[quote=Fearful]You are making several mistakes. Compare pre-tax to pre-tax or post-tax to post-tax, but do not mix the two. Compare the CD to the pre-tax interest rate; compare muni bond interest rates to post-tax interest rate. At 5% you are roughly breaking even.
Also, your marginal tax rate is probably around 45%, so the 5% is converted to 2.75%, not 2%.
Finally, your mortgage interest is only deductible to the extent that it, plus your property and state taxes, exceed your standard deduction.
[/quote]
You are making several incorrect assumptions and have also read my post incorrectly…at no point did I say 2%, I said 2.x%.
I did not run my tax savings calculations based on tax rates or marginal tax rates. I went into TurboTax and looked at what my fed tax would be with mortgage interest deducted, and what my fed tax would be if I had NO mortgage interest to deduct.
That gave me how much my mortgage is saving me in fed taxes. I divided this savings by twelve, to give me my monthly savings.
Using this savings figure, I used a mortgage calculator to figure out what interest rate would have been required to have a payment = my current payment – my monthly savings. That interest rate varies each year, but is in the 2.x% range.
Using this method, TurboTax automatically calculated the standard deduction in and I did not have to waste an ounce of pencil lead. There was no guesswork – since TT included all my actual income data, all I varied was the mortgage interest deduction. Piece of cake. I know my exact fed tax savings.
[quote=Fearful]
However, you are correct in recognizing the benefits of diversifying your assets by taking on debt and offsetting it with equivalently earning investments. Better to be $100K in debt and have $100K in the bank than have zero in both. If interest rates fall further, you can pay off the debt. If interest rates rise, you can enjoy increased earnings. Just don’t lock up the money in 10-year debt – borrow long and lend short to give yourself the most flexibility.[/quote]
