Home Mortgage Interest Tax Deduction

Sometimes I really feel like people are incapable of thinking for themselves… Let’s take a home loan for example.

It’s widely known that you can write off the interest of the loan (not the principal) in your income taxes. Soon I’ll be building a house, and everyone keeps telling me that I should get a loan so I can write off the interest. Okay, that’s nice… but why not just pay for it outright I ask them? Their response is always, “Because then you can’t write off the interest.”

So if people would stop repeating what other people say and actually think about it, they might not think that way. Let’s do the math here… A 30 year loan for $1,000,000 at 7% interest would be $6,653.02 per month. That means you have paid $2,395,087.20 over the course of the loan (roughly $1.4M in interest). Wow, that’s fantastic, eh? Now you can write off $1.4M that you paid out that you otherwise could have simply kept. Which at a 30% tax bracket would be a savings of $420,000 because of your write off.

Hmmmm… pay $1,395,087.20 so you can get back (“save”) $418,526.16. What a deal!

It is a good thing, but if you can pay cash, that’s better… it’s funny to see people argue that you should “keep” your money rather than pay off your loan so that you can have the tax “break”.

If you are reading this, and you think it’s a good idea, maybe you should shop around for the highest interest rate you can find, because then you get a bigger tax write off. 🙂

33 thoughts on “Home Mortgage Interest Tax Deduction”

  1. That’s a bit like those ads that say “hurry on down and you can save hundreds on this product” – if I don’t hurry on down I’ll save even more by not having it in the first place!!!

    “Never a lender or borrower be” is what my mate Dave says.

    Keep us posted on how your house plan & build goes, Shawn. I’m looking to do the same over here in the next couple of years.

  2. LOL! Very true but try convincing people otherwise! One point I wanted to add is that standard investment routes offer lower interest rates than what one pays on mortgages. Plus, the interest earned on these investments is taxable. Which is why it makes even more sense to repay your mortgage as soon as possible rather than keep the money in standard investments. Unless you’re getting significantly higher returns on your money elsewhere, you’re getting further into debt. It’s all part of the capitalist economy where it is in the interest of banks to keep you in debt and ensure the scarcity of fiat money.

    On a personal note, we took a loan cos we needed to build up our credit history. No mortgage company would give us a loan for the amount we were short so we got as small a loan as they would give us for a reasonable interest rate, which was still much higher than the general market rates.

    We paid it off by making additional payments to principal within a couple of years. We did re-finance at one point to bring our interest rate down. There are loopholes in pre-payment – in Illinois there is no pre-payment penalty but that did not stop the mortgage company from trying to make us pay interest for the entire month even though we were pre-paying in the first week of the month. Apparently the lady at the title company knew that mortgage companies do this but is legally bound not to disclose this information. She is just supposed to do her job. We refused to close because of this discrepancy and she had to run around for some desperate paper-work to get the mortgage company to re-calculate their figures. She said most people just pay the additional interest because they don’t know any better – any statement that comes from the mortgage company as final payment has to be ‘correct’ – right? Wrong!!

  3. Shawn,

    As a licensed real estate professional and licensed mortgage broker, I can tell you, PAY IT CASH!

    Too funny about the higher interest rate. If someone wants some help finding the highest interest rate, I can get you in around 50% if you want…

  4. I do not understand how lenders keep repeating that myth….or should I say deception. Every time I call a lender on it they agree that is a bunch of bull and look surprised that I could have figured out it is not beneficial to anyone except the lender. I know people that buy a motorhome, (never use it) because they say it is a tax write off. OK, after the depreciation AND interest lost (what you don’t get back) it is odd to think that people think the government is giving them a motorhome or something. It is a funny little financial fog people like to live in and then wonder why they can not offord to ever retire until they die.

  5. Didn’t take you too long to figure that out. So many people say stuff like that but couldn’t afford to pay cash anyways, but it lets them sound smart to the general public. (Kind of like Kerry, too many people just take his word for it instead of getting the facts.)

    BTW – your house is not an asset when you owe money on it. How does your asset column compare to your liability column?

    -Debunked

  6. while you right in saying you’ll save money by paying cash, if you did need money for a business, medical emergency or to invest at a higher rate of return, getting money out of your house is simple and cheap. i used my house to buy 2 houses. both went up A LOT and i sold off one and used it to pay down my mortgage by half.

  7. Thank you! Sheesh I’m so sick of explaining this type of thing to people. I tend to get it moreso when people ask me about business-related tax deductions. They seem to think that anything I spend for my business which is tax deductable is exactly the same as that item (s) being absolutely free and of no financial consequence in any way shape or form. People – tax deductable simple means you don’t have to pay tax on those dollars – i.e. roughly a 30% help, NOT FREE!

    – ephricon

  8. If the house increases in value at a faster rate than the interest rate you pay on the loan, you win. Even if the rate of return on the house is slightly less than the interest rate, you can still come out on top, because of the tax break. You could then invest all the money you would have used to buy the house elsewhere.

  9. Your example is WAY too extreme. The average homeowner keeps the home for a little more than five years on average. That means they’re paying heavy amounts of interest for the first few years of the loan and subsequently those heavy amounts of interest will give you a nice write-off each Spring.

    Obviously paying for a home in cash is more profitable. But there’s a reason most people don’t: They can’t afford it. The next best thing is to put as much money down as you can, and take every tax return and apply it to the principle. Write-offs are just perks in the process of gaining substantial equity. Taking some of that equity and buying a second home is the best way to go to ensure that depreciation write-off ;-).

    But congrats on being able to pay cash…

  10. FINALLY SOMEONE THAT MAKES SENSE. The fact is, not very many people can pay cash for their house, and if they could usually they are smart enough to use that money to invest in MORE real estate or BETTER investments. A mortgage @ 6% if you pay that back you are only making a return of 4% or less because of the tax deduction. It is not that hard to find a 7% investment that would yield the exact same while ALSO allowing your home to APPRECIATE at that same rate!! That’s 14% GAIN per year. You use your money to invest then you use the banks money to invest also. It’s called STRATEGY!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

  11. Is it better to keep paying higher tax in my home and
    and get it back when file for income tax or make extra
    payment to the principle and pay less tax as well as
    paying off the mortgage earlier. I need to know your
    opinion
    thank you.

  12. You should really ask yourself, what can I do with the money that you would use to pay off the house. By taking out a loan on the house, you pay more for the property in the end but much of the taxes are deductible which lowers the overall rate you are paying on the initial amount. Now if you instead take the money you want to use and setup up a mortgage offset account, you will almost always end up with more money at the end of the length of the loan depending on the rate of return of this investment. This is called arbitrage: a kind of hedged investment meant to capture slight differences in price. Why not allow the government to pay for part of your house – tax write off? So I would suggest allowing your money to make money for you rather than burrying it under your house where it definitely won’t make any money. Remember, the house is going to appreciate no matter how you pay for it.

  13. Engineer is exactly right! You have to look at the monthly outlay that you would be paying for 30yr. vs. the cost of the home. If you invest the chunk of cash, setup the mortgage, and use the writeoff, you will be FAR better off at the end of the 30yrs. than if you had paid for the home in cash! The best part is your house will appreciate at the same time. I like to think of it like a business. Businesses issue bonds at a certain rate. They then use the money raised from bond sales to make more money through their business.

  14. Based on the saying, “Put your money where your mouth is” I challenge all the people who continue to support the myth of the benefit of the mortgage tax deduction to find me ONE person who is actually taking the full amount of deducted income and investing all of it…anecdotal stories don’t count!

    The truth is that no one invests their deducted income..they just like to say, “with the deduction I can take that money I saved and .”

    The economic study of buyer behavior shows we live according to the level of our incomes when we are forced to do so. Buyer behavior dictates that you will NOT in put that money into another investment, rather it will be spent on anything other than investments.

  15. This completely depends on your finances. If you have a large income at a top bracket, it makes sense to take the biggest mortgage you can get. Write off the interest while constantly refinancing (every 5-8 years). Take that $1,000,000 in cash and buy some stocks or other investments. Average return of the stock exchange has been about 10.5% over the last 150 years. Now i wouldnt go and buy high risk stocks, but talk to an advisor and set a goal of say %8. Don’t sell the stocks until you retire and your capital gains taxes will be small (because they get factored into your now diminishing income). In the end your will get the appreciation of the $1,000,000 house and the $1,000,000 you had and only be paying a small amount to the government

  16. I don’t get it. I thought it was simple. I have $200,000 in stocks that average 10% interest. I am buying a home for $200,000 with a loan at 6%. Should I put my $ in the home or make a higher interest rate with it on the stocks? Yes, I’ll pay the interest on the house, but what I make with the stocks more than makes up for it. It just looks so obvious that I feel I’m missing something.

  17. If you really want to decide the best way to approach this question, I challenge you to do the following (based on a $250,000 house and that much cash on hand):

    1. Find out the exact amount you will pay per month for principle and interest on that amount of house (since you will always pay tax and insurance regardless).

    2. Find a financial calculator on-line and determine who much money you would have over 30 years for the following (assume 10% return for both):

    a. One lump sum investment of $250,000
    b. Monthly investments of amount figured above

    Strictly from a dollar amount, you WILL have more money doing the lump sum investment method. calculator won’t lie.

    Now with respect to the statement of “people do NOT actually follow through and invest money”, I offer you this challenge. Which is easier to “really” do:

    a. Make one lump sum investment of $250,000 cash that you have on hand into some sort of reasonable no-load mutual funds, etc.) that you must not touch until ready, or…

    b. Consistently make 360 monthly deposits into the same type of investments on the amount you are not having to pay in interest and principle…

    Personally speaking, if I have problems with financial discipline, I will find it easier to make the one deposit than 360 over the course of 30 years.

    Just my two cents worth… Pay the minimum down on the house and invest the rest….

  18. Have to disagree. There are several places that money that we make above and beyond basic living expenses could go. We have school loans but none of them are higher than 8%. No consumer/car debt. Mortgage around 7%. However, we have been averaging 10-12%/year on investments. Why would I put extra sums of money obtained (bonuses, etc.) into paying off my mortgage when I could:

    A: Pay down school loans especially since we can’t deduct the interest because our incomes are too high

    B: Pay down principal on mortgage even though the interest is tax deductible

    C: Continue investing and pay the minimal on loans (including mortgage) that have interest rates less than my investment returns

    Unless I am having monthly cash flow problems I should keep investing, especially maxing out our 401K plans.

    Disagree?

  19. Dudeman: you’re right and wrong.

    Take that $800K cash and invest it in a balanced portfolio (required for a 30 year horizon – aggressive at first, then conservative). Buy the house with an $800K mortgage (20% down for no PMI) at a fixed rate over 30 years. Never refinance, unless you’re 100% positive you won’t extend the duration of the loan and that you will get a lower rates and no extra fees. Take the write-off and make sure you do your homework so that all that money coming back at you is plowed right back into your investment.

    The day you stop putting the tax money into an investment. You lose.

    Many things happen over 30 years: you get married, you have to help kids pay for college, etc.

    The above scenario is great if you can hold it for 30 years.

    Reality is you probably won’t. But paying all cash for a house is not the best decision either. Maximize the downpayment to minimize the interest rate, take it over a 15 year period. This way, at the end of 15 years, if you’ve had kids in the meantime, you can help them through college (year 18+ for them, so 4 to 5 years of wouldbe-mortage money)

    Anyway. Good luck to you all.

  20. Hi Shawn,

    As you might have figured out this is more complicated than your first wave of supporters make it seem. As Engineer, Planner and Dudeman point out you have to consider:

    1. Opportunity lost. Remember that to save that fortune in interest you had to lock up $1,000,000 cash. What would that principle be doing elsewhere? As was indicated your house appreciates regardless of the debt tied to it. So subtract from your “huge interest losses” the gains you’d get from this money.

    2. Front loaded interest. This is a KEY point since it means that the higher interest you’d be paying (while the principle balance is really high) will create larger write-offs than if you are paying down your mortgage. Many very wealthy individuals NEVER own their home because they’d prefer their assets to exist out in the market somewhere (earning 8-11%)

    As for Law’s comments, perhaps the general public but don’t paint with such a wide brush. Shawn seems to be a bright guy and he can decide if he’ll be disciplined enough to reinvest the tax refunds. I’m not painting you an anecdotal story, I do these types of things diligently. Dudeman is another example. Or are you telling me we are making this up and 100% of people have 0 discipline?

    My two, er three bits. 🙂

    Cheers, Dylan

  21. Law,
    I am. The money I could have used to buy my house in cash is in the stock market. I make–on average over the long haul, some years more some less–10% a year there. Net after taxes that’s about 7% earned on that money.
    I borrowed to buy my house, and pay 6% interest on that loan, which after the mortgage interest deduction nets to about 4%. 7% minus 4% is 3% net profit on money that I wouldn’t have if I had paid in cash.
    Thanks, Uncle Sam!
    And yes, I think this is scandalous, and is the reason the mortgage interest deduction should be abolished. There is no reason for us to be subsidizing home ownership–it’s just welfare for the wealthy. On the other hand, as long as it is the law of the land, you can be sure I’ll be taking my deduction.

  22. I made 120,000 last year. Forked out almost $55,000 to uncle sam. If I had a mortgage of 900,000 at 5.25% I would have been able to wright off $47,000. No to mention I would have been living in a nice home for almost free by my figure.

  23. Any Fool would also know you are paying more if you take a loan as opposed to paying hard cash for anything, be it a laptop or a jetliner. The argument given by people about write-offs is only because they are looking at the brighter side of things for those who are ‘regular’ people doing financially okay and therefore cannot dream of buying a home cash down. But if a multi-millionaire chooses to take a loan for , say, a 800k loan he is either stupid or wants more cash at hand to enjoy right now then at an age of 70. the price you pay for having your payments spread out over a long period of time is [the interest – the write-off savings]. That is what people mean not that they say paying cash is not preferable even if you have it. If you have met such a madman you needn’t have quoted him.

  24. If you have enough money to pay for a house and that money is sitting under your mattress not invested, then yes it makes more sense to pay off the house up front and not pay interest. (and not get the tax deduction)

    However, if the money is invested and you’re getting a good rate of return, then it may make more sense to borrow the money for the house AND get the tax deduction AND keep getting your good rate of return.

  25. Oh, but you think this is true? There was a study done by the Federal Reserve (of Chicago, I think) a couple of years ago, detailing the reason for not pre-paying principal on a mortgage. The conclusion was so detailed and the findings so sound, that it makes better sense than what you’re thinking. Don’t take my word for it. By utilizing the power of leverage with your equity, you’ll actually build wealth rather than just paying off your house, IF you invest wisely, and that’s always a big IF.

    Good luck, though. See you in ten years!

  26. 30 year loan for $1,000,000 at 7% interest would be $6,653.02 per month. That means you have paid $2,395,087.20 over the course of the loan (roughly $1.4M in interest). Wow, that’s fantastic, eh? Now you can write off $1.4M that you paid out that you otherwise could have simply kept. Which at a 30% tax bracket would be a savings of $420,000 because of your write off.

    Hmmmm… pay $1,395,087.20 so you can get back (“save”) $418,526.16. What a deal!

    I would do this 20% down 200K. Make the payment take the tax write off. Invest 800K in the market at a 7% return over 30 years! Ok this is really conservative rate of return. Avg Market return more like 10%

    Amount invested 800,0000
    Simple earnings 1,680,000
    Compound earings 3,609,804
    Grand total 6.089,804

    And the house is paid off sweet deal, now where did i put the Mil?

    You have to factor the power of compounding over time!

    Taking a tax write off is never the reason to make an investment.

  27. Your deduction seems clear and simple, but you forgot – apparently because you must be rich upon rich to have 1mil to spend in cash on a home that 90% of the people in the USA do not have enough cash to front such a large purchase. Our only option IS to get a loan. So having a write-off is beneficial for us, non-loop-hole-finding-to-avoid-paying-taxes-working-class-regular-folks

  28. The principal behind a good investment is leveraging as much as you can with as little as they’ll let you. By keeping your cash on hand over the 30yr term it should give you (the average millionaire) the capital to reinvest that extra cash and out gain the difference. You can do this by investing in some sort of securities, commodities or more real estate that should outpace the difference between your tax write off and the interest you will pay. You also gain the benefit of diversifying your risk while avoiding locking your money in to idle equity. Simple money math.

  29. I disagree. I took a $750,000 line out against my house in 2005. Since then I invested hard money FIRST MORTGAGES with a weighted coupon of 10%. I only would lend 50% of the homes value so some of these older loans are NOW (2010) approaching 90% LTV due to the market declining.

    If I now have to foreclose (have had 1) and can sell the house or rent it. But I own it free and clear.

    So lets run the numbers:

    $750,000 x 10.15% = $78,750 PER YR x 5 YRS $393,750

    COST OF MONEY

    $750,000 x 4.25% = $31,875 PER YR x 5 YRS $159,375

    REAL PROFIT
    $234,375
    – 9,350 Loss On Forclosure
    ======
    $225,025

    Bottom Line, You have to look for better ways to invest.
    P.S. I do buy my investment real estate free and clear from a self directed IRA. If you change jobs do a roll over into a self directed IRA. You can buy stocks, bonds, notes and real estate. I use Lincoln Trust (formerly FISERV ISS).

    Just my thoughts

  30. I was wondering, is there an income limit for not being able to write off interest on a mortage.
    For example, a family of four with an income of $350,000. Should they purchase a home for $700,000 and get a mortgage, can the interest be written off? Someone told us we could not. Is this true?

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