Mortgage Deduction Looks Less Sacred

[davelj]

If we start with a $250K house and a $200K mortgage at 5.5% over 30 years, assuming a 25% tax bracket, the present value of the mortgage interest tax deduction is about $35K (discounting at 5.5%) over the life of the loan. (I made some crude assumptions to simplify the calculation that could swing the numbers by a couple thousand dollars in either direction.) That amounts to about 14% of the value of the house. That’s a meaningful number, but I agree the whole concept/rationale is over-marketed.

[garysears]

That 14% sounds like a lot, but is it really your total cost advantage? Are you assuming the taxes saved are applied to the loan principal?

You only see the full advantage if you are already itemizing more deductions than the standard deduction. If you don’t have a lot of other expenses to deduct you have to pay a lot of that interest (without tax benefit) before you see any benefit to itemizing.

Over the 30 years, 200K at 5.5% is just under 409K in total payments (principal and interest only). Fully realizing a 35K tax break will give you about an 8.5% advantage. If much of your yearly tax advantage is not realized due to insufficient other deductions and you are relying largely on interest deductions, your mileage can vary.

In general I don’t understand the tax benefit argument to write offs. It doesn’t make sense to spend a lot of money to save a little unless you were already going to spend that lot of money and the little savings turns out to be a side benefit.

Not the point of the thread, but here is how I’m starting to think of mortgage debt:

You can save significantly more than 35K by paying the loan off early and not paying interest for 30 years. I know that is not a popular argument to make. Seems like most proclaimed financial experts think you should invest the difference and not “tie up” your net worth in your non liquid house. The problem I see with that is you have to make assumptions about rate of return which may not be valid (though in an environment of credit fueled expansion and asset inflation with stagnating wages, the logic is hard to ignore…because in that environment savings and paying off debt are discouraged).

Someday, it will be considered wise to aggressively pay off debt, including your house. The primary thing I try to remember about debt is it presumes upon the future…my future ability to pay. Savings and debt free living is insurance against life’s uncertainty.

[garysears]

That 14% sounds like a lot, but is it really your total cost advantage? Are you assuming the taxes saved are applied to the loan principal?

You only see the full advantage if you are already itemizing more deductions than the standard deduction. If you don’t have a lot of other expenses to deduct you have to pay a lot of that interest (without tax benefit) before you see any benefit to itemizing.

Over the 30 years, 200K at 5.5% is just under 409K in total payments (principal and interest only). Fully realizing a 35K tax break will give you about an 8.5% advantage. If much of your yearly tax advantage is not realized due to insufficient other deductions and you are relying largely on interest deductions, your mileage can vary.

In general I don’t understand the tax benefit argument to write offs. It doesn’t make sense to spend a lot of money to save a little unless you were already going to spend that lot of money and the little savings turns out to be a side benefit.

Not the point of the thread, but here is how I’m starting to think of mortgage debt:

You can save significantly more than 35K by paying the loan off early and not paying interest for 30 years. I know that is not a popular argument to make. Seems like most proclaimed financial experts think you should invest the difference and not “tie up” your net worth in your non liquid house. The problem I see with that is you have to make assumptions about rate of return which may not be valid (though in an environment of credit fueled expansion and asset inflation with stagnating wages, the logic is hard to ignore…because in that environment savings and paying off debt are discouraged).

Someday, it will be considered wise to aggressively pay off debt, including your house. The primary thing I try to remember about debt is it presumes upon the future…my future ability to pay. Savings and debt free living is insurance against life’s uncertainty.

[garysears]

That 14% sounds like a lot, but is it really your total cost advantage? Are you assuming the taxes saved are applied to the loan principal?

You only see the full advantage if you are already itemizing more deductions than the standard deduction. If you don’t have a lot of other expenses to deduct you have to pay a lot of that interest (without tax benefit) before you see any benefit to itemizing.

Over the 30 years, 200K at 5.5% is just under 409K in total payments (principal and interest only). Fully realizing a 35K tax break will give you about an 8.5% advantage. If much of your yearly tax advantage is not realized due to insufficient other deductions and you are relying largely on interest deductions, your mileage can vary.

In general I don’t understand the tax benefit argument to write offs. It doesn’t make sense to spend a lot of money to save a little unless you were already going to spend that lot of money and the little savings turns out to be a side benefit.

Not the point of the thread, but here is how I’m starting to think of mortgage debt:

You can save significantly more than 35K by paying the loan off early and not paying interest for 30 years. I know that is not a popular argument to make. Seems like most proclaimed financial experts think you should invest the difference and not “tie up” your net worth in your non liquid house. The problem I see with that is you have to make assumptions about rate of return which may not be valid (though in an environment of credit fueled expansion and asset inflation with stagnating wages, the logic is hard to ignore…because in that environment savings and paying off debt are discouraged).

Someday, it will be considered wise to aggressively pay off debt, including your house. The primary thing I try to remember about debt is it presumes upon the future…my future ability to pay. Savings and debt free living is insurance against life’s uncertainty.

[garysears]

That 14% sounds like a lot, but is it really your total cost advantage? Are you assuming the taxes saved are applied to the loan principal?

You only see the full advantage if you are already itemizing more deductions than the standard deduction. If you don’t have a lot of other expenses to deduct you have to pay a lot of that interest (without tax benefit) before you see any benefit to itemizing.

Over the 30 years, 200K at 5.5% is just under 409K in total payments (principal and interest only). Fully realizing a 35K tax break will give you about an 8.5% advantage. If much of your yearly tax advantage is not realized due to insufficient other deductions and you are relying largely on interest deductions, your mileage can vary.

In general I don’t understand the tax benefit argument to write offs. It doesn’t make sense to spend a lot of money to save a little unless you were already going to spend that lot of money and the little savings turns out to be a side benefit.

Not the point of the thread, but here is how I’m starting to think of mortgage debt:

You can save significantly more than 35K by paying the loan off early and not paying interest for 30 years. I know that is not a popular argument to make. Seems like most proclaimed financial experts think you should invest the difference and not “tie up” your net worth in your non liquid house. The problem I see with that is you have to make assumptions about rate of return which may not be valid (though in an environment of credit fueled expansion and asset inflation with stagnating wages, the logic is hard to ignore…because in that environment savings and paying off debt are discouraged).

Someday, it will be considered wise to aggressively pay off debt, including your house. The primary thing I try to remember about debt is it presumes upon the future…my future ability to pay. Savings and debt free living is insurance against life’s uncertainty.

[garysears]

That 14% sounds like a lot, but is it really your total cost advantage? Are you assuming the taxes saved are applied to the loan principal?

You only see the full advantage if you are already itemizing more deductions than the standard deduction. If you don’t have a lot of other expenses to deduct you have to pay a lot of that interest (without tax benefit) before you see any benefit to itemizing.

Over the 30 years, 200K at 5.5% is just under 409K in total payments (principal and interest only). Fully realizing a 35K tax break will give you about an 8.5% advantage. If much of your yearly tax advantage is not realized due to insufficient other deductions and you are relying largely on interest deductions, your mileage can vary.

In general I don’t understand the tax benefit argument to write offs. It doesn’t make sense to spend a lot of money to save a little unless you were already going to spend that lot of money and the little savings turns out to be a side benefit.

Not the point of the thread, but here is how I’m starting to think of mortgage debt:

You can save significantly more than 35K by paying the loan off early and not paying interest for 30 years. I know that is not a popular argument to make. Seems like most proclaimed financial experts think you should invest the difference and not “tie up” your net worth in your non liquid house. The problem I see with that is you have to make assumptions about rate of return which may not be valid (though in an environment of credit fueled expansion and asset inflation with stagnating wages, the logic is hard to ignore…because in that environment savings and paying off debt are discouraged).

Someday, it will be considered wise to aggressively pay off debt, including your house. The primary thing I try to remember about debt is it presumes upon the future…my future ability to pay. Savings and debt free living is insurance against life’s uncertainty.

[davelj]

[quote=garysears]That 14% sounds like a lot, but is it really your total cost advantage? Are you assuming the taxes saved are applied to the loan principal?

You only see the full advantage if you are already itemizing more deductions than the standard deduction. If you don’t have a lot of other expenses to deduct you have to pay a lot of that interest (without tax benefit) before you see any benefit to itemizing.

Over the 30 years, 200K at 5.5% is just under 409K in total payments (principal and interest only). Fully realizing a 35K tax break will give you about an 8.5% advantage. If much of your yearly tax advantage is not realized due to insufficient other deductions and you are relying largely on interest deductions, your mileage can vary.

In general I don’t understand the tax benefit argument to write offs. It doesn’t make sense to spend a lot of money to save a little unless you were already going to spend that lot of money and the little savings turns out to be a side benefit.

Not the point of the thread, but here is how I’m starting to think of mortgage debt:

You can save significantly more than 35K by paying the loan off early and not paying interest for 30 years. I know that is not a popular argument to make. Seems like most proclaimed financial experts think you should invest the difference and not “tie up” your net worth in your non liquid house. The problem I see with that is you have to make assumptions about rate of return which may not be valid (though in an environment of credit fueled expansion and asset inflation with stagnating wages, the logic is hard to ignore…because in that environment savings and paying off debt are discouraged).

Someday, it will be considered wise to aggressively pay off debt, including your house. The primary thing I try to remember about debt is it presumes upon the future…my future ability to pay. Savings and debt free living is insurance against life’s uncertainty.[/quote]

In order:

No, I’m not assuming that the savings are applied to the loan principal (it’s just a straightforward PV calculation of cash flows). Yes, I’m assuming itemization of more than the standard deduction to begin with (good assumption for many, but not for everyone). Yes, if you have the cash available to buy the house outright, in many cases you should do that – and avoid a mortgage – if you don’t think you can achieve a long-term nominal rate of return above: Your Mortgage Rate * (1-tax rate) over the life of the mortgage. (That’s about 4% these days, give or take.)

I don’t think it’s appropriate, however, to compare the PV of tax savings ($35K) with the TOTAL mortgage payments made over time. From a time value of money standpoint, that’s comparing apples and oranges. You compare the PV of the tax savings with the current (or “present,” if you will) value of the house itself. In other words, when making such comparisons you have to keep the time periods consistent. That’s a mathematical quibble.

I agree with your other points. What you’re getting at is one of my core beliefs: Where you stand on any issue depends upon where you sit.

[davelj]

[quote=garysears]That 14% sounds like a lot, but is it really your total cost advantage? Are you assuming the taxes saved are applied to the loan principal?

You only see the full advantage if you are already itemizing more deductions than the standard deduction. If you don’t have a lot of other expenses to deduct you have to pay a lot of that interest (without tax benefit) before you see any benefit to itemizing.

Over the 30 years, 200K at 5.5% is just under 409K in total payments (principal and interest only). Fully realizing a 35K tax break will give you about an 8.5% advantage. If much of your yearly tax advantage is not realized due to insufficient other deductions and you are relying largely on interest deductions, your mileage can vary.

In general I don’t understand the tax benefit argument to write offs. It doesn’t make sense to spend a lot of money to save a little unless you were already going to spend that lot of money and the little savings turns out to be a side benefit.

Not the point of the thread, but here is how I’m starting to think of mortgage debt:

You can save significantly more than 35K by paying the loan off early and not paying interest for 30 years. I know that is not a popular argument to make. Seems like most proclaimed financial experts think you should invest the difference and not “tie up” your net worth in your non liquid house. The problem I see with that is you have to make assumptions about rate of return which may not be valid (though in an environment of credit fueled expansion and asset inflation with stagnating wages, the logic is hard to ignore…because in that environment savings and paying off debt are discouraged).

Someday, it will be considered wise to aggressively pay off debt, including your house. The primary thing I try to remember about debt is it presumes upon the future…my future ability to pay. Savings and debt free living is insurance against life’s uncertainty.[/quote]

In order:

No, I’m not assuming that the savings are applied to the loan principal (it’s just a straightforward PV calculation of cash flows). Yes, I’m assuming itemization of more than the standard deduction to begin with (good assumption for many, but not for everyone). Yes, if you have the cash available to buy the house outright, in many cases you should do that – and avoid a mortgage – if you don’t think you can achieve a long-term nominal rate of return above: Your Mortgage Rate * (1-tax rate) over the life of the mortgage. (That’s about 4% these days, give or take.)

I don’t think it’s appropriate, however, to compare the PV of tax savings ($35K) with the TOTAL mortgage payments made over time. From a time value of money standpoint, that’s comparing apples and oranges. You compare the PV of the tax savings with the current (or “present,” if you will) value of the house itself. In other words, when making such comparisons you have to keep the time periods consistent. That’s a mathematical quibble.

I agree with your other points. What you’re getting at is one of my core beliefs: Where you stand on any issue depends upon where you sit.

[davelj]

[quote=garysears]That 14% sounds like a lot, but is it really your total cost advantage? Are you assuming the taxes saved are applied to the loan principal?

You only see the full advantage if you are already itemizing more deductions than the standard deduction. If you don’t have a lot of other expenses to deduct you have to pay a lot of that interest (without tax benefit) before you see any benefit to itemizing.

Over the 30 years, 200K at 5.5% is just under 409K in total payments (principal and interest only). Fully realizing a 35K tax break will give you about an 8.5% advantage. If much of your yearly tax advantage is not realized due to insufficient other deductions and you are relying largely on interest deductions, your mileage can vary.

In general I don’t understand the tax benefit argument to write offs. It doesn’t make sense to spend a lot of money to save a little unless you were already going to spend that lot of money and the little savings turns out to be a side benefit.

Not the point of the thread, but here is how I’m starting to think of mortgage debt:

You can save significantly more than 35K by paying the loan off early and not paying interest for 30 years. I know that is not a popular argument to make. Seems like most proclaimed financial experts think you should invest the difference and not “tie up” your net worth in your non liquid house. The problem I see with that is you have to make assumptions about rate of return which may not be valid (though in an environment of credit fueled expansion and asset inflation with stagnating wages, the logic is hard to ignore…because in that environment savings and paying off debt are discouraged).

Someday, it will be considered wise to aggressively pay off debt, including your house. The primary thing I try to remember about debt is it presumes upon the future…my future ability to pay. Savings and debt free living is insurance against life’s uncertainty.[/quote]

In order:

No, I’m not assuming that the savings are applied to the loan principal (it’s just a straightforward PV calculation of cash flows). Yes, I’m assuming itemization of more than the standard deduction to begin with (good assumption for many, but not for everyone). Yes, if you have the cash available to buy the house outright, in many cases you should do that – and avoid a mortgage – if you don’t think you can achieve a long-term nominal rate of return above: Your Mortgage Rate * (1-tax rate) over the life of the mortgage. (That’s about 4% these days, give or take.)

I don’t think it’s appropriate, however, to compare the PV of tax savings ($35K) with the TOTAL mortgage payments made over time. From a time value of money standpoint, that’s comparing apples and oranges. You compare the PV of the tax savings with the current (or “present,” if you will) value of the house itself. In other words, when making such comparisons you have to keep the time periods consistent. That’s a mathematical quibble.

I agree with your other points. What you’re getting at is one of my core beliefs: Where you stand on any issue depends upon where you sit.

[davelj]

[quote=garysears]That 14% sounds like a lot, but is it really your total cost advantage? Are you assuming the taxes saved are applied to the loan principal?

You only see the full advantage if you are already itemizing more deductions than the standard deduction. If you don’t have a lot of other expenses to deduct you have to pay a lot of that interest (without tax benefit) before you see any benefit to itemizing.

Over the 30 years, 200K at 5.5% is just under 409K in total payments (principal and interest only). Fully realizing a 35K tax break will give you about an 8.5% advantage. If much of your yearly tax advantage is not realized due to insufficient other deductions and you are relying largely on interest deductions, your mileage can vary.

In general I don’t understand the tax benefit argument to write offs. It doesn’t make sense to spend a lot of money to save a little unless you were already going to spend that lot of money and the little savings turns out to be a side benefit.

Not the point of the thread, but here is how I’m starting to think of mortgage debt:

You can save significantly more than 35K by paying the loan off early and not paying interest for 30 years. I know that is not a popular argument to make. Seems like most proclaimed financial experts think you should invest the difference and not “tie up” your net worth in your non liquid house. The problem I see with that is you have to make assumptions about rate of return which may not be valid (though in an environment of credit fueled expansion and asset inflation with stagnating wages, the logic is hard to ignore…because in that environment savings and paying off debt are discouraged).

Someday, it will be considered wise to aggressively pay off debt, including your house. The primary thing I try to remember about debt is it presumes upon the future…my future ability to pay. Savings and debt free living is insurance against life’s uncertainty.[/quote]

In order:

No, I’m not assuming that the savings are applied to the loan principal (it’s just a straightforward PV calculation of cash flows). Yes, I’m assuming itemization of more than the standard deduction to begin with (good assumption for many, but not for everyone). Yes, if you have the cash available to buy the house outright, in many cases you should do that – and avoid a mortgage – if you don’t think you can achieve a long-term nominal rate of return above: Your Mortgage Rate * (1-tax rate) over the life of the mortgage. (That’s about 4% these days, give or take.)

I don’t think it’s appropriate, however, to compare the PV of tax savings ($35K) with the TOTAL mortgage payments made over time. From a time value of money standpoint, that’s comparing apples and oranges. You compare the PV of the tax savings with the current (or “present,” if you will) value of the house itself. In other words, when making such comparisons you have to keep the time periods consistent. That’s a mathematical quibble.

I agree with your other points. What you’re getting at is one of my core beliefs: Where you stand on any issue depends upon where you sit.

[davelj]

[quote=garysears]That 14% sounds like a lot, but is it really your total cost advantage? Are you assuming the taxes saved are applied to the loan principal?

You only see the full advantage if you are already itemizing more deductions than the standard deduction. If you don’t have a lot of other expenses to deduct you have to pay a lot of that interest (without tax benefit) before you see any benefit to itemizing.

Over the 30 years, 200K at 5.5% is just under 409K in total payments (principal and interest only). Fully realizing a 35K tax break will give you about an 8.5% advantage. If much of your yearly tax advantage is not realized due to insufficient other deductions and you are relying largely on interest deductions, your mileage can vary.

In general I don’t understand the tax benefit argument to write offs. It doesn’t make sense to spend a lot of money to save a little unless you were already going to spend that lot of money and the little savings turns out to be a side benefit.

Not the point of the thread, but here is how I’m starting to think of mortgage debt:

You can save significantly more than 35K by paying the loan off early and not paying interest for 30 years. I know that is not a popular argument to make. Seems like most proclaimed financial experts think you should invest the difference and not “tie up” your net worth in your non liquid house. The problem I see with that is you have to make assumptions about rate of return which may not be valid (though in an environment of credit fueled expansion and asset inflation with stagnating wages, the logic is hard to ignore…because in that environment savings and paying off debt are discouraged).

Someday, it will be considered wise to aggressively pay off debt, including your house. The primary thing I try to remember about debt is it presumes upon the future…my future ability to pay. Savings and debt free living is insurance against life’s uncertainty.[/quote]

In order:

No, I’m not assuming that the savings are applied to the loan principal (it’s just a straightforward PV calculation of cash flows). Yes, I’m assuming itemization of more than the standard deduction to begin with (good assumption for many, but not for everyone). Yes, if you have the cash available to buy the house outright, in many cases you should do that – and avoid a mortgage – if you don’t think you can achieve a long-term nominal rate of return above: Your Mortgage Rate * (1-tax rate) over the life of the mortgage. (That’s about 4% these days, give or take.)

I don’t think it’s appropriate, however, to compare the PV of tax savings ($35K) with the TOTAL mortgage payments made over time. From a time value of money standpoint, that’s comparing apples and oranges. You compare the PV of the tax savings with the current (or “present,” if you will) value of the house itself. In other words, when making such comparisons you have to keep the time periods consistent. That’s a mathematical quibble.

I agree with your other points. What you’re getting at is one of my core beliefs: Where you stand on any issue depends upon where you sit.

[garysears]

You are right. I made an inaccurate comparison.

[garysears]

You are right. I made an inaccurate comparison.

[garysears]

You are right. I made an inaccurate comparison.

[garysears]

You are right. I made an inaccurate comparison.

[Author]

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