11 Reasons to Carry a Big Long Mortgage - Reason 4 & 5
This article has been around since I was originating loans and it was recently updated on Ric's site. I thought I'd take each one of his comments as a single post and share a few comments for those of you not familiar with this article or Ric's original claims about keeping the biggest and longest mortgage you can afford.
"His words in Blue", my words in white. I'll deconstruct his key points.
SHOULD I PAY OFF MY MORTGAGE?
11 great reasons to carry a big, long mortgage.
Ric Edelman – Edelman Financial Services
REASONS #4 AND #5: YOUR MORTGAGE INTEREST IS TAX-DEDUCTIBLE. AND MORTGAGE INTEREST IS TAX-FAVORABLE.
A question people often have is, “Should I pay off my mortgage or invest?” But those two choices aren’t mutually exclusive.
TOTALLY AGREE: This is actually (from work we did with thousands of consumers) the biggest question most consumers have, they often don't know how to ask it. They'll ask questions like 15-vs-30 year mortgage, or about bi-weekly payment plans, or making extra payments when they can, etc. but what they are really trying to figure out is 'what is the highest and best use of my money?' - should I repay my mortgage or save?
The interest you pay on loans to buy, build or substantially improve a qualified residence (up to $750,000) is tax-deductible if you itemize your deductions. The deduction is taken at your top tax bracket. Thus, if you’re in the 35% tax bracket, every dollar you pay in mortgage interest saves you 35 cents in federal income taxes. You save on state income taxes too.
TOTALLY DISAGREE: I used to have this as critical concept we taught (EPR), and EPR still plays a major role, but if you believe mortgage interest is tax deductible you need to consider several things:
1) Only 13.7% of US citizens itemize. That's the only way you could benefit from mortgage interest deductions, so you must ask that question first. as 86.3% of your clients are not itemizing, which means they all receive the same tax deduction regardless of having a mortgage or not.
Source: Tax Foundation
2) If you itemize, then you'd have to have a mortgage over $400,000 to start to see benefits, and the benefits are on the interest above that amount. Here's an example from our CLA Course:
Say you’re in the 32% tax bracket and you get a 3% mortgage. That loan costs you 2.04% after taxes.
TOTALLY DISAGREE !!!: If you are in a 32% tax bracket, AND you itemize in this example then they are leaving out the mortgage amount. He's been using a $300,000 mortgage in his earlier examples. If you borrow $300,000 and your mortgage is 3%, you are paying no more than $9,000 in interest (max). If you are married filing together you already get $24,800 in deductions, so if you itemize there is no benefit for having a mortgage, you get those savings either way. At 3%, your mortgage would have to be over $826,000 to have any shot at benefits, and that would be for those higher income earners as benefits only begin there.
Meanwhile, say you invest money and earn 3%. Your profits are taxed at only 15%, meaning your after-tax profit is 2.55%. Thus, even if your investments earn no more than what you pay for your loan, you’re still making a profit!
TOTALLY DISAGREE: As this is cherry picking. The long term capital gains tax for federal is 15% if you hold a stock for over 12 months. The average hold time in the US today is 7 months, meaning that only long term investors get this 15%, but you also have to pay state capital gains tax. In NC, that's 7%, so right there on long term holds you are at 22% and not 15%. If you invest and sell within 12 months you pay taxes at the same 32% rate he is using above based on your current tax bracket. Your best choice in this example might be municipal or tax free investments, or increasing contributions to your retirement plans where there is no tax due now.
TIP: Mortgages have many benefits, and the biggest one of all is inflation protection. As to mortgage tax deductibility, the fact this article has been updated and still shows old information is problematic. That said, EPR (Effective Percentage Rate) is still a powerful concept when you understand how to use it.
As a bonus, here is another slide from our CLA course to further clarify key dates:
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