

Admittedly, that was a loaded question; there’s a caveat to it. What if you have less money but also a greater sense of financial independence? Would that change things? There’s nothing that can match the feeling of knowing you own your home outright and the bank can’t take it away. There’s also nothing like knowing you never have to make a rent or mortgage payment again for the rest of your life.

Wes Moss, author of You Can Retire Sooner Than You Think. has found — in his own surveys — that the psychological benefits of paying off a mortgage early are undeniable: “There’s a world of happiness and freedom out there just waiting for you once your biggest monthly expense is eliminated. Happiness levels rise undeniably as mortgages vanish.”

So, even if you have more money by not paying off the mortgage early, is it worth sacrificing the happiness you’ll experience by shedding the payment years — even decades — in advance?

The Smiths are a fictional couple used to illustrate the bigger points in this article. Try any of our newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .


Should You Pay Off a Mortgage Early? The Answer May Surprise You! The Motley Fool


#pay off mortgage early

#

Should You Pay Off a Mortgage Early? The Answer May Surprise You!

Sep 14, 2014 at 7:00AM

Imagine a married couple — let’s call them Matt and Donna Smith — bought their dream house two years ago. The house was $250,000, and they paid $50,000 as a down payment. Since then, both have gotten raises, and with the extra cash, they are now asking themselves a crucial question: Should we pay off the mortgage early?

The math on this is clear: You should absolutely not pay off a mortgage early. You could lose money by doing this. But it’s funny how math is much less absolute when it’s dropped into the real world. There are hidden variables at play that make the decision to pay off a mortgage early the best option for the vast majority of Americans.

Couldn’t I make more by paying the mortgage on schedule?
Mortgage rates are still at historical lows right now — that’s an important factor in the math. Back when Matt and Donna bought their house, they took out a 30-year, $200,000 mortgage with a 4% interest rate. That equates to monthly payments of roughly $950. But after getting their raises, they can throw $1,200 at the mortgage.

A quick Internet search showed that the stock market averages roughly a 9% return per year over long periods of time. “Even if it’s only 6%,” Donna thinks, “it makes more sense to invest our extra cash instead of putting it toward a home. The stock market can give us a higher return.”

And, on paper, she’s right. Here’s how the two scenarios would play out in terms of the overall value, assuming the home’s value continues to appreciate at roughly 3% per year, while the stock market returns its average 9%.

Source: Author’s calculations. Home equity values calculated using amortization tables

Like any chart trying to predict the future, this isn’t perfect. The family could move, wages could rise, or any other number of variables could change. But the bottom line is clear: Using this simple math, not paying off a mortgage early means more money in your pocket (and house) at the end of 30 years.

Who wouldn’t want more money when all is said and done?

Can you really expect returns like that?
Here’s where the first lurking variable rears its ugly head. It is true that the S P 500 — since as far back as 1871 (though it wasn’t technically the S P 500 then) — has returned an annualized gain of 9.07% per year after dividends are reinvested. If every investor like Matt and Donna got returns like that, that would be phenomenal.

The problem is that the average investor does far, far worse than 9.07%. In fact, a recent release by JPMorgan Funds shows just how poorly the average investor has done over the last 20 years: 2.5% per year.

Why does this happen?

In a nutshell, the average person is not a good investor. They buy high, sell low, and generally shoot themselves in the foot over and over again by paying high fees. Because of this painful truth, paying off a mortgage early looks like a much better decision.

Of course, if you have a track record of successfully controlling your emotions and holding stocks for the long run, this might not apply to you.

But another key variable might.

What’s your goal: money or financial independence?
Earlier, I wrote: “Who wouldn’t want more money when all is said and done?”

Admittedly, that was a loaded question; there’s a caveat to it. What if you have less money but also a greater sense of financial independence? Would that change things? There’s nothing that can match the feeling of knowing you own your home outright and the bank can’t take it away. There’s also nothing like knowing you never have to make a rent or mortgage payment again for the rest of your life.

Wes Moss, author of You Can Retire Sooner Than You Think. has found — in his own surveys — that the psychological benefits of paying off a mortgage early are undeniable: “There’s a world of happiness and freedom out there just waiting for you once your biggest monthly expense is eliminated. Happiness levels rise undeniably as mortgages vanish.”

So, even if you have more money by not paying off the mortgage early, is it worth sacrificing the happiness you’ll experience by shedding the payment years — even decades — in advance?

The Smiths are a fictional couple used to illustrate the bigger points in this article. Try any of our newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .


Why Your Mortgage Interest Tax Deduction Doesn t Really Help Much – The Motley Fool


#mortgage tax deduction

#

Why Your Mortgage Interest Tax Deduction Doesn t Really Help Much

Jan 11, 2015 at 9:33AM

No tax deduction is more misunderstood than the mortgage interest tax deduction. By law, taxpayers can deduct interest paid on their mortgage, but most middle-class taxpayers save little or nothing at all from the mortgage interest tax deduction.

In fact, the mortgage interest tax deduction is more for the benefit of millionaires than it is the average American.

How the mortgage interest deduction works
You can deduct all of your mortgage interest on up to $1 million in principal on the home in which you live. Thus, if you pay interest on a $100,000 mortgage, all of it is deductible. If you pay interest on a $1.5 million mortgage, only the interest on the first $1 million of principal is tax deductible.

But there are limitations. To qualify for the mortgage interest tax deduction, you have to itemize when you file your taxes. By itemizing, you forgo the standard deduction, which starts at $6,200 for singles and $12,400 for couples.

The standard deduction is a baseline. You can opt for the standard deduction, and not itemize, at your discretion. Thus, whether or not the mortgage interest deduction helps your financial being rests on whether or not it pushes you over the standard deduction.

Consider this scenario
You and your spouse paid $10,000 of mortgage interest on your $200,000 home this year. You also had $3,000 in other tax deductions.

When you itemize, you’ll be able to claim $13,000 in tax deductions. If instead you choose not to itemize, you’ll get $12,400 just by virtue of being a married taxpayer.

Thus, the net effect is that only $600 of your mortgage interest is tax deductible, because your deductions exceed the standard deduction for your situation by only $600. If you end up in a marginal tax bracket of 25%, you’ll save about $150 in taxes for paying $10,000 in mortgage interest — not much more than a rounding error.

Tax savings for high earners
All in all, the mortgage tax deduction is a (small-f) fool’s game for middle-class earners in low-cost areas, and a boon for high-income earners in high-cost areas.

Someone who owns a million-dollar home and who pays interest on a $1 million mortgage will inevitably be able to deduct more of their mortgage interest than someone who pays interest on a $100,000 mortgage.

So, while the mortgage interest tax deduction is touted as one of the best reasons to buy a home, it often provides little help to people who don’t live in a modern day McMansion. Buyer beware.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .


Should You Pay Off Your Mortgage Early? The Answer May Surprise You – The Motley


#pay off mortgage early

#

Should You Pay Off Your Mortgage Early? The Answer May Surprise You

Jan 18, 2014 at 2:00PM

What’s better: Paying off your mortgage early or saving? Photo: AT T YouTube.

When it comes to home ownership, the American dream used to be quite simple: Buy a house with a 30-year mortgage, make your payments, and someday down the road, you’ll own your home free and clear.

Nowadays, people tend to move around a lot more than they used to, resetting the 30-year clock every time they do, greatly decreasing the likelihood that a home will ever be paid off in full. Also, people tap into their home’s equity and refinance their mortgages much more today than they used to for repairs, upgrades, etc. often creating a new 30-year loan in the process.

This got me thinking: Does anyone actually pay off their home in 30 years (or less) anymore? Is this a goal younger homeowners have in mind? And perhaps most importantly, is it worth it?

How many people actually live “rent-free”?
The actual number depends on where you live, but almost one-third (29.3%) of U.S. homeowners have no mortgage. As would be expected, the percentage gets higher in the older age groups. Of those homeowners over 85 years old, over 77% own their homes outright, and about 63% of those in the 74 to 84 age group own their homes.

One interesting statistic is the higher percentage in the lowest age group, those homeowners from ages 20 to 24. 34.5% of these young homeowners have no mortgage, and generally speaking, these young homeowners either inherited their money or have some kind of assistance. Another reason could be the fact that most younger buyers tend to buy more inexpensive, or “starter” homes and have fewer financial commitments (like kids), making it more feasible to pay off a house quickly.

The percentage of homeowners who own homes free and clear has dropped steadily over the past several decades, from a high of 42% of homeowners in 1960. However, after years of building up our “debt culture,” we are beginning to see younger homeowners make paying down their debts a priority, having witnessed the effect of too much debt on the older generation. In fact, the average percentage of equity in the average home is up to about 45% from a low of around 38% in 2009.

A few actual accounts.
The website about.com has a pretty interesting thread of people who share their experiences with a paid-off mortgage. The first entry is from a 35-year-old whose parents paid off his mortgage as a gift, and he now puts his former mortgage payment into a retirement account.

Another entry is from a 43-year-old who paid off his mortgage in just over 12 years as a means of financial safety should he ever lose his job. Several other entrants chose to buy fixer-upper houses in order to have the lowest purchase price, and hence the lowest mortgage possible. Another homeowner took a loan from his IRA in order to build a home without a mortgage.

Foolish final thoughts
While not having a mortgage may indeed be freeing, not everyone agrees it’s the best course of action. According to many experts, paying off your mortgage may not be the best use of your money. While it certainly would be nice to not have to make that $2,000 house payment every month, it has not been hard to find fairly safe investments at any point in history that offer returns higher than the interest a mortgage is costing you.

For instance, let’s say I owe $320,000 on my house on a 3.875% 30-year fixed mortgage and happen to come into some money and have enough in the bank to pay off my balance. If instead of simply paying off my balance, I invest the money in a pretty safe income fund that pays, say 6%, my $320,000 investment should be worth about $1.7 million in 30 years, which far outweighs the $541,713 in mortgage payments I would have made over that time.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .


Why Your Mortgage Interest Tax Deduction Doesn t Really Help Much – The Motley Fool


#mortgage tax deduction

#

Why Your Mortgage Interest Tax Deduction Doesn t Really Help Much

Jan 11, 2015 at 9:33AM

No tax deduction is more misunderstood than the mortgage interest tax deduction. By law, taxpayers can deduct interest paid on their mortgage, but most middle-class taxpayers save little or nothing at all from the mortgage interest tax deduction.

In fact, the mortgage interest tax deduction is more for the benefit of millionaires than it is the average American.

How the mortgage interest deduction works
You can deduct all of your mortgage interest on up to $1 million in principal on the home in which you live. Thus, if you pay interest on a $100,000 mortgage, all of it is deductible. If you pay interest on a $1.5 million mortgage, only the interest on the first $1 million of principal is tax deductible.

But there are limitations. To qualify for the mortgage interest tax deduction, you have to itemize when you file your taxes. By itemizing, you forgo the standard deduction, which starts at $6,200 for singles and $12,400 for couples.

The standard deduction is a baseline. You can opt for the standard deduction, and not itemize, at your discretion. Thus, whether or not the mortgage interest deduction helps your financial being rests on whether or not it pushes you over the standard deduction.

Consider this scenario
You and your spouse paid $10,000 of mortgage interest on your $200,000 home this year. You also had $3,000 in other tax deductions.

When you itemize, you’ll be able to claim $13,000 in tax deductions. If instead you choose not to itemize, you’ll get $12,400 just by virtue of being a married taxpayer.

Thus, the net effect is that only $600 of your mortgage interest is tax deductible, because your deductions exceed the standard deduction for your situation by only $600. If you end up in a marginal tax bracket of 25%, you’ll save about $150 in taxes for paying $10,000 in mortgage interest — not much more than a rounding error.

Tax savings for high earners
All in all, the mortgage tax deduction is a (small-f) fool’s game for middle-class earners in low-cost areas, and a boon for high-income earners in high-cost areas.

Someone who owns a million-dollar home and who pays interest on a $1 million mortgage will inevitably be able to deduct more of their mortgage interest than someone who pays interest on a $100,000 mortgage.

So, while the mortgage interest tax deduction is touted as one of the best reasons to buy a home, it often provides little help to people who don’t live in a modern day McMansion. Buyer beware.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .


Here s the Average American s Mortgage Payment, by Age and Income – How Do


#monthly mortgage payment

#

Here s the Average American s Mortgage Payment, by Age and Income — How Do You Compare?

How much money does your family pay every month in mortgage-related expenses? Source: Mark Moz. via Flickr.

There is, perhaps, no bigger expense you will ever have than the purchase of your house. Along with saving for retirement, and a college education for your children, paying a mortgage has become one of the “Big Three” financial events in one’s life.

But how much are we actually spending on our mortgages, and does it make sense for the type of lives we lead?

Last month, the Bureau of Labor Statistics (BLS) released its Consumer Expenditure Survey for 2013. If you’ve ever bought a house, you know the monthly payment you make is actually more than just your mortgage. The regular price of being a homeowner also includes property taxes, the interest on your mortgage, several different types of insurance and — for the purposes of the data collected by the BLS — regular maintenance.

So, how much are average Americans paying for their mortgages? When we break it down by household income, here’s what the data says.

There are two important things to note, here.

The first is the percentage of pre-tax income that a household devotes to mortgage-related payments. With the exception of those earning between $80,000 and $100,000, each successive group — though it spends more on housing — is spending a smaller percentage of their income on their mortgage.

Second, it’s clear that this data isn’t perfect. Many may be wondering how a household earning under $40,000 per year could afford a home. While it’s certainly possible to own a home with that salary, the data is skewed, because it also includes retirees that already own their homes, and are able to live comfortably on far less than they may have been earning in their prime years.

To help get a little clarity, I also broke out the Average American’s mortgage payment by age as well.

There are, again, two key takeaways here. First, the bulk of first-time homebuyers are between the ages of 25 and 44. Once we eclipse the 44-year-old barrier, we starting seeing a reduction in mortgage payments.

That is due to a number of factors. First, some homeowners select a 15-year mortgage instead of a fixed, 30-year. Second, many who start with a 30-year fixed mortgage refinance to a 15-year mortgage once their salaries go up. And third, 30-year fixed mortgages allow for principal to be paid back early without a penalty.

More importantly, however, is what we see in the percent of income being devoted to mortgage payments. Although this percentage falls significantly from 25-year-olds all the way to 64-year-olds, it picks up again once folks enter their golden years.

This may go against conventional wisdom, as many have paid off their mortgages once they retire. But we often forget that property taxes and insurance still have to be paid indefinitely. Additionally, many of the fixes you may have made yourself in your younger years are now being contracted out to younger hands — and often at a premium.

At the same time, largely because of the poor record we Americans have at saving for retirement, the amount of income we have to fall back on in retirement is far less than we were earning during our working years.

The point is that it’s crucial for homeowners to take such costs — those that go beyond the mortgage principal and interest payments — into account when (1) buying their home, and (2) deciding whether or not to stay put when retirement time comes.

If you did a good job saving up in your younger years, this likely won’t be an issue. But for many Americans, there could sticker shock involved when taxes, insurance, and maintenance bills need to be paid on a house you own outright, while you’re bringing in less than you have since you were in your 20s.

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