I’ve mentioned it in the past, but confusion over the tax deduction for mortgage interest warrants it being repeated: the deduction is not a reason to have a big mortgage. Too many people get talked into buying more house than they can afford because they get sold on the idea that a big mortgage means a big deduction from the interest you pay. While it’s true that the more you pay in interest, the larger your deduction will be, that deduction is simply returning a portion of your money to you. You would be much better off not paying the interest in the first place.
The amounts vary with your tax bracket, but let’s assume that you are in the 28% bracket. That would mean that for every dollar you spend in mortgage interest, you’d reduce your taxable income by a dollar, which would save you 28 cents in taxes. If you were in the 25% bracket, you’d save 25 cents per dollar spent, etc. Spending a dollar to save 28 cents means that you are losing money. Having a larger mortgage and paying more in interest means that you are losing more money. So yes, a larger mortgage means that you get a larger deduction, but you also have to pay much more. Which is better, spending $10,000 in interest to get a $2,800 deduction of spending $20,000 to get a $5,600 deduction? Clearly, the first option is much less expensive.
It’s great that mortgage interest is a tax deduction, and you should obviously take advantage of it if you have a mortgage. Just don’t make the mistake of being sold into a larger mortgage under the rationale that you’ll get a larger deduction. You will get a larger deduction, but it will still cost you more money.
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