canceled.2021.1
#AMERICAISDEAD
In this thread about home ownership, the topic of interest rate deduction is discussed. It is astonishing to me the financial ignorance of people who actually think buying a house for this deduction is a good thing. That aside, what was more astonishing was that Micawber tried to pass along this lie and nobody else was able to call him out.
Let me work out the math for you.
Micawber claims to have put down $127,000 on his house to avoid PMI. Assuming that was a 20% downpayment, that would mean he paid $635,000 for his home. Assuming a 30 year mortgage at prevailing rates, I will take a guess at 4% (probably is lower) as a higher rate will give him the benefit of the doubt. Using that information, we come up with a monthly mortgage payment of $2425/month. His interest payment for the year would be about $20,000 using rounded numbers.
Now here is how the mortgage interest deduction works. First and foremost it is not a tax credit, meaning that you can deduct the entire $20,000 off of your federal tax bill. It is a deduction, meaning you lower your taxable income by $20,000 and you only deduct that percentage that you pay in federal income taxes. So let's assume Micawber is in the highest tax bracket of 39%, his income tax savings would be $7,800 a year not $20,000 as he claimed.
Here are a few other things to know about the mortgage deduction.
1) You have to itemize your mortgage so it doesn't benefit all households
2) You are paying significantly more in interest than you are getting back. The best way to describe this would be to ask you this question. Would you give me $1 if I promised to give you back $.39? The answer of course would be no.
3) That mortgage interest deduction benefit decreases over time as you pay down principal
Now of course everyone will come running here telling me how Micawber is making this great investment because real estate always goes up. But, as I said in another thread, people rarely if ever calculate their total cost of ownership.
For example, if Micawber sells his $635,000 house in 15 years for $1 million, he will think he came out ahead on the deal and made a great investment. But, did he? Did he make $365,000 on his investment?
Let's look at the math
In 15 years, Micawber will have paid $257,519 in interest to the bank
In 15 years, Micawber will pay $75,000 in property taxes
In 15 years Micawber will pay $14,400 in homeowners insurance (assumed $1200/year)
So just in these three items, over a 15 years period Micawber paid $346,919 and I didn't even count maintenance, landscaping, repairs etc.
But, let's be really generous and say that Micawber bought a brand new house and had ZERO issues in those 15 years and cuts his own grass.
He paid $346,919 and got a return of $365,000 or a difference of $18,081 or a little over $1,000 a year. Not a great investment at all
Now please let me be VERY clear. I am not arguing that owning a home is not a good thing. I am arguing against two myths that have seemed to take root in the American consciousness.
1) Owning a home is a good investment
2) You should buy a home to get the interest deduction
Both are financial fallacies
