Mortgage Interest Tax Deduction? No, Thanks
I’m going to make a statement that is bound to divide you, dear readers, into two camps: the “Are you crazy?” folks and the “Right on, (wo)man!” people.
Are you ready?
I think the mortgage interest tax deduction is a joke, and I’d rather not claim it on my taxes.
Whew. Glad I got that off my chest.
Yes, we chose to buy a home. We know that our 5% mortgage, while at a decent interest rate, is going to have us paying $268,000 in interest over the 30-year term of the loan. That’s only $20K shy of the amount of the loan. And I think that’s sickening.
As a loan amortization table demonstrates, you’re paying the bulk of your interest in the beginning of the loan period. So our $1,550 mortgage payment is made up of $1,200 in interest. Sure, at the end of the year, that’s a lot of $$$ to deduct if you itemize your mortgage interest. But think about what you could do with all that money if it were available for investment purposes. Right now, it’s just money being paid to the bank, and for every $1 of that, you might get 35 cents back in a tax refund.
For our example, $1,200 in interest over 12 months is $14,440. The standard deduction for married filing jointly (that’s me and Mr. Saver) is $11,400. Sure, it’s $3,000 more to itemize the interest, but what we’ll get back from that is just another $1,000 or so.
I don’t think it’s worth paying the bank just to get some cash back from the government. I’m a strong advocate of paying toward your mortgage principal and knocking down the amount of interest that the bank is getting. The lower the principal amount, the less you’ll be paying in interest.
I’ve broken down how just small monthly extra principal payments or yearly lump-sum payments can shorten our 30-year mortgage anywhere from 2 to 10 years, saving up to $50,000 in interest. That’s nothing to sneeze at.
It may not be a fully sustainable plan — I’m sure if and when kids come into the picture, it will cause us to reassess where our money goes — but the beauty of it is that we can choose how and when we want to make those extra payments.
If our extra payments knock down the amount of interest we can claim on my taxes next year, so be it. I’ll be laughing my way to the bank with the money we’ll have saved down the line. And knowing our home will be paid off before our retirement will be an added bonus.
FDIC Chairwoman Questions the Deduction
What’s even more interesting is that Foxbusiness.com is reporting that FDIC Chairwoman Shelia Bair has gone so far as to cite the mortgage interest tax deduction as one of the causes of the current banking crisis. Of the federal tax and credit subsidies, Bair said, “We must avoid policies that encourage such economic distortions.”
So do the tax deductions and the First Time Homebuyer’s Credit push more Americans into buying homes that they can’t afford, all while causing the values to drop? I have to agree with this thinking — to a point. Sure, getting back $8,000 for purchasing your first home is pushing some buyers into homes before they’re ready, but shouldn’t the banks also be held responsible for subprime lending practices?
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