Overheard two guys in Bojangles talking about the importance of keeping a mortgage "for the tax write off" ....say what??? It's simple math and one of the biggest financial jokes the banking system has ever pulled. Surely they were kidding?!
Are people really THIS STUPID ??
- Thread starter bleeduncblue
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Occasionally it can make sense to keep a mortgage. Depending on tax bracket, interest rate, and investment options. If you have a 30 year fixed at 4% and are in the 25% tax bracket (or higher) that mortgage loan is only costing you 3% (or less) annually after the tax benefit. If you instead invested the money you would have used to prepay the mortgage, and you earn over 3% (after taxes) on that money - it behooves you to keep the mortgage and invest the money rather than prepay.
However, risk-free rates are below 3% - so in order to earn an after tax 3%, you'd need to dabble in stocks and longer term bonds - which obviously both carry risk. Whereas the mortgage payoff is a risk-free 3%. If someone is risk averse, they might as well pay down the mortgage. If someone doesn't mind introducing some risk to get over 3% - they're fine paying the minimum on the mortgage and investing the difference.
If someone is not prepaying their mortgage "For the tax write-off" but then also not investing that money to earn a higher rate than the mortgage interest - they're a moron.
However, risk-free rates are below 3% - so in order to earn an after tax 3%, you'd need to dabble in stocks and longer term bonds - which obviously both carry risk. Whereas the mortgage payoff is a risk-free 3%. If someone is risk averse, they might as well pay down the mortgage. If someone doesn't mind introducing some risk to get over 3% - they're fine paying the minimum on the mortgage and investing the difference.
If someone is not prepaying their mortgage "For the tax write-off" but then also not investing that money to earn a higher rate than the mortgage interest - they're a moron.
Hypothetical:
$200,000 balance ... 4% rate = $8k/year interest paid
$8k x 25% tax bracket = $2k saved in taxes
So I paid $8,000 to save $2,000 --- genius!!!!
Instead, I'll take that $8,000 and give it to a charity and get the exact same tax benefit WITHOUT having to be in debt to a bank.
$200,000 balance ... 4% rate = $8k/year interest paid
$8k x 25% tax bracket = $2k saved in taxes
So I paid $8,000 to save $2,000 --- genius!!!!
Instead, I'll take that $8,000 and give it to a charity and get the exact same tax benefit WITHOUT having to be in debt to a bank.
I keep a mortgage because I just don't have $200k to lay down and pay off what I owe. It's a bit easier of a decision for me.
Right, but this assumes the money isn't invested - if this hypothetical person had $200k sitting under their mattress (or in a checking account earning 0%) they're an idiot for paying the $8k to save $2k.
But in my example, and using your hypothetical values:
$200,000 balance ... 4% rate = $8k interest paid in that year
$8k x 25% tax bracket = $6k net paid after accounting for tax break.
$200,000 balance invested in 50/50 stock/bonds earns a conservative 5% = $10k earned.
$10k earned - $6k net paid = $4k profit by not paying off mortgage and instead investing the $200k.
Also - while this isn't the case in today's interest rate environment - if inflation were over 3%, it would make sense to hold the mortgage. The inflation would eventually make the amount owed significantly less in nominal dollars.
Not totally 4k profit. You've got to pay tax on the 10k earnings - 25% ordinary income is $2500, 15% cap gain is $1500.
Y'all are way smarter than me about numbers and shit. I'm definitely coming to OOTB whenever I buy a house 
I believe you can file those under "Charity." That was her name, right?
Keep your receipts.
Keep your receipts.
Plus the standard deduction is around $12,500 so you are going to have to come up with around $4500 to 5000 more of medical, charitable, etc. deductions to even be able to use the interest deduction..
Fair point. I alluded to the fact your profit would get taxed in my original post on it, but neglected to include it in the second example. Still, you'd be running a profit doing it that way. Although, if you didn't sell the investment in the year, you wouldn't get taxed on it. If you allowed it to compound until you were retired and in a lower tax bracket - long term cap gains tax is 0% in the 15% bracket I believe.
Yes exactly. Popping out a couple kids would contribute to that as well I believe. I got a few chuckles from one of my buddies who asked for a receipt for paying $100 to enter some charity golf tournament we did last year and he said "Gotta save this to write off as a charitable contribution on my taxes" then I was like "Dude, you don't own a house or have any kids... don't you take the standard deduction or do you actually itemize?" He wasn't sure what he did as he farms out his taxes to a tax guy (chuckle #1)... we later found out he takes the standard deduction so he didn't need the receipt anyways (chuckle #2), and since he doesn't itemize his taxes are incredibly easy to do, so he's been paying that guy to do his taxes for no reason (chuckle #3).
Y'all are way smarter than me about numbers and shit. I'm definitely coming to OOTB whenever I buy a house
Better hope you don't get the same treatment that guy asking for visitor tips on the Blitz thread got.
1. Yes, THN11 - a 9.75% APR mortgage is a great rate, take that deal!
2. Buy the most expensive house in the neighborhood - a tried and true plan for great resale value!
3. Yes, you can absolutely afford that house that is 20x your annual income - that's the perfect sweetspot for the Home Value-to-Income ratio!
I meannnnnnn I don't know if I'd believe THAT, but you could definitely sell me a slightly more believable bill of lies.
Buy in Boston - the neighbors will be much friendlier than if you bought in rural Georgia.....?
Whether it's $200k or $34k the math is the same ... the guy was talking about not paying off his house early because of the tax benefits of having the deduction - that was my point.
Craziest stat of all, only 27% of Americans who qualify actually itemize.
Craziest stat of all, only 27% of Americans who qualify actually itemize.
Yes. If you get a receipt with a restaurant name or something on it as many strip clubs do. Also tips , they are serving you right? But you would need to be in a profession where you can write off entertainment.
Maybe it's all the beers talking, but I really liked that.
Side note: I really appreciate all the people who spend their time adding lyrics to songs like in that link.
Dude, Manchester Orchestra is a gooooood band. I feel like they're definitely up your alley, musically. And Andy Hull's lyrics are incredible. They're so good that it's one of those bands where you can't even listen to certain songs if you're already in a sad mood because they'll overpower you.
I would've linked the actual video but it starts out with a car crash and I didn't feel like that was appropriate, given the happenings in the past week.
@Hark_The_Sound_2010 if you listen to Manchester Orchestra, your stock just went up in my back (or down? Whatever the good direction is for stocks and money and such, it would go that way.)
I like their stuff - wouldn't say I listen regularly, but that goes for pretty much all music. I've never been one sit down and listen to a whole album of anything.
Your stock rose a few points. You should feel good about that.
They're from Atlanta by the way. Well technically Lilburn, same town as Jeff Francoeur.
They're from Atlanta by the way. Well technically Lilburn, same town as Jeff Francoeur.
Might should be a fourth chuckle. I don't think he'd be allowed to use it anyway because he received goods or services for the $100.
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