“Buy a house” they said. “You’ll be able to deduct the mortgage interest” they said. Probably one of the greatest lies ever told, and possibly a lie you believed.
This is how many prospective homeowners think about things:
- Buy a house.
- Pay mortgage interest.
- Deduct said mortgage interest from taxes.
- Convince yourself this is an amazing benefit.
- Tell people who don’t have mortgage interest they suck at being awesome.
The reason I love personal finance is because of it’s inherent objective nature. One can’t say they are financially stable if they have significantly more money going out each month than they are bringing in. Subjectivity is limited when it comes to cold, hard numbers. Let’s look at the mortgage interest deduction from an OBJECTIVE stance.
Let’s pretend Girl Ninja and I buy a $350,000 house tomorrow. We put 20% down and get a 3.75% interest rate on our loan. Wanna know how much mortgage interest we pay in the first year? About $10,300. Sure we could deduct that amount from our taxes, but why would we? The standard deduction we get is already $12,200. Oh, and don’t forget as each year passes the amount of mortgage interest you pay DECREASES which means your mortgage deduction benefit DECREASES. What a great deal, right? Hahaha!
So what does all this mean? It means the mortgage interest deduction benefit (if you can call it that) is essentially worthless. The numbers don’t lie. Only 25% of tax filers actually include the Mortgage interest deduction on their annual taxes. Or in other words, most people DON’T realize any benefit from having mortgage interest.
Obviously if you donate 10′s of thousands of dollars each year, or if you buy a million dollar home, you will get a benefit from the deduction, but that is not the case for most people, and probably wont be the case for you.
I’m not saying you shouldn’t buy a house. Just don’t let stupid people try to convince you that mortgage interest is a “perk” to homeownership.
p.s. Here is a video of me not sticking the landing after skiing off a small rock yesterday. Ninja skiing.