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Home Loans and Mortgages - The Myth of Tax Deductible
Interest
Home ownership has risen sharply in recent years, and the
percentage of Americans who own their own homes is approaching a
record seventy percent. That's a good thing; we'd all rather live
in our own home than consider the alternatives. The most common
method of purchasing a home is by taking out a mortgage. Mortgage
types vary, but most loans consist of some variation of a
thirty-year loan, with interest applied to the purchase price.
This added interest can easily cause the total sum paid to be
double or triple the actual purchase price of the home. This is
an unavoidable cost of borrowing a large sum of money over a long
period of time, but it still causes alarm at closing time when
the borrower realizes that his or her $150,000 home will cost a
half million dollars by the time the loan is paid off. At this
point, the lender usually points out that the interest is tax
deductible, and the borrower offers a sigh of relief. Is the
deductibility of the interest really that big of a deal? Does
anyone really benefit from it?
Without question, the best way to pay for a home is to pay
cash. It's the cheapest way to buy a home and once you pay for
it, you are done. Few Americans are in a position to do so,
however. Homes are expensive. And depending on economic
conditions, it may actually be cheaper to take out a loan than to
pay cash. If you could borrow money for thirty years at six
percent and invest money at ten percent, you'd be better off
borrowing and investing instead of paying cash. But lenders and
others who mean well often mention that tax deduction as though
it should be a deciding factor in how a home is purchased.
The interest on a primary residence is deductible on loans of
up to one million dollars. That means that the amount of interest
paid in a calendar year can be deducted from taxable income,
effectively reducing the amount of income tax paid. More often
than not, this turns out to be of little benefit to taxpayers.
It's not as though the Government is paying your interest. For
the typical American taxpayer who pays in the 28% tax bracket,
the deduction amounts to a rebate of twenty eight cents for every
dollar paid in interest. Complicating matters is the fact that
this is only true for that portion of the interest that exceeds
the standard deduction allowed for every taxpayer that files.
That deduction, currently $10,000 per married couple, is usually
greater than the amount of mortgage interest most couples pay
during the year. What this means is that many, if not most,
Americans derive no tax benefit from their mortgage interest
what'soever.
Of course, homeowners who pay more than 28% of their income in
taxes or those who own homes with large mortgages can benefit
more from the tax deduction. Most American homeowners, on the
other hand, get nothing from it. The tax deduction isn't entirely
insignificant, but it shouldn't be a deciding factor in
determining how to pay for a home. Prospective buyers should
realize that while the deduction is a potential perk of taking
out a mortgage, the likely tax benefit from it ranges from "very
small" to "nothing at all."
©Copyright 2005 by Retro Marketing. Charles Essmeier is
the owner of Retro Marketing, a firm devoted to informational
Websites, including HomeEquityHelp.com, a site devoted to
information regarding mortgages and home equity
loans.
 MORE RESOURCES updated Tue. February / 07 / 2012
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