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You would only pay the higher rate on your income in the higher bracket, not your entire income.
Assume a single person, income of $183,250 (ceiling of the 28% bracket) and a $5000 deduction. If you lose the deduction the tax rate on the $183,250 won't change; you will just have to pay 33% of the additional $5000 in taxes, or $1650. Personally I'd rather pay the $1650 in taxes than the $5000 in interest, maybe I'm just strange.
Yes. I understand the point of not paying a dollar to save 30 cents (or 39 cents - ha!).
When you get phased out of everyone's regular deductions cuz you make too much, you need to break into high enough deductions so that line item becomes worth it, too, though.
That allows you to add other things like sales tax, etc.
What if the deduction drops you out of a higher tax bracket?
What if your mortgage is less than both the rate of inflation and your earnings in your investment account?
I have been consistently earning more than 5% in my investments.
My mortgage is 2.8%. It's also my only deduction besides my property taxes. So...why would I pay it off?
Good question, Stan and reminds me of a conversation I had with my sister, years ago, over the very same thing. We both had mortgages and I said I wished I was in a position to pay mine off. She told me I shouldn't do it because it was a good write-off. I asked her (and this was based on what my income was at the time) "Why would I want to give the IRS a dollar and get back 28 cents? I'd rather pay off the house and put more of my paycheck into a tax-deferred IRA for my retirement years. She didn't really have an answer for me because she didn't understand taxes all that well and relied on the information her DH gave her. He was only doing what he was advised by his financial adviser.
Mortgage interest is one of few deductions left for Americans. I remember a time when credit card interest was tax deductible. I guess it made it easier for people to justify paying on a large balance. They could deduct the interest and feel better. But their deduction still wasn't all that great. Any time you pays taxes on money you've borrowed, you'll never get back 100% of that money. So I guess it really depends on the person and how much they value their money.
Personally, I like not owing more than what I paid for something, which is why I pay my cc off at the end of the month. If I let the balance roll over to the next month, the item I bought would end up costing me more than the original purchase price. It's just simple math. Oh and I like the rewards I get back by using the bank's card and paying off my balance.
But if you feel comfortable with the way you're doing it, then by all means, don't listen to anyone else. It really is a decision that should be made by an individual. People like Dave Ramsey don't take the time to really look at the entire financial picture of his callers. And his advice, although probably good, should be taken at face value and not something that should be set in stone for every individual.
As a side note: There are rumors that Congress wants to eliminate the mortgage interest deduction for Americans. If that happens, there will be more people upset than they are already.
If your loan is less than or equal to the average rate of inflation, I see no point in paying it off.
Even throw out the fact that your investments are doing better than your loan rate.
So, I happened to be listening to Dave Ramsey today and a caller asks Dave
Caller: Should I pay off my mortgage?
Dave: How much do you owe?
Caller: Approximately $180k.
Dave: How much money do you have?
Caller: Approximately $350 - $425k
Dave: Why wouldn't you pay it off?
Caller: We're debt free except for our mortgage. If we paid it off, we would lose our only deduction
Dave: [after doing some calculations] So, you're telling me that you'd rather give the bank $8k so you can get $2,700 back from the IRS?
Caller: What was I thinking? I guess I have my answer
Dave: [in his typical smug voice] yeah, its really a very simple argument. I used to think the same way, until I saw the light.
You ever notice that the analysis never goes any deeper than that? You ever notice that there are certain questions that never get asked? Like:
- "What are the tax implications of selling off $180k of securities, which I assume is how the money is being held? Dave never asks.
This is an important point. You could lose a lot of money by selling too much at once rather than spreading it out over 2 - 4 yrs to avoid being pushed into another bracket.
Quote:
Originally Posted by dmills
- "What about diversification? Is it wise to put 45 -55% of your nest egg into your home, which by his own admission isn't an investment?"
Here, I think you are failing to distinguish between buying a home and paying off the mortgage on a home you already have - these are not the same. In the latter case, the eggs have already been placed in the basket, and the new eggs are being placed in a different basket. The first basket is "one residential property less one mortgage note" and the second is "A single mortgage note".
Quote:
Originally Posted by dmills
- "What about the opportunity cost of liquidating a significant portion of your savings/investments. Even if I am not free to invest the previous mortgage payment, haven't I lost the leverage of the larger balance?"
Yeah, Ramsey is very anti-leverage, although the relative ordering of baby steps 4 and 6 indicates he isn't dogmatically so. I would also mention that he thinks 12% stock returns are reasonable, and yet, even if we grant him that for the sake of argument, that only happens if you invest in companies that employ a lot of leverage.
Quote:
Originally Posted by dmills
- While it is true that not having a mortgage does provide a degree of security, "what happens if I lose my job and need the equity from my home? How will I be able to access it?"
Not really relevant here given that caller's liquid assets far exceed the mortgage balance - there is still more than enough remaining for emergencies even after paying off that mortgage, assuming, of course, that the caller has health, disability, and long-term care insurance.
Quote:
Originally Posted by dmills
- " If I can make 12% in the market (which is what HE boasted of in another call in the same segment), does it make financial sense to pay off a 4% mortgage (effectively leaving 8% on the table)?" Now of course Dave's counter to that is that the 12% is not guaranteed, but the argument swings both ways. Your home is also not guaranteed to continue to appreciate - as many home owners found out in the recent recession. "What happens if I put the $180k in my home, then the bottom falls out of the housing market?" Which approach is really more risky
Bottom fallout is the same dollar amount loss whether you have a mortgage or not.
Also, this risk is much lower if you live in a city with a diversified local economy rather than a city that is centered around a single sector or industry.
Quote:
Originally Posted by dmills
These are just a few of the questions that never get asked (or talked about) on Dave's show. Is it possible that he is screening his calls? Maybe this is why he has a disclaimer at the end of every show that reminds listeners that the host is not engaged in the business of providing financial and/or legal advice and that listeners should be sure to consult with an accountant or attorney before following his advice.
Before this turns in to a argument about whether one should pay off a mortgage, let me say that I advocate getting rid of your mortgage, I just believe that like any other financial decision, each case is fact dependent, and should be done from a balanced perspective. In fact, am accelerating the payoff of my own mortgage. I'm just not willing to do it at the expense of my overall financial health.
Good question, Stan and reminds me of a conversation I had with my sister, years ago, over the very same thing. We both had mortgages and I said I wished I was in a position to pay mine off. She told me I shouldn't do it because it was a good write-off. I asked her (and this was based on what my income was at the time) "Why would I want to give the IRS a dollar and get back 28 cents? I'd rather pay off the house and put more of my paycheck into a tax-deferred IRA for my retirement years. She didn't really have an answer for me because she didn't understand taxes all that well and relied on the information her DH gave her. He was only doing what he was advised by his financial adviser.
Mortgage interest is one of few deductions left for Americans. I remember a time when credit card interest was tax deductible. I guess it made it easier for people to justify paying on a large balance. They could deduct the interest and feel better. But their deduction still wasn't all that great. Any time you pays taxes on money you've borrowed, you'll never get back 100% of that money. So I guess it really depends on the person and how much they value their money.
Personally, I like not owing more than what I paid for something, which is why I pay my cc off at the end of the month. If I let the balance roll over to the next month, the item I bought would end up costing me more than the original purchase price. It's just simple math. Oh and I like the rewards I get back by using the bank's card and paying off my balance.
But if you feel comfortable with the way you're doing it, then by all means, don't listen to anyone else. It really is a decision that should be made by an individual. People like Dave Ramsey don't take the time to really look at the entire financial picture of his callers. And his advice, although probably good, should be taken at face value and not something that should be set in stone for every individual.
As a side note: There are rumors that Congress wants to eliminate the mortgage interest deduction for Americans. If that happens, there will be more people upset than they are already.
Do you mean "any time you pay interest on money you've borrowed"?
How many of you that think he is an idiot and don't listen are debt free and millionaires? That's what I thought!
You joined to criticize a guy who helps tens of thousands debt addicted family's find freedom and what's your argument for judging? A paragraph of nonsense that even this physicist who damn near flunked spelling and English can't even understand. That's pretty bad!
Dave Ramsey has a good, basic philosophy. But the problem with good, basic philosophies is that they can be followed too closely. I mean, if you have a $180,000 mortgage at 3.5% and investments earning 6-7% annually, do you cash out your investments to pay off your mortgage? No. That would be incredibly stupid. And that's the problem with One Size Fits All approaches. Yeah, they have to be straightforward for knuckle-dragging simpletons, but they don't necessarily work for those with more sophisticated understanding of money.
So, I happened to be listening to Dave Ramsey today and a caller asks Dave
Caller: Should I pay off my mortgage?
Dave: How much do you owe?
Caller: Approximately $180k.
Dave: How much money do you have?
Caller: Approximately $350 - $425k
Dave: Why wouldn't you pay it off?
Caller: We're debt free except for our mortgage. If we paid it off, we would lose our only deduction
Dave: [after doing some calculations] So, you're telling me that you'd rather give the bank $8k so you can get $2,700 back from the IRS?
Caller: What was I thinking? I guess I have my answer
Dave: [in his typical smug voice] yeah, its really a very simple argument. I used to think the same way, until I saw the light.
You ever notice that the analysis never goes any deeper than that? You ever notice that there are certain questions that never get asked? Like:
- "What are the tax implications of selling off $180k of securities, which I assume is how the money is being held? Dave never asks.
- "What about diversification? Is it wise to put 45 -55% of your nest egg into your home, which by his own admission isn't an investment?"
- "What about the opportunity cost of liquidating a significant portion of your savings/investments. Even if I am not free to invest the previous mortgage payment, haven't I lost the leverage of the larger balance?"
- While it is true that not having a mortgage does provide a degree of security, "what happens if I lose my job and need the equity from my home? How will I be able to access it?"
- " If I can make 12% in the market (which is what HE boasted of in another call in the same segment), does it make financial sense to pay off a 4% mortgage (effectively leaving 8% on the table)?" Now of course Dave's counter to that is that the 12% is not guaranteed, but the argument swings both ways. Your home is also not guaranteed to continue to appreciate - as many home owners found out in the recent recession. "What happens if I put the $180k in my home, then the bottom falls out of the housing market?" Which approach is really more risky
These are just a few of the questions that never get asked (or talked about) on Dave's show. Is it possible that he is screening his calls? Maybe this is why he has a disclaimer at the end of every show that reminds listeners that the host is not engaged in the business of providing financial and/or legal advice and that listeners should be sure to consult with an accountant or attorney before following his advice.
Before this turns in to a argument about whether one should pay off a mortgage, let me say that I advocate getting rid of your mortgage, I just believe that like any other financial decision, each case is fact dependent, and should be done from a balanced perspective. In fact, am accelerating the payoff of my own mortgage. I'm just not willing to do it at the expense of my overall financial health.
Okay, rant over.
if that's the way the call went, his advice is wrong anyways. if interest is $8K, the caller has the standard deduction...he's not saving $2700 even. If he's married, then the interest is irrelevant since it's less than the deduction for a married couple (unless he has other things to itemize as well).
i don't like Ramsey because I just don't think his advice makes sense usually. It just assumes all debt is bad. For some people, all debt is bad...but I'd rather educate people on how to use cheap debt to their advantage. It's not easy, but if you're smart, it's lucrative.
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What was I thinking? I guess I have my answer
is screening his calls? Maybe this is why he has a disclaimer at the end of every show that reminds listeners that the host is not engaged in the business of providing financial and/or legal advice and that listeners should be sure to consult with an accountant or attorney before following his advice. 
