fourwedge wrote:Another question no one has addressed....
Where is this big tax deduction everyone is talking about with a mortgages???
Specifically... How much money are you saving on your taxes? And how much interest are you paying?
No one that talks tax deduction ever answers this question when I pose it.
Is this a rhetorical question meant as a barb towards people who tout the tax benefits of a mortgage, or was it asked sincerely? People answer it frequently. There are two things to look at.
1. Overall effective interest rate of the mortgage. You exclude mortgage interest from your tax return and determine how much tax you would owe without a mortgage. Then determine how much tax you would owe with mortgage interest on your deductions. Reduce the mortgage interest by the change in tax liability and you have the overall effective interest that the mortgage is costing you. This way, you can account for a scenario where some of the mortgage interest is not helping your tax return since you are still below the standard deduction, and the rest of the interest is putting you over the top.
2. Marginal benefit of extra payments towards mortgage principal. This is more simple. If you itemize, multiply the mortgage interest rate by (1 - marginal tax rate). If you take the standard deduction, it's just the mortgage rate.
avalpert wrote:Really, no one ever answers that question - how many times have you posed it without a response? Any examples.
I paid $5,245 in mortgage interest last year - which was then worth ~1,469 in lower federal taxes and ~$288 in state taxes. So my net interest expense was $3,488.
For comparison, my net portfolio returns on the value of my mortgage last year was about $19,000 (that's a low end approximation)
Any other questions no one has addressed for you?
This is an incomplete story since we don't know what your portfolio holds. If you have bonds in your portfolio and barring barriers like large embedded capital gains, or funds being in tax-advantaged accounts, you might be borrowing at a rate that's higher than the bonds you hold, and you could have done even better by selling bonds to pay the mortgage and holding the same amount in equities.
Just trying to give fourwedge more food for thought.
I would still recommend that the first priority be maxing tax-advantaged accounts every year before paying low interest mortgage debt ahead of schedule.