[quote=CA renter][quote=FormerSanDiegan][quote=CA renter]
I’ve often questioned the wisdom of paying a dollar in interest in order to save 30-40 cents in taxes.
Am I missing something?
[/quote]
The answer to your question is yes, you are missing something in that statement. You are missing the alternatives for comparison.
Obviously in a vacuum it makes no sense to pay $1 to save 30-40 cents in taxes.
It’s not as simple as comparing paying a dollar to get 30-40 cents back versus not paying that dollar.
If you compare
A. paying $1 and saving 30-40cents in taxes (by having a mortgage)
to
B. paying 75 cents and saving zero in taxes (by renting)
it might make sense, depending on other deductions relative to the standard deduction.
You can also compare the use of cash for other inverstments versus buying a place for cash as others have above.
Of course, I know that you know these things. It’s just that the wisdom (or lack therof) of paying a dollar to get 30-40 cents back, depends on the alternatives.[/quote]
The OP was questioning whether he should pay cash, or get a mortgage. It wasn’t a rent vs. buy issue.
IMHO, if one can get a fairly safe and consistent after-tax ROI that would be equal to or greater than the post-deduction mortgage interest (and origination) costs, then it could be argued that they should use a mortgage and invest the cash.
The problem is that many people talk about the “tax savings” of a mortgage, without considering the costs associated with the mortgage (interest and fees). If you’re paying a dollar in interest, just to save the 30-40 cents (or less!) from the mortgage interest deduction, you’re not thinking straight. You have to look at the net benefit of getting a mortgage and using that cash in other ways, vs. paying cash and getting a “guaranteed” return that’s equal to the mortgage interest and origination costs — and this “return” is tax-free, because savings aren’t taxed.
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As far as the rent vs. buy issue, you also have to consider appreciation/depreciation, maintenance costs, the benefit of flexibility, whether or not your income is going to be stable/up/down over the next 30 years, the benefit of stability/control of housing costs, the benefit of owning a house outright in retirement, whether or not the MID is really going to make a difference in your tax situation, etc. There are a lot of things to consider when trying to decide if one should buy or rent. Realtors like to make it sound as though the MID is proof enough of the benefit of buying, but that’s a very simplistic and dangerous way to look at it, IMO.[/quote]
Agreed. So it’s not just paying $1 to get 30-40 cents in savings. Many other factors.
