The Breakdown
Convention lack of wisdom might tell you that having a mortgage for a tax write off is better than having no mortgage. I love to keep my money out of the hands of the IRS as much as anyone else, but paying substantial amounts of interest to save a little on taxes only benefits the mortgage company. By all means use mortgage interest as a write off while you are working your fingers to the bone trying to pay your home off early. This write off is NOT a good reason to keep what is likely your largest monthly expense. See below for a close look and breakdown of the numbers.
This deduction is not a dollar for dollar write off. The mortgage tax deduction is calculated using your tax rate. For the example below, we will use the average US income of $56,516 that lands in the 22% tax bracket and the median home price in the US which is $188,900. The following information is built using the current interest rate of 4.56% (8/13/18) on a 30 year fixed rate mortgage with a 10% down payment making monthly payments.
The home owner in this situation will pay a total of $142,285.41 in interest over the life of the mortgage. That means that you will pay $331,185 for that same $188,900 home. That $331k figure also doesn’t include PMI, insurance, or property tax. With all those variables included, the total cost of your home explodes to approximately $419,537!!!!! You could have bought 2.22 of the same homes for that price! To add insult to this equation that $142k in interest will only reduce your taxable income by $31,302!!! Would you rather have $31,302 or $142,285?
There are some other intricacies to this example but for simplicity the breakdown between $31k and $142k is pretty drastic and easy to understand. Some would argue that the mortgage interest write off will allow you to itemize your deductions instead of taking the standard deduction. With the new tax code the standard deduction has increased almost 50% to $12,000 if filing single, $18,000 for head of household, and $24,000 for married filing jointly. For many, these new standard deductions will be a difficult threshold to meet making itemizing deductions less desirable.
Still thinking about keeping that mortgage around to “save” you money on taxes? Protect every penny that you worked hard for. Protect Lincoln.