Dinsmore <dinsmore[at]nospamhere.com> wrote in message news:<401FAD35.561[at]nospamhere.com> ...
- quote -

There are three situations which require different equations.

1) If $X (other deductions) is more than $9700, then your dollar
savings is just your mortgage interest times your tax rate ($Y x Z%).

2) If $X + $Y is less than $9700, then your dollar savings is zero.
You get no benefit from paying mortgage interest.

3) Otherwise, your dollar savings is the amount of deductions you get
above the standard deduction times your tax rate. ($X+$Y-$9700) x Z%.

However, the dollar savings isn't generally very useful, because you
always pay much more in mortgage interest than you get back on your
taxes (so it always tells you to pay off your mortgage). It's
generally more useful to figure out what your after tax mortgage rate
is and compare that to the interest on other debts or what you expect
to earn on investments. To calculate that, take the dollar savings
you calculated above ($D) and substract it from your total mortgage
interest. This gives you the actual interest paid. Then divide that
by your total mortgage interest ($Y) to figure out what fraction of
the total interest you actually paid. Finally multiply that by your
mortgage rate(M%) to get your after tax mortgage rate.

(($Y-$D)/$Y) x M%


- quote -

Nope you've got case 3 above. So your dollar savings would be
($12000+$4000-$9700)*.25=$1575. If your mortgage rate was 6%, your
after tax mortgage rate would be $12000-$1575/$12000 x 6% = 5.21% (If
you had enough other deductions that all of your mortgage interest was
taxable, then your after tax rate would be 4.5%.)

[sizzlemp[at]aol.com (SizzleMP)] wrote:
[ 14 lines in misc.invest.financial-plan ]
===================

- quote -

That's how it works. Large interest payments give you a sort of "tax
shield", decreasing your effective interest a bit. Taking out large loans
will give you a lower interest rate (in practice, a loan of max 80% of the
market value of the home gives the best deal), which can then be saved in
something yielding a higher return.

This strategy is common. However, be very aware of what this is doing to
your risk. Compare the following two scenarios:

Scenario 1: $100k liquid, want to buy a house for $300k. Put $100k down and
get a mortgage for the final $200k. Now you have 33% equity in your home,
and reasonably low monthly expenses for the loan.

Scenario 2: $100k liquid, same house. Only put 20% ($60k) down, invest the
final $40k. Your loan will be $40k larger, and the total loan of $240k will
possibly increase your deduction, lowering your effective interest rate.
The after-tax return on the $40k has to be larger than the interest rate on
the "extra" $40k loan. This is possible, but not without risk to principal.


Scenario 2 probably has a larger variance of return compared to scenario 1.
Of course, there are other issues with emergency funds and retirement
savings, but I'm ignoring those for now. It boils down to whether you think
you can handle the added variance of return, compared to the expectation of
getting a higher return on your assets.

--
Joakim Persson
M.S. student, CS/CE [at] LTH, Lund, Sweden
Libertarian -- Heavy Metal fanatic
zaladin[at]home.se -- http://www.efd.lth.se/~d00jp

- quote -


I am not sure if I understand. As I said in my previous post. If I had $10,000
in interest, and my standard deduction is $9,700, how would I be saving $2,500
from the mortgage interest if I would be getting that anyway with my standard
deduction?
Isn't the first $9,700 a freebee?

sizzlemp[at]aol.com (SizzleMP) writes:
- quote -

It depends. Do you have other itemizable deductions? Most
folks do - state income taxes are a biggie - for many folks,
state income taxes alone are enough to put them over the
hurdle to where it's worthwhile to itemize. Toss in charitable
contributions. If your state taxes and charity add up to, say,
$8000, the your savings from that interest come to:
($10,000 + $8000 - 9700) = $8300 that's now deductible.

Oh, don't forget property taxes, too.

--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

- quote -

Very good point, I did not know that. the first $9,700 is free anyway, your
right. So if I had let's say $10,000 in interest, my savings would be almost
the same as if I had no interest, right?

You've got it. The calculation of the tax benefit is the total cost of the
deduction ($10,000 in interest) times your tax rate (25%) is the benefit
(2,500). The same holds true for the rest of your deductions, added together
has to top $9,700.

"Dinsmore" <dinsmore[at]nospamhere.com> wrote in message
news:401FAD35.561[at]nospamhere.com...
- quote -

HW "Skip" Weldon wrote:

- quote -


I'd never really thought too much about this. Is there a way to put
this into numbers?

Suppose the rest of your deductions come to $X, your mortgage interest
is Y$, and your tax rate is Z%. (I'm simplifying the tax rate here, but
in real life I know this would be dependent to some extent based on how
much you deduct).

In a simple situation, if your other deductions were $4,000, your
mortgage interest was $12,000, and your tax rate was 25%, would your tax
savings attributable to mortgage interest be $3,000?

What if your mortgage interest was $6,000. As pointed out above, your
standard deduction is $9,700, and in this scenario, your total
deductions are only $10,000. It obviously makes no sense to say that
you're saving $1,500 (25% of $6,000) when the spread between the
standard deduction and itemization is only $300.

There's clearly some kind of sliding scale involved here, but I'm not
sure how you'd calculate it.

This is obviously a moot question for anyone with very low mortage
interest, or very high mortage interest.

But for someone who may be near the $9,700 threshold, how would I set up
an equation to quantify the benefits of paying a bigger down payment vs.
a smaller down payment taking into account the $9,700 standard
deduction?

- quote -

I already have some cash in the Fidelity Spartan NY Municipal Bond fund that
has been returning tax-exempt yields of at least 4%, sometimes as high as 6%,
for the past few years. While this does not guarantee future earnings, it seems
like a good low risk investment to beat out the mortage interest.

"tom" tdavison[at]columbus.rr.com, writes:

<< <I> Be clear that you need to earn 3.8% on your money, AFTER-TAX, to break
even. 3.8% is the after-tax interest cost, so you should compare that to the
after-tax investment rate of return. <b> With interest-generating investments,
that works out to earning 5.5% before tax. </b> Keeping the tax nature of the
rates clear changes the balance point. </I> >
While this is a good thought, this is not necessarily so. One can still have
long-term capital gain on interest bearing investments. And with current tax
rates on long term gains, it can work out to be significantly less than 5.5%.
Also, if the money is in a tax favored position, then this also wouldn't be
true (e.g. muni-bonds, annuities . . . even life insurance comes to mind).

On Mon, 2 Feb 2004 08:29:54 CST, "tom" <tdavison[at]columbus.rr.comwrote:

- quote -

Your point about the different levels of risk (comparing paying off a
mortgage to something that offers higher returns) is important. My
suspicion is, however, that most folks understand that.

What sometimes gets lost is the meaning of "after-tax interest cost" -
the thing they must beat with their net investment profit. Here's how
I see it.

The '04 Standard Deduction for joint filers is $9,700. Taxpayers who
don't itemize get that without spending a penny.

That freebie is important because *itemizers* get no benefit for the
first $9,700 because they would have received it anyway without any
deductions. So they only benefit to the extent that their deductions
exceed $9,700.

Most folks, when speaking of their "after-tax" cost, do not account
for that first $9,700 that they paid out and which didn't help. So my
position is that their after-tax cost is higher than they think.


-HW "Skip" Weldon
Columbia, SC

Thanks to all for your input. I will keep you posted after my closing.

Be clear that you need to earn 3.8% on your money, AFTER-TAX, to break even.
3.8% is the after-tax interest cost, so you should compare that to the
after-tax investment rate of return. With interest-generating investments,
that works out to earning 5.5% before tax. Keeping the tax nature of the
rates clear changes the balance point.

This is a common question/strategy, and can work out well. But be clear
that you are switching from a very low-risk investment to what is likely a
higher risk investment.


"SizzleMP" <sizzlemp[at]aol.com> wrote in message
news:20040131064214.04483.00001028[at]mb-m10.aol.com...
- quote -

sizzlemp[at]aol.com (SizzleMP), you asked:

<< <I> Well after doing a lot of researching, I think I might be considering
taking out a big mortgage instead of buying my house outright.

To refresh, I am in contract to buy a house for $494,000 and to sell my house
for $410,000. When the smoke clears, and after doing my math, I can buy my
house outright and still have $40,000 in the bank. I thought this was great to
have no debt looming over my head. But then I said what if I did the total
opposite? </I> >
Excellent . . . you're not sticking yourself with just thinking about something
in just one way (i.e. some thinking outside of the box as I might put it). ;-)

<< <I> If I took out the max for a 30 year mortgage, $333,701 [at]5.5% then I would
have roughly $360,000 in cash ( after closing costs). The effective interest
rate after writing off the interest is about 3.8% ( assuming 31% federal+state
tax bracket). <b> If I can take that $360,000 and invest it wisely, I can do
better than 3.8%.</b> Also, it's very likely that interest rates that banks
offer for savings and CD's will start to go up in a few years. I can do a lot
better in this scenario than if I had $40,000 in the bank after buying my house
outright. I was just wondering what evryone else thinks?
I can </I> >
This is what I was suggested to start with. OF COURSE it's not without some
risk. But neither is just buying the house to start with. And I might add,
you've got the cash in hand instead of in the house . .. and if you have other
resources and don't take on too much risk, you can still wind up having the
house paid off but with quite a bit more cash in hand at some point in time in
the future - plus the house appreciates just as it would or wouldn't even if
you had paid cash. I would argue that for a great many people (who own homes
and/or other real property), this is one of the best leverage sources
available.

Further . . . depending on just what time frame you're looking at and the state
of your other financial resources, it's also worth considering an Option Arm
type of loan instead of a 30 yr. fixed. There would be a difference of about
35% or more in your first year's cash flow and over a 5 year period, you could
have $33k or more in your pocket by the end of 5 years (depending on how you
might invest this difference). In my opinion, 30 yr. fixed rate loans are over
rated and not so useful for most people.

. . . just a little more to throw at you for consideration, that's all. ;-)

Here's one other thing to consider (at least it's something I considered in
a similar situation).

How likely are you to add to that $40,000 you have left over? How likely is
it that you will need to use it in the future? (I know whenever I buy a new
house, there always ends up being something significant I need to do to it
or buy for it.)

If you pay cash for the house, then you need some of that money in the
future, you have to borrow against your house. That's OK, but what if
interest rates are 10% or 12% when you need the money? It's "your" money
(or it was), but now you have to pay someone 10% or 12% to get access to it.
Or in the worst case scenario, you lose your job or have no source of income
and no one will lend you "your" money!

You *know* you can have it now for a maximum 3.8% if you just stick it under
a matress, less if you invest it even in the most safe vehicles.


"SizzleMP" <sizzlemp[at]aol.com> wrote in message
news:20040131064214.04483.00001028[at]mb-m10.aol.com...
- quote -

In article <20040131064214.04483.00001028[at]mb-m10.aol.com> , SizzleMP
<sizzlemp[at]aol.com> wrote:

- quote -

This is a lifestyle choice. From a numbers standpoint, this strategy
should be a big winner over time. But it requires debt, which some
people are comfortable with, while others get nervous when they have
too much debt. As long as you have that long term time horizon and
you are comfortable doing this, then it is the right choice for you.

-john-

--
================================================== ==================
John A. Weeks III 952-432-2708 john[at]johnweeks.com
Newave Communications http://www.johnweeks.com
================================================== ==================

Well after doing a lot of researching, I think I might be considering taking
out a big mortgage instead of buying my house outright.

To refresh, I am in contract to buy a house for $494,000 and to sell my house
for $410,000. When the smoke clears, and after doing my math, I can buy my
house outright and still have $40,000 in the bank. I thought this was great to
have no debt looming over my head. But then I said what if I did the total
opposite?

If I took out the max for a 30 year mortgage, $333,701 [at]5.5% then I would have
roughly $360,000 in cash ( after closing costs). The effective interest rate
after writing off the interest is about 3.8% ( assuming 31% federal+state tax
bracket). If I can take that $360,000 and invest it wisely, I can do better
than 3.8%. Also, it's very likely that interest rates that banks offer for
savings and CD's will start to go up in a few years. I can do a lot better in
this scenario than if I had $40,000 in the bank after buying my house outright.
I was just wondering what evryone else thinks?
I can