A Mortgage on your home should be taken out for one reason only – If you don’t have the money to pay cash for your home.
As a practicing CPA for 30 years, many of my clients were very wealthy business people, who could afford to pay cash for a home. However, I advised them to take out a home mortgage. The mortgage interest is deductible, and a home mortgage is a major tax shelter.
Then, one day, it hit me right in the mouth. This is total B S.
Take out a Mortgage to save taxes, and you will lose
If you can afford to pay for your house, do it. Never take out a mortgage just to save taxes. If you do, you’ll get hit very hard. You might as well take money, burn it in the fireplace and watch the smoke rise from the chimney. Here’s why.
Mortgage interest saves income tax, but you still have to pay the interest
For most people, the income tax rate is 33 percent. This means that 33 percent of the money you earn goes to the Internal Revenue.
Let’s assume it’s January, 2017, and you made mortgage payments every month during 2016. When you get your annual mortgage statement, let’s also assume the the total interest you paid on your mortgage is $15,000. This is deductible. Whatever your taxable income was, it’s now $15,000 less because of this interest.
Does this look good? It does if you have to take out a mortgage. But if you have the money to pay for your house, this sucks.
You’ve paid $15,000 in interest. With a tax rate of 33 percent, you save $4,950 in income tax.
You may think “Wow, that’s great. I saved almost 5 grand in income tax!” But that’s not so great. You had to pay $15,000 interest to save $4,950 in taxes. You’re $10,050 in the hole, meaning that you have to pay a whole lot more interest than you save in taxes.
Why CPA’s will give you such B S advice about having a mortgage
First of all, a CPA will tell you, “The money you pay the IRS is lost money, that you’ll never get back.” This is true. The tax money is gone, but so is the interest paid.
Second, you may be told, “You’ll always get back any money you pay for your home.” That’s true, because a home is a good investment. However, if you sell your home years later, and make a profit, this profit will always be reduced by the interest you paid during the mortgage. On most mortgages, you’ll pay much more money for interest than the amount your home will increase in value. You’ll never get back all of the interest you pay. I’m going to show you in another article which will be out during the next 24 hours.
I realize that many people have to take out a mortgage, because they can’t afford to pay for a house with cash. In this case, there’s no choice. But, if you can afford to pay for your house, do it. Never take out a mortgage because it saves income taxes. Otherwise, lose, and lose royally is exactly what you will do!