Here I go again... dispensing financial advice without a
degree or license. I have nothing more
than a lifetime of experience behind me, so you might want to disregard what
you will read in the next several paragraphs.
But that's okay, I know I'm right anyway.
It seems that our politicians, especially those at the top
of the ladder, believe that a good sign of their success in office is to
increase the number of people who own their homes instead of renting living
space from someone else. In fact, the
rules and limits on getting a mortgage have been relaxed to a point where
almost anyone with a paycheck can now get a loan for real estate.
It used to be that you needed a down-payment of five-to-ten
percent in order to apply for a mortgage, but that went out the window during
the Clinton years. As little as one
percent would qualify you, and credit scores, credit history and other factors
were just about ignored in order to get as many people into their own homes as
possible. In fact, the big banks came
up with a brilliant idea to bundle all mortgages, good or bad, into one package
called "Mortgage Backed Securities" and sell them as investments on
Wall Street. And we all know how that
worked out in 2008...
The big sell on home ownership has always been the tax
advantage. That is, you get to deduct
the mortgage interest when you figure your income tax liability each year. Since mortgage interest is usually a big
number, it seems like Uncle Sam is paying it for you when you can deduct it
from your income. Well, it used to be a
big number back when we paid up to twelve percent, but it isn't quite so large
at 3-4 percent, is it?
Getting back to that deduction, I always wonder how many
people actually look at the Schedule A of the Federal Form 1040 to see how much
in itemized deductions their real estate interest helps to offset their
income. (I also wonder how many
actually do their own taxes to be able to understand what to look for - but
that's another topic) You see, the standard
deduction for a couple with filing status 'Married, filing jointly' for tax
year 2014, is $12,400. In order to take
more than that amount you would have to be paying at least $10,000 in mortgage
interest assuming normal deductions in the other Schedule A categories.
Okay, let's say you do have enough to exceed the $12,400
standard deduction. The only benefit
you really get from the mortgage interest is whatever amount is above that
ceiling. And, unless your a big earner,
you're probably in the 25% tax bracket, which means that the excess only gains
you one quarter of its value. If you
have $14,000 in deductions, you'll only see a $400 decrease in taxes from what
you would have paid using the standard deduction.
Don't misinterpret what I am preaching here; own-versus-rent
has its advantages, but for most people it isn't the boon that it is trumpeted
as, and those who were foreclosed on when the bubble burst back in 2008 and
beyond came out a lot worse than if they had stayed as renters. If you can afford a mortgage and you truly want
to own your home, go for it. Just don't
count on the tax advantages to be a big boost for you. The real prize is when you own the home free
and clear. The time spent paying off
the mortgage is only good when you start building some equity, and that only
happens if prices continue to rise and you keep the property in good condition
and saleable.
