Is it worth taking a mortgage for the tax deduction? (insurance, loan)

[Hobokenkitchen]

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!

[ufcrules1]

This is a no brainer, if you have the cash to buy a house and still have money left over for emergencies etc. then buy a house outright and invest the money you have coming in from your jobs etc. The money you would be putting towards the payments/interest.

[Thatguywho]

no

[hindsight2020]

is it worth taking on a mortgage for the interest tax deduction....um, if you like spending a dollar to save 35 cents then yeah.....lol bottom line not only no, but h%ll NO!

[chet everett]

I have to say that there are two issues, if not more. The first is, of course, what is the REST of your financial picture like? Is this cash that you COULD put into paying for your home just one big "windfall" or do you have a broadly diversifed set of savings / investments? If you do not it would NOT be a "no brainer" to sink essentially ALL your liquid assets into a home! In fact it could a HUGE mistake.

The second broad issue has more to do with the direction you forsee happening with your personal situation AND the overall economy. I strongly believe we are in a period that will not last too long of unusually low interest rates and relatively low taxes. In my opinion it is very likely that both will increase in the future. You must do some pretty fancy calculations to determine how you would fare by locking in things now vs various future scenarios.

Of course, total out of pocket costs will be far higher by financing, and if that is your primary concern the rest is somewhat beside the point...

[Hobokenkitchen]

Chet - this has crossed my mind too. It would be quite nice to have a mortgage if we go into hyper inflation, as the loan becomes very, very cheap.

We are not hugely diversified truth be told.
I have a small SEP, DH has a larger 401k and we have an additional 10% in the market.
I am not a huge fan of the stock market because neither of us understands it well enough. Right now we've lost a lot of money in the market, mostly because we don't know what we're doing.

We would still have a large emergency fund left over after buying this particular house. We would probably keep this liquid in a bank until the stock market sorts itself out.

We may do a bit of bargain hunting, but probably not more than $20,000 worth. Just don't have the stomach for it - might as well take it to Vegas and put it on red.

The house funds are not a windfall - we made a lot of money in real estate over the years.

[svendthrift]

"But there are tax advantages to holding a mortgage," you say. The government raises a tax on your current income via an income tax, then offers to partially reduce it if you accept a tax on your future income via interest on a government sponsored loan to buy a house that barely keeps up with the rate of inflation–except during a housing bubble, such as we just experienced. This is what passes for good household finance? How long have North Americans been falling for this nonsense?

How Much of Your Car Should You Finance? Zero percent. - iTulip.com

Rent.

[Hobokenkitchen]

Originally Posted by svendthrift

How Much of Your Car Should You Finance? Zero percent. - iTulip.com

Rent.

Lol, thanks. Been doing that for coming up on 2 years.
Time to settle down.

[chet everett]

HK:

There are LOTS of alternative to the "stock market", one being OTHER real estate! I hate to sound like a "boaster" but honestly if I was a young guy with no kids and a pile of cash I would be 'prowling' for the possibility of a LARGE return on a distressed property that I could ONLY buy all cash.

Of course that involves some WORK and some special knowledge, and that may not be what you want to do, but that still is NOT the only thing to do with a big pile of cash such that you would have if you were contemplating a new home purchase. There are many ways to get a return on your cash that tends to move with inflation, preserving your wealth / buying power MUCH better than an ordinary owner occupied home...

Everything from buying a place that is income property to various government securities, bonds, real estate investment trusts, and ETFs are all alternatives that any body with lots of cash and little diversification SHOULD investigate before they shut the book on getting a mortgage / paying cash.

Good Luck!

[svendthrift]

Consider the other side for a moment.

It is usually cheaper to rent (10-15% less). If you are disciplined and save/invest the difference over the life of a typical mortgage (20-30 years) you will likely either come out with more equity than the home"owner" or around the same. The added benefit of renting is mobility, which is very important. Your equity is highly liquid if you need it etc.

So run the numbers. Look at homes you'd like to buy and see what they cost to rent. Then add in property taxes, minus income tax deductions and factor in a realistic budget for repairs (remember, a home is a depreciating asset on top of a slowly appreciating asset -the land). For upkeep of a middle class home, figure about 5 grand/yr. You also need to look at insurance, energy costs (my water and power are included in the rent). Quite a bit to consider.

Look at that over 25 years, paying close attention to interest paid and decide if financially it is reasonable. Quite often, it isn't.