January 12, 2015

Mortgage Misconception


"You should never pay ahead on a mortgage."  Some homeowners have been brainwashed by the real estate industry that buying  a house you can barely afford is a good "investment" and that the mortgage interest deduction is the greatest tax benefit. Yes, the mortgage interest deduction is a terrific benefit for high income (high MTB) taxpayers, especially those who own two homes with large mortgages on both. In reality, low and moderate income taxpayers are subsiding the mega-mansions of the wealthy.  

Wall Street Journal columnist Jonathan Clements explains:  Assuming "you itemize your deductions—and that your itemized deductions are substantially higher than your standard deduction, which in 2015 is $12,600 for married couples filing jointly... and $6,300 for single individuals. If you aren’t itemizing, or your itemized deductions aren’t much above your standard deduction, all that mortgage interest is saving you little or nothing in taxes." (emphasis added).
You ONLY benefit from the mortgage interest tax deduction IF you itemize deductions AND then only to the extent that your total interest exceeds the standard deduction! The lower your marginal tax bracket, the less you benefit. 70% of taxpayers are in the 10 or 15% marginal tax brackets so you only get to deduct 10% (or 15%) of the amount of your mortgage interest that exceeds the hefty standard deduction. Do the math and quit fooling yourself!
Of course the real estate and mortgage industries perpetuate this myth that you should buy the most expensive house and largest mortgage you can qualify for. Have you forgotten about the housing bubble that brought down the economy in the 2008 crash? Buy a more modest house in order to free up money to invest for retirement and for your children's post-secondary education. AND for peace of mind.

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