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Old 05-23-2009, 11:46 AM
 
Location: I think my user name clarifies that.
8,292 posts, read 24,081,858 times
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Quote:
Originally Posted by Hobokenkitchen View Post
Sorry if this is a stupid question!

We are thinking about buying a house with cash.
We got pretty slammed this year on taxes because we have been renting - in the past we always had interest and and real estate taxes to deduct.

So, if we can afford to pay cash, and would prefer to have no mortgage, does it make an financial sense at all to take out a mortgage for the tax deduction?

I've run the numbers as best I can (which is quite pathetic really), and I think you save more by not paying interest, than you would in saved taxes.
Does this sound right?
Thanks!
I may be missing something here, but this seems pretty simple.

If you can pay cash for a house, do it! Taking out a mortgage loan to get a tax break is like spending $10 to save $5.

The mortgage interest you pay goes toward your Itemized Deductions. If you don't have over (I believe) $10,300 in Itemized Deductions, you're better off taking the Standard Deduction anyway.

You'll pay Property Taxes on a house whether you own it outright, or are making payments on it.
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Old 05-23-2009, 04:09 PM
 
3,460 posts, read 5,150,447 times
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Quote:
Originally Posted by chet everett View Post
Each and every ALTERNATIVE use of the cash HAS TO BE WEIGHED and not merely the interest vs tax questions.

This is a somewhat subtle point, but basically it has to do with the FACT that about THE CHEAPEST cash a homeowner WILL EVER have access to is a secured mortgage. The cheapness of this money has, unfortunately, caused some people to behave irresponsibly, and others to contemplate doing things that are imprudent (like borrow more than can afford or take money out of their home and put that into more volatile investments), but if one has a firm grasp on appropriate levels of risk and a nice balanced approach to savings / investing a mortgage is a perfectly appropriate means of having more of one's money working / growing.

The first thing you have to consider is the standard deduction, which takes away any tax benefits from the first $10.3 K in interest payments. At 5% interest, that means you're only getting a benefit on your principle above $206K. With the median home price dropping below $200K, the mortgage interest deduction is a losing game for over 50% of mortgage holders.
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Old 05-23-2009, 04:44 PM
 
Location: Great State of Texas
86,068 posts, read 76,140,372 times
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You never get back your interest paid dollar for dollar so why do it ?
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Old 05-25-2009, 12:23 AM
 
Location: Colorado Springs, CO
2,221 posts, read 4,860,187 times
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Quote:
Originally Posted by chet everett View Post
Each and every ALTERNATIVE use of the cash HAS TO BE WEIGHED and not merely the interest vs tax questions.

This is a somewhat subtle point, but basically it has to do with the FACT that about THE CHEAPEST cash a homeowner WILL EVER have access to is a secured mortgage. The cheapness of this money has, unfortunately, caused some people to behave irresponsibly, and others to contemplate doing things that are imprudent (like borrow more than can afford or take money out of their home and put that into more volatile investments), but if one has a firm grasp on appropriate levels of risk and a nice balanced approach to savings / investing a mortgage is a perfectly appropriate means of having more of one's money working / growing.
No, I vehemently disagree. The cheapest cash I have access to is sitting in my bank account. The cheapest DEBT a homeowner can get access to may be through his house, but the assumed equivalency between cash and debt is the fundamental root problem of the American economy today.

I know nobody that truly has a firm grasp on risk these days, because it's simply not knowable when corporate America is allowed to lie, cheat, and steal with impunity behind an opaque veil held up by the government itself. If you buy your home outright and stay in it long term, you have a known outcome. Take a mortgage and put your money in the markets, you are operating leveraged and have introduced a tremendous amount of uncertainty and risk.

The truth is that assumptions on the expected rate of return on financial market investments based on the last two decades are likely to be very flawed going forward. Sure, if I knew I could expect 8-12% returns in the future, it'd make sense to take a mortgage at 5% and invest my money in the markets. But real trailing 12-month P/E for the S&P 500 is over 130:1 now, so it's inconceivable to me that we would see those sorts of sustainable returns for a very long time. Quite the opposite in fact, I think we have real declines still ahead.

Read Mohammed El-Erian's take on the effects of deleveraging and its impact on global growth. The next two decades are not shaping up to look anything like the last two. Throw out the conventional wisdom and all you think you know about markets based on the pre-crash economy. Rethink EVERYTHING.
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Old 05-25-2009, 09:08 PM
 
Location: Pinal County, Arizona
25,106 posts, read 36,294,545 times
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It would be best for the OP to sit down with a competent tax advisor to take a look at their particular situation -

No one on this board can give insightful advice be it they don't know the particulars -
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