Debunking the Mortgage Interest Deduction
Within the last 2 months, I made the initial painful decision to write 2 six figure $ checks to pay off my second mortgages I had both in my primary and secondary residences. You see…about 10 years ago, I fell into the lovely lull that sounded like this…”you should take out as much mortgage as you can so you can really leverage your money. Anyways, the interest is tax deductible…”
Have you also fell into that almighty “tax deduction” trap, that sultry string of promises of leveraged riches and how you can pull from your home’s equity to buy more property. GUILTY…yes, that was me. You would think 17 years in the financial services industry, a CFP ® certificant, I would have been able to see past the lipstick on THIS PIG…
Earlier I mentioned “painful”, and initially, yes it was tough to write out a check for six figures, not once, but twice mind you. I think part of me writing this article is part of bereavement and grief for taking this amount of money out my investment portfolio…HAH! In actuality, the more I think about it, the more I fall asleep much better at night taking the plunge in paying off this secondary mortgage.
It’s all an Illusion
You see, just like Penn and Teller, there is an illusion at play here. It is one of those gimmicks where they make you focus on thing so you don’t see the other side. Who is they? I have lots of friends in the mortgage business so I am not going to say a word…catch my drift?
What is the allure here? Let’s take a simple case example here. Take a look at this illustration:
Credit: Rollan Dizon RED 13Ventures
See the math?!? Amazing. Most people would rather give more money to the bank so they can stick up to Uncle Sam…^&* almighty!
Is there a benefit?
Now, don’t get me wrong. Most folks can’t save all the cash they need to buy a home outright. I think it is perfectly fine to take on a mortgage to buy a home. You can see it as almost a forced wealth building strategy, since the payments you make will eventually pay down the mortgage and the house; and you will own it free and clear. Some can also argue in the example above, that the cost of money is really not 5% rather 4% because of the tax deduction…and I agree with that. They will then go on to advise you to invest in the stock market to get better returns than that 4%. OK, I can sort of buy that conversation. However, at the end of the day, returns are not free. If you think you can return better than 4% after tax out there without additional risk, please email me and I will send you my money!!! In all seriousness, there are risks to your principal if you are ever promised a better return than what the prevailing low risk bond out there is yielding.
Since paying off the excess mortgage debt in my homes, I almost pull my hair out whenever I hear this angle of taking on as much mortgage debt for leverage and interest rate tax deduction. YEACK!!! I would rather minimize my mortgage and send more money to the charities that I support rather than to the banks. I think my local church will provide more good to the community than executives in the oval office of your neighborhood bank. Whether you take this advice to heart or not, I hope you see a different angle whenever you hear this mortgage tax deduction benefit.
Empower yourself! CHEERS!