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Author: yodaorange Big red star, 1000 posts Feste Award Nominee! Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 455792  
Subject: Mortgage Interest Deduction Debate Date: 11/27/2012 2:15 AM
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One of the largest tax items up for debate is the deductibility of mortgage interest. It is WIDELY misunderstood IMO. (SonnyPage and other realtors please forgive me for what I am about to say.) The National Association of Realtors (NAR) continues to spread the gospel about how important the interest rate deduction is to housing sales. I sure hope all prospective homeowners understand exactly what savings if any they will achieve from the deduction.

The value of the deduction has been greatly diminished to the point of elimination mainly due to very low mortgage interest rates. The problem is that the NAR and politicians have not caught on to this yet.

Here are the numbers to illustrate the nominal case:

US Median Home Price= $186,100
Assume 5% down, gives a loan amount= $176,795
Current 30 year fixed mortgage rates = 3.45%
Maximum interest paid in the first 12 months of the mortgage= $6,045
Assume 2.0% property taxes = $3,722

Total MAXIMUM deduction for interest and taxes= $9,767

Current standard deduction for married filing jointly= $11,600

So purchasers of the median house MUST come up with an additional $1,833 in itemized deductions BEFORE they get a single cent of tax benefit from the mortgage interest deduction.

The median family income is ~ $50,000, so coming up with an additional $1,833 in deductions in addition to the house payments will be difficult for most people.

Also understand that mortgage interest decreases each year as the mortgage is paid off. Even if the interest paid lowers your taxes in year 1, the effect will diminish each year as the interest paid goes down.

I have found close to zero first time home buyers that understand these simple calculations and that they will get little to no benefit from the mortgage interest deduction.

I have found zero REALTORS that properly explain this to prospective homebuyers. They keep perpetuating the myth of some kind of large income tax savings.

Why don’t we talk about who DOES benefit from the mortgage interest deduction?

Somewhat simplified, the main beneficiaries are the left coast (California, Oregon, Washington) and the right coast (New York, Connecticut, Vermont, Washington DC area). These areas have high house prices in addition to typically high income taxes. They are the main beneficiaries of the mortgage interest deduction.

Middle America, the other ~ 44 states get little to no benefit from the deduction. Yes, I know if you buy a multimillion dollar house in Podunk, Iowa you are helped out, but not many folks in Podunk are buying multimillion dollar homes. Most likely they are buying $100k houses.

We have another us versus them tax debate, however it is never framed in these terms. I am not picking sides, just attempting to make the different sides clearly understood.

BOTTOM LINE (slightly exaggerated) is that only “rich folks” with expensive houses gets any benefit from the mortgage interest deduction. Johnny and Susie Six-pack in middle America get no benefit, and in fact are helping subsidize the housing for “rich folks.” Maybe this is what Americans want, but I am not sure the Six-pack family would support it if they really understood what was going on. . .


Thanks,

Yodaorange
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Author: mwparker Two stars, 250 posts Old School Fool CAPS All Star Global Fool Motley Fool One Everlasting Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409701 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/27/2012 4:29 AM
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You make a hugely important point that if well understood not only for this entitlement but for the others as well would make a real solution possible.

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Author: Gingko100 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409703 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/27/2012 5:21 AM
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I get a massive deduction every year (I am in CA). Thanks Uncle Sam. I have never understood why the government thinks they need to subsidize my housing. Frankly my feeling is if you can't afford the house without the tax deduction, you can't afford it, period.

I think it should go away. All it does it convince people to buy houses for the wrong reasons.

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Author: zenbro Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409704 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/27/2012 7:41 AM
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I am more than willing to give up the mortgage interest tax deduction,
in return I want hedge fund owners/managers to give up their sweet
"income is not income, it's capital gain" loophole.

Snowballs chance in hell of that ever happening.

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Author: notehound Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409707 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/27/2012 8:29 AM
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Current 30 year fixed mortgage rates = 3.45%
Maximum interest paid in the first 12 months of the mortgage= $6,045
Assume 2.0% property taxes = $3,722


Yoda's point (that the interest deduction is not particularly valuable right now) is well made at the moment. However, the moment may not last.

Assume interest rates 2% higher (quite possible) and the numbers change substantially. Assume that property taxes increase (also quite possible) and the numbers also change substantially.

The real estate agents who are running the NAR remember the days of 13% mortgage rates and rising tax burdens.

They don't want to give up some of the few things that helped them convince buyers to buy a house with high interest rates. History repeats itself and they're protecting their future income.

I don't think that government should be subsidizing any industry. I'm just saying that the real estate folks are not making much ado about nothing. It's a very big deal to them.

Give credit for past bubbles where credit is due. They are proud of their ability to float the economy. Bernanke, et cie. are counting on them to re-inflate. A great burden, but somebody's got to blow up the government's next bubble.

Real estate agents are a very big group - and they can mobilize in about 15 minutes. Within hours, not days, they can rally a million E-mails to Congress. I've seen it in operation.

And unlike some other special interest groups, they are highly literate and have electronic Rolodexes to die for. I think they may even outnumber private sector union members (but not government unions).

The interest deduction and the capital gains exemption on a principal residence are two tax loopholes real estate agents consider sacrosanct. They will fight and bloody any politician who dares to cross them on these two things - or on property taxes, for that matter.

I miss SonnyPage. He would have stated the agents' position much more elegantly - and with wit.

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Author: tim443 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409710 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/27/2012 9:08 AM
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Here are the numbers to illustrate the nominal case:

US Median Home Price= $186,100
Assume 5% down, gives a loan amount= $176,795
Current 30 year fixed mortgage rates = 3.45%
Maximum interest paid in the first 12 months of the mortgage= $6,045
Assume 2.0% property taxes = $3,722

Total MAXIMUM deduction for interest and taxes= $9,767



Y'all get to deduct your property taxes?!!!! }};-()

5% down!!!!


I am more than willing to give up the mortgage interest tax deduction,
in return I want hedge fund owners/managers to give up their sweet
"income is not income, it's capital gain" loophole.


I think ours is only a capital gain if it is not your primary source of income? Otherwise you are a professional investor and it is income. I'll see if I can look it up when I get aroundtuit.

Tim

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Author: PosFCF Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409712 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/27/2012 9:24 AM
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Total MAXIMUM deduction for interest and taxes= $9,767

Current standard deduction for married filing jointly= $11,600


However, (taking the opposing view), with $9,767 in the bag (so to speak) it makes that $11,700 hurdle possible to overcome for those who have other legitimate deductions like: charitable giving, unreimbursed work expenses, other taxes paid, unreimbursed medical expenses, mileage deductions for charitable & medical travel, etc.

Without the mortgage interest deduction, the itemization process it becomes almost impossible to exceed the $11,600 hurdle. This can be seen in the tax returns of those who either don't own a house or who have paid it off. Many seniors fall into this category.

Poz

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Author: GardenStateFool Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409715 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/27/2012 9:58 AM
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BOTTOM LINE (slightly exaggerated) is that only “rich folks” with expensive houses gets any benefit from the mortgage interest deduction. Johnny and Susie Six-pack in middle America get no benefit, and in fact are helping subsidize the housing for “rich folks.” Maybe this is what Americans want, but I am not sure the Six-pack family would support it if they really understood what was going on. . .

How about that people in HIGH COLA OVERALL benefit from the mortgage interest deduction?

Let's look at it another way: If the AMT is not adjusted, more than 50% of the folks in NJ are impacted. I sincerely doubt that more than 50% of the NJ population considers themselves "rich folks" given how much everything costs here.

GSF

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409716 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/27/2012 10:00 AM
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BOTTOM LINE (slightly exaggerated) is that only “rich folks” with expensive houses gets any benefit from the mortgage interest deduction.

I know you exaggerated but a more realistic bottom line is that only those with two-person income households with college educations (e.g. making north of $75k a year) get any benefit.

My home is cheaper than the price you listed and we make more than the either figure - but neither my wife or I currently make enough that we don't have to pay SS on every dollar earned - yet we have filled long form (claimed the mort deduction) every year for the last 12 years.

If not for the mortgage deduction, we would likely donate less to charity. We would not completely eliminate such but we would get less utility from doing so. We give a lot to Goodwill and Salvation Army every year (because of our two kids) and we would instead sell many of those items in yard sales - or give them to other friends with younger kids. We've donated entire bedroom sets to the Salvation Army. I would imagine we could have sold them for a lot more than the deduction we received.

I am in favor of capping it or getting rid of it above certain home prices or income levels but I think you are underestimating not only how many middle-class currently use this but also how the elimination of such would have unintended consequences or organizations like Goodwill and Salvation Army. The so-called "rich" are not likely to start having yard sales in front of their McMansion if they don't get the same deduction they used to for their charitable donations.

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Author: synchronicityII Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409721 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/27/2012 10:41 AM
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Here are the numbers to illustrate the nominal case:

US Median Home Price= $186,100
Assume 5% down, gives a loan amount= $176,795
Current 30 year fixed mortgage rates = 3.45%
Maximum interest paid in the first 12 months of the mortgage= $6,045
Assume 2.0% property taxes = $3,722

Total MAXIMUM deduction for interest and taxes= $9,767

Current standard deduction for married filing jointly= $11,600

So purchasers of the median house MUST come up with an additional $1,833 in itemized deductions BEFORE they get a single cent of tax benefit from the mortgage interest deduction.


I'm surprised nobody has mentioned state income taxes (or sales taxes in states with no income tax) yet. Those can also be included in itemized deductions. Using yoda's 50K median income number, that translates to anyone with a state tax hit over ~3.6%. Granted, that's to get a minimal marginal benefit over the standard deduction alone.

I'd also take note of the other point raised previously in this thread that our current low interest rate environment is unlikely to last forever.

THBS, what makes this deduction a difficult one to address politically is that in most circumstances it hits the "idealized average American" - the type of taxpayer we like to think of as an "average American" even though they're generally "above average" - probably earning 50K to 80K, obviously homeowners, likely married with one or more children. White picket fence suburbia or small town families with soccer moms and all that. It's a tough sell to say "yeah, let's take a widely known tax break with a long history that encourages home ownership away from them".

As I often say: "numbers are easy, people are difficult"

-synchronicity

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Author: steve203 Big funky green star, 20000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409727 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/27/2012 12:29 PM
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I have found close to zero first time home buyers that understand these simple calculations and that they will get little to no benefit from the mortgage interest deduction.

I had this debate with a coworker in the late 90s. At that time, my mortage interest rate was a smidge over 8%

She had worked at a bank, and considered herself financially astute. She was completely at a loss as to why I wanted to get the condo paid for as fast as possible, because, she said, I "would lose that great tax deduction"

The analysis: after itemizing all deductions, including property tax and state income tax, only about half of what I was paying in interest actually made a difference in my deduction total vs the "standard deduction". Secondly, I didn't see the sense in paying a dollar in interest to the bank, just to save 25 cents on my taxes.

So I pushed every dollar I could scrape together into the mortgage. Then, when the mortgage was gone, I took all the money I had been paying on the condo, and put it into my 401K, where it was all deductable, and I was paying it to myself, rather than to the bank.

Steve

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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409731 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/27/2012 12:47 PM
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<Somewhat simplified, the main beneficiaries are the left coast (California, Oregon, Washington) and the right coast (New York, Connecticut, Vermont, Washington DC area). These areas have high house prices in addition to typically high income taxes. >

In the interest of accuracy, I would like to point out that Washington State does not have an income tax. WA finances itself entirely by sales taxes, use taxes, license taxes, etc. WA voters have rejected an income tax twice in the past 4 years.

This makes WA an attractive abode for LBYMers (who by definition spend less than they earn).

Wendy

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Author: sykesix Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409732 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/27/2012 12:49 PM
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The theory behind the mortgage interest deduction is that home ownership is a major source of personal wealth for many people, home ownership helps make people invested in their communities, and there is also a romantic notion of owning one's home.

Those are all surely good things, but there is not a scrap of evidence that the mortgage interest deduction actually helps someone buy a home who otherwise wouldn't. Canada has no mortgage interest deduction and home ownership rates are virtually the same. If it is not working the way it is supposed to, then get rid of it. Might have to be phased out over time or grandfathered or something, but it is time for it to go.

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Author: PSUEngineer Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409733 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/27/2012 12:50 PM
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BOTTOM LINE (slightly exaggerated) is that only “rich folks” with expensive houses gets any benefit from the mortgage interest deduction. Johnny and Susie Six-pack in middle America get no benefit, and in fact are helping subsidize the housing for “rich folks.” Maybe this is what Americans want, but I am not sure the Six-pack family would support it if they really understood what was going on. . .

As mentioned already, state income tax is another deduction. I can deduct all of my mortgage interest (not an expensive house) due to the state income tax deduction.

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409735 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/27/2012 1:03 PM
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Folks, Folks, FOLKS.......

I was about to respectfully rattle Yoda... but I see an entire THREAD of folks missing the forest for the trees!!! The Mortgage Interest Deduction provides *ZERO* beneficial advantage to current homeowners or buyers.

In open market sales, buyers integrate their deduction benefits into their bids to drive sales prices higher, transferring the net benefit away from themselves and to the seller... however, even the SELLERS enjoy no net benefit, because although they are now selling at a tax-subsidized inflated price, THEY TOO integrated the benefits into *THEIR* purchase bid to ACQUIRE their home at an inflated purchase basis in the first place.

So... neither the buyer/owner, nor seller/owner net any advantage... who else might?

What about real estate agents.. they make a percentage commission based on the tax-subsidized inflated sales prices, right? Certainly *THEY* are the actual beneficiaries... PLUS everyone else that makes more on higher prices over lower prices... loan originators & lenders, Title & P&C insurers, escrow companies, local tax jurisdictions... they benefit, right?

Not really... natural competitive forces are naturally attracted to where there may be any unnatural accumulation of "fat" and eliminate & equalize it as immediately as possible. Realtors®, lenders, title & escrow salespeople swarm & focus on the sales involving buyers/sellers who get to skate on the tax-subsidized higher prices. The increase in competitive capacity drives *DOWN* the actual production per professional, back to the minimum necessary average to attract the amount of service the consuming markets desire.

It *COULD* be argued that its an unintended redistribution of net tax revenues *FROM* the federal coffers *TO* the local jurisdictions... but that a nebulous reach, at best, anyway.

The *BOTTOM LINE* is that net/net/net... the mortgage interest deduction is a non-benefit to anyone, really (other than those professionals who benefit from navigating complexity for those who are ensnared by it... *and* the con artists who benefit by "story-telling" and confusing the consumers.) It merely drains natural productivity away from the economy due to the resources it requires to deal with the artificial distortions.

We'll be slightly better off without it.

Dave Donhoff
Leverage Planner

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Author: steve203 Big funky green star, 20000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409738 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/27/2012 1:17 PM
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The theory behind the mortgage interest deduction is that home ownership is a major source of personal wealth for many people, home ownership helps make people invested in their communities, and there is also a romantic notion of owning one's home.

That would be propaganda employed by the lenders to stoke demand for mortgages.

As in the case of my coworker cited above, the propaganda is so pervasive that it encourages people to get in debt, stay in debt and think that being in debt is a good deal.

Steve

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Author: warrl Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409742 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/27/2012 1:43 PM
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In the interest of accuracy, I would like to point out that Washington State does not have an income tax. WA finances itself entirely by sales taxes, use taxes, license taxes, etc. WA voters have rejected an income tax twice in the past 4 years.

Washington has no income tax, Oregon has no sales tax.

The politicians constantly are informing Washington voters that they need to adopt a modern tax system, which of course includes an income tax. And of course they promise to lower the sales tax to make the change revenue-neutral... but won't include that change in the necessary amendment to the state constitution.

And also informing the Oregon voters that they need to adopt a modern tax system, which of course includes a sales tax. And they similarly promise to lower the income tax.

The voters of both states have repeatedly noted that California has a higher income tax than Oregon *and* a sales tax nearly as high as Washington, and told the politicians "up yours".

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Author: tim443 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409751 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/27/2012 2:43 PM
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Canada has no mortgage interest deduction and home ownership rates are virtually the same. If it is not working the way it is supposed to, then get rid of it. Might have to be phased out over time or grandfathered or something, but it is time for it to go.

sykesix

Its worse than that and yet we are having the same discussion.

Some of the complaints are that home ownership reduces the mobility of the workforce, probably somewhat true.

Another that will shock y'all is that our government run CMHC (Canada Mortgage and Housing Corporation) takes in billions for the government and pays out millions is also mostly true. So insurance companies make money why shouldn't the government if they are providing a service?

I always bought with enough down payment to completely dodge the extra CMHC payment. This included my first $9000 home that I put exactly 25% ($2250) down on then had to buy furniture at one of those house full places with no payments for 90 days. At the end of the 90 days I scrapped together enough from my salary to pay off the cheap furniture.


Tim

http://www.cbc.ca/news/canada/story/2012/09/21/home-ownershi...

Should we stop encouraging home ownership?

By Mark Gollom, CBC News

Posted: Sep 24, 2012 5:07 AM ET

Home ownership is often connected to the notion of living the "American dream." But it is as much a part of Canadian identity as it is in the U.S.

Indeed, statistics show that the percentage of home ownership in Canada is edging close to 70 per cent, which is actually higher than the ratio south of the border at the moment – 65.4 per cent, a 15-year low, according to the most recent data. Many economists believe the Canadian government has played an active role in spurring home ownership, particularly by forming the Canada Mortgage and Housing Corporation back in 1946.

...

She also argued that the corporations securitization programs lead to more choice and price competition for Canadian borrowers, adding that these programs and loan insurance have contributed $16 billion to government coffers through the income tax and net income that CMHC passes along.

...

"What happens when you have a high home ownership rate is it reduces worker mobility and that's a fairly well known phenomenon. So there's that danger as well."


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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409752 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/27/2012 2:45 PM
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We'll be slightly better off without it.

If you take it away just from new buyers, then I agree with you, but you take it away from those, as you indicated, paid inflated prices due to such, then you necessarily harm those individuals.

I can't say I would be opposed to phasing it out completely over the next three years on new purchases.

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Author: steve203 Big funky green star, 20000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409765 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/27/2012 6:06 PM
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...but you take it away from those, as you indicated, paid inflated prices due to such, then you necessarily harm those individuals.

Taxes and fees are routinely increased, with no regard for grandfathering people who made decisions based on the previous rates.

Equally, employee pay and benefits are routinely cut, without regard for grandfathering people who made decisions based on the previous rates.

Steve

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Author: rainphakir Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409766 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/27/2012 6:30 PM
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Secondly, I didn't see the sense in paying a dollar in interest to the bank, just to save 25 cents on my taxes.


Well said, Steve!

I think if more people understood THIS concept, then more folks would make different choices.

ralph

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Author: eudaimon6 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409775 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/27/2012 7:28 PM
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I quit itemizing five or six years ago. I live in a respectable home in a decent neighborhood in the midwest. In the town where I live, I would need to buy two, almost three median homes in order to itemize.

My cousin who lives outside DC, who lives in a similar vintage and quality home which is about ten percent larger than mine, paid about five times what I paid for my home. DC is pricy, huh? He'll be able to itemize for most of his mortgage.

Just some anecdata.

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Author: yodaorange Big red star, 1000 posts Feste Award Nominee! Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409778 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/27/2012 10:01 PM
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Thanks for all of the excellent comments. A few additional points:

1) I agree with NOTEHOUND that eventually interest rates will rise. I am just not sure we will still be alive to see it. And this is from someone with a 900 year life expectancy! (Obscure reference to my cousin YodaGreen in Star Wars.)

2) When rates rise, the argument is mostly unchanged. “Rich folks” on the coasts will get the vast majority of the tax benefit. The Six-Pack family might get a $100 per month subsidy, while the “Rich folk” family might get a $1,000 per month subsidy. Middle America still subsidizes the coasts.

3) Dave raises an interesting point, in essence saying that very few people gain a financial advantage by having the deduction. A few years ago I had this debate with someone that is now a US Senator. The end result is that the markets will reach equilibrium, regardless of tax policy. It just might take a long time. Same thing for interest rates. If all of a sudden mortgage rates were 10% and interest was not deductible, it would certainly put a damper on the industry. Anyone remember the early 1980’s? Eventually the bid-ask spread will be crossed. Incomes will rise, homebuilders will find a way to build lower price houses. Land prices will go down. Do you think Americans would just say “I guess nobody will be able to buy a new house for the next few decades?” Certainly not. The gap will be bridged.

4) I do disagree with Dave about whether this is a wealth transfer from non-deducters to deducters. I think the deducters are able to buy larger/nicer homes with the deduction than without. Let’s assume the deduction goes away and the price of the houses fall. Maybe they still live in the exact same house, but unless their income also falls, that homeowner will certainly pay more taxes. He will send more money to Uncle in Washington.

5) All of the comments that some states have income taxes and/or high sales taxes are correct. I had to make some broad generalizations to illustrate the point. I was considering doing the exercise for all 50 states using median incomes and median house prices. I decided not to spend the time, because I do not think it adds anything substantial to the argument.

6) CHALLENGE TO ALL METARITES: My bet is you can ask 10 homeowners how much per month their house payment is and at least 9 out of 10 can quickly answer. Your mission should you decide to accept it, is to ask the same 10 homeowners, how much they save on taxes per month due to the mortgage deduction. I am willing to bet that at most 1 out of 10 can answer off the top of their head AND BE IN THE RIGHT BALLPARK. I am also willing to bet that most of them will give the WRONG answer, which would have to be verified by re-computing their income tax without the deduction. In many, many cases, I have learned that people think they are getting a much larger benefit than reality. Try it and see. I do wish REALTORS would provide a more accurate story to prospective home buyers.

7) One other tax act under consideration approaches this in a slightly different way. They leave all of the itemized deductions in place, but cap the maximum total for all of them. I have heard numbers ranging from $17k up to $50k. If it ends up being close to the $17k, an awful lot of “rich folks” are going to be mighty upset and pay more taxes.

8) Like every other tax issue in Washington, there is very strong opposition to changing anything from various constituencies. NOTEHOUND is correct that the REALTOR lobby is incredibly diverse and powerful. Once again, I am not advocating one side or the other. I just wish the politicians and public understand the real issues before they decide.

Thanks,

Yoda

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Author: ModernViking Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409779 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/27/2012 10:38 PM
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BOTTOM LINE (slightly exaggerated) is that only “rich folks” with expensive houses gets any benefit from the mortgage interest deduction. Johnny and Susie Six-pack in middle America get no benefit, and in fact are helping subsidize the housing for “rich folks.” Maybe this is what Americans want, but I am not sure the Six-pack family would support it if they really understood what was going on. . .


There is a cost-of-living disparity at play here that is basically ignored by the tax code. This has larger import beyond the mortgage interest deduction.

What makes a living wage in the sticks won't pay the rent in the urban cores (at least not any place one would want to live). If one is going to consider the rural lower middle class as "subsidizing" MIDs for the urban upper middle class, the same can be said for the middle earners in high cost areas basically subsidizing tax breaks for those living at a similar income/cost-of-living level in a less expensive region.

If I could take the income I'm earning today and move back to the sticks I'd be living tony. But as it is I'm making ends meet and not much more. Either way I'd basically be paying the same taxes. There's something wrong with that.

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Author: ModernViking Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409780 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/27/2012 10:41 PM
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How about that people in HIGH COLA OVERALL benefit from the mortgage interest deduction?

Let's look at it another way: If the AMT is not adjusted, more than 50% of the folks in NJ are impacted. I sincerely doubt that more than 50% of the NJ population considers themselves "rich folks" given how much everything costs here.


On top of that, let's recognize that five to seven years ago that real estate market was peaking. Finding a single-family, 3-5 bedroom home in the DC/Baltimore area in any kind of a decent neighborhood under $300k was damn near impossible. There are a lot of people who bought into the region to follow job opportunities, and still hold those jobs, but the slow economy coupled with contraction in the real estate market has left them stuck with houses that are worth far less than what they paid for them.

Sure, I get the "if you couldn't afford the house without the mortgage interest deduction then you couldn't afford the house..." argument, but such sanctimony doesn't help the fact that many, many people stretched themselves (at the urgings of a Realtor, more often than not) to make something work in a tough market. Many people in this position are not "rich," by any stretch of the imagination, despite most of them earning far above the median.

Making some broad assumptions based on my personal experience and the circles in which I dwell, these are the 20% ers, and as an economic class they exhibit the following traits:
1. As consumers they spend about the same percentage-wise as lower income quintiles on consumables.
2. As consumers they generate economic activity in the "mainstream"; depite being in a higher income bracket, their spending patterns are similar to (if at a higher magnitude than) those at the rest of middle-class America. They shop at grocery stores and go out to the movies and hit the malls and home improvement centers on the weekend. There isn't a whole lot of Louis Vitton and speedboats going on here.
3. These are the folks that are going to get slammed if the MID is eliminated (or significantly curtailed). Local economies in these higher-cost-of-living areas (such as DC) have remained healthy through this past recession. But if we want to stress those economies a bit we could always reduce the spending capacity of these "rich people."

The question becomes this: Is there a level above which the MID should be phased out? And as I replied to the OP, isn't this just part of a larger issue with the lack of cost-of-living adjustments in the tax code?

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Author: OrmontUS Big gold star, 5000 posts Feste Award Nominee! Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409781 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/27/2012 11:31 PM
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I think what is lost in the discussion is that the cost of a house has two attributes:

1) It will be related (or at least rationally should be) on a supply demand curve biased by its affordability. If interest rates go up or the possible effective cost savings of a mortgage deduction is reduced, then a house's cost should go down.

2) A house is not an investment. It is true that, for a couple of decades until 2008 house values rose faster than the rate of inflation. Even after the recent drop in house prices, they still beat inflation if they had been owned for a couple of decades. That said, its value is "one housing unit". If it goes down in value, so will a replacement house if it is sold. It is a product like a car which may lose value over time, not a product like a bond which is obligated to provide income (but which also may not keep pace with inflation).

Realtors are salespeople. It's not that they lie, but like all salespeople they present a favorable sampling of the truth. We are led to believe by them that houses will gain in value. We are told that somehow our savings in taxes make it worthwhile borrowing vast sums of money to purchase the houses they say are fairly valued. On a rational basis, we would all like to purchase houses for 1/2 the cost they sell at today, but on an emotional level we feel obligated to bid to "win" (defined as being willing to pay more than anyone else in the crowd) when we buy a house.

While shelter is one of the primary important aspects to existing, everything beyond that becomes an optional choice. Those choices are promoted in an upsell action by realators and it is the responsibility of each of us to unemotionally weigh their needs and desires against their arability to afford them without giving up other more desirable expenses.

Jeff

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Author: Homebythesea Three stars, 500 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409798 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/28/2012 3:22 AM
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Question for Yoda:

Is it true that on the schedule E, a landlord can deduct 100% of the mortgage interest and taxes (with depreciation! ), AND still get the standard deduction even if they don't meet the schedule A minimum ?

Thanks,

---alan
Vancouver-WA

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Author: FastMike Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409801 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/28/2012 4:53 AM
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"...They keep perpetuating the myth of some kind of large income tax savings..."

Dear yoda :

Case in point : I'm in the process of buying a home, most likely in the New England states. The type of property I'm looking for fits your average description precisely.

Seeing few safe places to distribute my savings "in retirement" (officially 31 January, 2013:-), it seems that I would benefit more by paying cash, especially where property (and other) taxes are much lower (as compared with NJ).

So here's the point : whenever I mention that "..I'm paying cash..", to almost anyone, the near instantaneous response is "...but then you won't get the mortgage interest deduction...".

This is usually followed by, "...but interest rates are so low...".

Contradictory statements.

So at current rates the mortgage interest deduction isn't so good at the getgo with and, as you noted, will decrease over time. (Also, the interest rate you quote above 3.45% is a little high. Rates are silly low)

Home owners are hypnotized into thinking that there are real savings in that mortgage interest deduction.

Naturally, my choice of home and location is important for the return I expect to get over say, 20 or more years (heaven permitting). The interest that I would have shelled out to 'a bank' stays in my pocket, available for better investing times ahead.

In any event you're right on about the mortgage interest deduction. However, the mortgage interest deduction is a small part of a tax system which is a tangled knot of special interest deductions and exemptions.

The entire tax code should be scrapped, and replace with a simple flat tax, at worst one for business and one for individuals. But the public will have to see the light : sacrifice that mortgage interest deduction, be rewarded with is simple, transparent, and fair tax system for both individuals and business (on any scale).

That mortgage interest deduction is a small part of a big, unfair, problem.

Your forward looking Fool,
FM

P.S. : I've been astonished at the amount of available recent construction, 2003 - 2007, many of which are 'move in ready'.

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Author: tim443 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409807 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/28/2012 9:30 AM
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Thank you for recommending this post to our Best of feature.

Seeing few safe places to distribute my savings "in retirement" (officially 31 January, 2013:-), it seems that I would benefit more by paying cash, especially where property (and other) taxes are much lower (as compared with NJ).



FM

You had me at "I would benefit more by paying cash". If you even think that you are probably right.

Once you own the place free and clear you can't lose it to some scam in the stock market nor do you worry about a sudden surge in interest rates or a drop in price along with a dozen other things when you throw your lot in with the financial industry.

The guy that implied I was an idiot for paying cash lost the 29 houses he bought with zero down interest only in California.

Frankly who needs the hassle?

Oh congrats on the retirement date, might be a good time to not be there.


Tim

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409809 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/28/2012 10:00 AM
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So at current rates the mortgage interest deduction isn't so good at the getgo with and, as you noted, will decrease over time. (Also, the interest rate you quote above 3.45% is a little high. Rates are silly low)

Home owners are hypnotized into thinking that there are real savings in that mortgage interest deduction.


The real savings for you, might the the fact that you will probably earn more on your money over the next 20 years than the cost of a mortgage because rates are so low.

Not a question I could answer for you but if you think your after tax earnings will be higher, then I would strongly consider taking the mortgage - tax deduction or not.

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Author: notehound Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409810 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/28/2012 10:12 AM
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(Also, the interest rate you quote above 3.45% is a little high. Rates are silly low)

The best deal in our lifetimes is 30 year mortgage money at 3.25%, payable in $$ US Dollars that are likely to continue to decline in value over the next 30 years.

At such rates, buying generally makes better sense than renting, with or without the mortgage interest deduction.

;-)

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Author: yodaorange Big red star, 1000 posts Feste Award Nominee! Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409816 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/28/2012 11:03 AM
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Homebythesea asks : Is it true that on the schedule E, a landlord can deduct 100% of the mortgage interest and taxes (with depreciation!), AND still get the standard deduction even if they don't meet the schedule A minimum?

HBtS, you are correct. You can deduct mortgage interest on a rental property as a business expense.(See IRS Publication 535, Business Expense [1]) This is totally independent of being able to take the standard deduction on schedule A.

YOU ABSOLUTELY, POSITIVELY SHOULD GET YOUR INDIVIDUAL SITUATION LOOKED OVER BY A CPA OR ENROLLED AGENT. There might be some other factors for a specific taxpayer that changes the deductibility.

*********************************************************
FastMike asks about the tradeoff of paying cash for a house instead of taking a mortgage. FM understands that the mortgage interest deduction will be of little value in his case.

FM, personally I would get a fixed rate, 30 year mortgage with 20% down. I would not pay cash for the whole amount. A few points:

1) The folks loaning out money for 30 years at ~ 3.45% make an assumption that inflation will be “well contained” for the full term. I might be 100% wrong, but I would not take that bet. My bet is that inflation will average >= 3.45% over the next 30 years. So taking a 3.45% loan is pretty low cost.

2) Let’s assume we get some form of Armageddon. It might be the fiscal cliff, EU insolvency, bond vigilantes show up, Kim Kardashian is elected President, etc. There is a small, but finite chance we get overall deflation. It is possible that house prices will drop further and stay down for many years. In the worst case scenario, you might want to “mail in the keys” to the mortgage company. Take a cue from Wall Street and use “non-recourse” mortgages literally. This might not work in your house is in “recourse state” where you are personally liable for the loan in the event of a default.

3) Lastly, being a METARite, I would make the bet that you can get >=3.45% long term returns with relatively LOW RISK. You certainly would not want to invest in anything high risk with these funds.

4) I never diminish people’s desire for the peace of mind that comes from having a free and clear house. In many cases, this overrides any financial consideration. I have no problem with this path.

Thanks,

Yodaorange

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Author: twopairfullhouse Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409817 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/28/2012 11:03 AM
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Thank you, Dave, for a very well-articulated explanation.

Of course, there is a group who benefits, and it's the group who is in a position to do something about it.

Congress. They are able to tell their constituents how they're 'protecting the middle class' by keeping yet another tax break alive. Congress would not benefit by a simpler tax code, which is why it will never be simple. Politicians are good at simple math: 51% wins you elections just as well as 100%.

Also, you don't want to be one of the ones who took the deduction away, because your future opponent will actively work to prevent the truth about the deduction from coming out.

In any campaign, whether political or military, the first casualty is truth.

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Author: esbita Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409818 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/28/2012 11:05 AM
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On top of that, let's recognize that five to seven years ago that real estate market was peaking. Finding a single-family, 3-5 bedroom home in the DC/Baltimore area in any kind of a decent neighborhood under $300k was damn near impossible. There are a lot of people who bought into the region to follow job opportunities, and still hold those jobs, but the slow economy coupled with contraction in the real estate market has left them stuck with houses that are worth far less than what they paid for them.

Hello, Neighbor! :) DH and I house-hunted under the same parameters- we bought late enough to have dodged most of the contraction. It took my husband some time to accept that the kind of house he wanted was simply out of budget at the time. I would love to move back to the Midwest with better overall quality of life and lower costs... but there's that pesky jobs detail.

When I was running numbers for a potential house purchase "back home," I came upon this somewhat buried provision:

http://en.wikipedia.org/wiki/Mortgage_Credit_Certificate

The biggest "injustice" about current mortgage interest deductions is that the starter homes (or even nicer homes) don't provide deductions that exceed standard deduction (especially for couples rather than singles). Under the provisions of the link above a buyer gets a tax *credit* for a portion of the mortgage interest paid. This is subject to some pretty strict income and purchase price maximums as currently implemented.

Where I'm originally from, you could get a pretty decent house for around $100K- that won't be overcrowded once your second kid leaves toddlerhood. I think that allowing "first dollar" tax deduction or a tax credit on mortgage interest paid would be a fair compromise. Limit it to either a certain amount of mortgage interest, or covering up to a maximum of mortgage balance.

For example, interest on mortgage balance up to, say $150K could be deductible without itemizing- which would be $7500 at an interest rate of 5%. Some lawmakers might push this deduction to be capped at a certain dollar amount (maybe $5000 of interest paid) instead of a cap on mortgage balance eligible for interest deductions. But everyone, in the high cost coasts or the heartland, could take advantage of it. Most people buying a $100K home aren't in high income tax brackets, so foregone taxes wouldn't be as high. People in the homes costing $400K don't get an "undeserved" tax deduction on their high mortgage balances- you are no longer subsidizing the well-off. They still get the same, or similar "help" that lower housing cost people get. If it's a tax deduction, it may be more "valuable" with a higher income tax bracket...but they no longer get to deduct the interest on the mortgage balance from $150,001 to $400,000 like they could now.

But then the people who only get a couple grand of deductions higher than the standard deduction get a real tax benefit and we can't have that, can we? </sarcasm>

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Author: tim443 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409820 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/28/2012 11:33 AM
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FM, personally I would get a fixed rate, 30 year mortgage with 20% down. I would not pay cash for the whole amount.


I actually looked at ours for the first time in years. I've never even seen 10 year fixed before, the longest I recall is 7 years and when I started it was 5 years maximum.

Tim

http://www.ratehub.ca/best-mortgage-rates

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Author: steve203 Big funky green star, 20000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409821 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/28/2012 11:39 AM
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So here's the point : whenever I mention that "..I'm paying cash..", to almost anyone, the near instantaneous response is "...but then you won't get the mortgage interest deduction...".

This is usually followed by, "...but interest rates are so low...".
----
Home owners are hypnotized into thinking that there are real savings in that mortgage interest deduction.


Amazing, isn't it? They want you to keep the money in a bank CD, where a 5 year pays 1% and you pay income tax on that 1% at your marginal rate, while borrowing at 3%, because the interest paid *might* knock a few bux off your tax bill.

'course the realtor doesn't tell you about a kickback he might get from the mortgage company.

...the mortgage interest deduction is a small part of a tax system which is a tangled knot of special interest deductions and exemptions.

Amen!

Steve

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Author: steve203 Big funky green star, 20000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409822 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/28/2012 11:48 AM
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For example, interest on mortgage balance up to, say $150K could be deductible without itemizing- which would be $7500 at an interest rate of 5%. Some lawmakers might push this deduction to be capped at a certain dollar amount (maybe $5000 of interest paid) instead of a cap on mortgage balance eligible for interest deductions.

I'm betting on no cap on the interest deduction. If anyone suggested a fixed amount of deductable interest, the mortgage industry would howl "what if interest rates went to 15%, like they did in 82?". If anyone suggested a cap on the mortgage balance, the industry would point at the price bubble of a few years ago.

A cap would be a clone of the regular dramas we see about "fixing" the AMT.

Steve

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Author: WilliB Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409826 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/28/2012 12:14 PM
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I didn't see the sense in paying a dollar in interest to the bank, just to save 25 cents on my taxes.

That's the bottom line, right there.

I wish they would do away with all itemized deductions and raise the standard deduction for individuals. I might make an exception for medical, but most people with horrendous medical deductions also have lowered incomes for that period.

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Author: CCinOC Big gold star, 5000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409827 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/28/2012 12:14 PM
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steve203 wrote: That would be propaganda employed by the lenders to stoke demand for mortgages. As in the case of my coworker cited above, the propaganda is so pervasive that it encourages people to get in debt, stay in debt and think that being in debt is a good deal.

Well, you just keep renting and paying my mortgages for me.

I love my tenants! May they forever stay out of "debt" and forever in my debt.

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Author: MadCapitalist Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409829 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/28/2012 12:30 PM
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The analysis: after itemizing all deductions, including property tax and state income tax, only about half of what I was paying in interest actually made a difference in my deduction total vs the "standard deduction". Secondly, I didn't see the sense in paying a dollar in interest to the bank, just to save 25 cents on my taxes.

If you are paying a dollar in interest to the bank *just* to save 25 cents on your taxes, then it doesn't make sense. Of course you could also try to earn a spread by instead investing the money rather than paying down your debt.

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Author: steve203 Big funky green star, 20000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409832 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/28/2012 12:44 PM
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Of course you could also try to earn a spread by instead investing the money rather than paying down your debt.

There are few investments that would yield a guaranteed return in excess of what you are paying on a mortgage.

My mortgage from 96 was costing me over 8%. Yes, I could have gotten a better return in 99 by putting the money into the tech stock bubble. By 02, the tech stock bubble had crashed, but I was still saving the 8% I was *not* paying on the mortgage.

Today, mortgages cost 3%, but the investment with the same level of surety as that debt is a bank CD, and a 5 year CD only pays 1%.

Steve

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Author: notehound Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409833 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/28/2012 12:51 PM
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It is possible that house prices will drop further and stay down for many years.

The TBTF banks have figured out that they can manipulate the residential real estate market the same way they have rigged all the other markets.

All they have to do is keep the defaulted borrowers in their homes, mark their defaulted loans at full face value, limit the number of foreclosures, keep the pipeline of potential foreclosures plugged, release only enough REO properties as necessary to keep cash investors interested in bidding against each other, offer 3% mortgages and wait until lack of inventory pushes up prices to the point where the defaulted borrowers can sell the house for the loan balance.

House prices have bottomed everywhere - even in Atlanta.

;-)

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Author: warrl Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409841 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/28/2012 1:51 PM
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You had me at "I would benefit more by paying cash". If you even think that you are probably right.

Once you own the place free and clear you can't lose it to some scam in the stock market nor do you worry about a sudden surge in interest rates or a drop in price along with a dozen other things when you throw your lot in with the financial industry.


Unfortunately, owning your home outright doesn't necessarily prevent a bank from foreclosing on it...

http://consumerist.com/2012/09/07/wells-fargo-sends-crew-to-...
http://abcnews.go.com/Business/bank-america-sued-foreclosing...

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Author: FastMike Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409842 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/28/2012 1:53 PM
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"...Frankly who needs the hassle?..."

Dear Tim :

Thanks! I only wish there was a better word than "retirement". I'm a heck of a long way from retirement. Better to have another word or phrase for it, like : "service completion", "career requirements satisfied", for examples.

In any event, my logic goes this way : I could leave my money in the FERS G fund. This is a special issue Treasury. It does not trade in the primary nor secondary markets, and is based on a composite of medium term treasuries. The yield is a whopping 1.25%. Naturally, there are other choices like a private sector bond fund (FERS F fund), better yield but it is based on marketable securities, hence my capital is at risk to a correction in the bond market. Then there's the S&P tracking fund called simply 'the C fund'. This fund has disappointed many a passive investor over the decades. I was lucky to have moved out of C and into G at two critical times : January of 2000 and August of 2007.

Hence, it's better to close out the entire kit and kaboodle. But then what to do with it on the outside? (Note : no penalty when withdrawn under a retirement incentive program. (sactioned accelerated career requirement completion).

The equity and bond market present the same problems in or out. Annunities present 'risky' problems also and my money is locked up for a long time, in general.

So then that leaves property. Owning property without a lien seems like the very best option. It solves the 'roof over my head' problem. It eliminates a big chunk of my living expenses especially the interest portion! I keep what the bank wants from me! If purchased 'feature rich' in a desirable location in today's inventory heavy market it will gain in value when the business cycle turns. It's a great inflation hedge. Lastly, there's always the option of getting a mortgage at a later time.

There's a lot more to tell, but I think I've covered all the bases. (But 'Hawk' posted that I should have a mortgage if I expect to be in a higher income bracket. I have to see what's up with that!)

So that's it in a nutshell. The sooner I plant my feet on some tangible real estate, in a favorable tax environment, in a desireable location, the better off I'll be. In fact, it seems as though I'll be getting in on the ground floor from what I've seen.

I'm so looking forward to the rocking chair, pipe and back porch......not!

Your energetic Fool,
FM

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Author: FastMike Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409846 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/28/2012 2:20 PM
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"...you will probably earn more on your money over the next 20 years than the cost of a mortgage because rates are so low.
..."


Dear Hawkin :

I've given that a lot of thought and that's a risk I'm willing to take. I do know that for the time being, the Federal Reserve is committed to keeping rates low even after the recovery takes hold. That puts me at an advantage.

There's a very good chance I can get a mortgage at a later time and get ahead of the game, if I choose. It seems that as long as Europe is in a continuing slump, (and I'll bet China is slowing more than they're willing to say), the US economy will grow but at a slower pace. This Fed regime will keep yields compressed.

Another consideration is that it's possible that the Fed policy of keeping rates low even after the recovery has taken hold might create a future opportunity for a carry trade for the little guy : leverage money at a lower rate to reinvest at a higher rate.

Another consideration is that I think that I can do better with that money than just betting against the bank. That's mortgage game is too narrow a path for me.

In general, I'm treating it as a flexible and functional asset. It will serve a financial asset in many varying situations.

That essential question which I must answer myself, boils down to my current health, age, and possible life expectation and what assets I must depend on for (I hope) many decades to come.

Lastly, the possibility for high after tax earnings? I hope it works out that well!!!!

Your dollar-eyed Fool,
FM

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Author: FastMike Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409847 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/28/2012 2:27 PM
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"...buying generally makes better sense than renting..."

Dear hound :

Just a side note. I currently rent a one bedroom apartment, with terrace and ocean view, utilities included. Really safe, well maintained, and just great. For the longest time, it was expensive, but affordable. The building was about 80% rented at best at anytime over the past 15 years.

In the past three years my rent has skyrocketed over $300 per month and the building has been 100% rented over that time.

Your "high-rise" Fool,
FM

P.S. : And at times the 'ocean view' seems to start right at the front door!

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Author: tim443 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409853 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/28/2012 2:40 PM
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Unfortunately, owning your home outright doesn't necessarily prevent a bank from foreclosing on it...


warrl,

Uh why unfortunately? Y'all live in USia home of the lawsuit, man what a gold mine!!! How does one encourage these fellows to foreclose on the wrong home?

I've never actually personally heard of a Canuck bank foreclosing on a home though obviously it must happen.

http://www.cba.ca/contents/files/statistics/stat_mortgage_db...

According to latest stats we currently have 0.33% of mortgages in arrears.

2012-09 4,386,656 14,437 0.33%


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Author: tim443 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409855 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/28/2012 2:46 PM
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Thanks! I only wish there was a better word than "retirement". I'm a heck of a long way from retirement.

...

So then that leaves property. Owning property without a lien seems like the very best option. It solves the 'roof over my head' problem. It eliminates a big chunk of my living expenses especially the interest portion! I keep what the bank wants from me! If purchased 'feature rich' in a desirable location in today's inventory heavy market it will gain in value when the business cycle turns. It's a great inflation hedge. Lastly, there's always the option of getting a mortgage at a later time.

...

I'm so looking forward to the rocking chair, pipe and back porch......not!

Your energetic Fool,
FM



Mike

Oh I'm on my third retirement, they give you an unlimited number of them. }};-D

Exactly, there is always the option to get a mortgage or a cheap HELOC later.

Tim

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Author: FastMike Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409858 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/28/2012 3:25 PM
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"...being a METARite, I would make the bet that you can get >=3.45% long term returns with relatively LOW RISK..."

Dear yoda :

I'm certain that I can do that! My problem, if one can consider this a problem, is that I've a bit too much 'liquidity'. Buying an appropriately sized home, with the right features, in the right location buffers the value of the home from a dis-inflating currency.

(I think that global economies, FOREX markets and bond markets have become so interconnected, that describing a currency in binary terms, inflating or deflating, is no longer a valid assessment. But that's an entirely different topic)

The continuing keynesian policy of central bankers with little positive effect is an indicative of a liquidity trap. Further, there are so many plates spinning that eventually, something will occur that will cause the value of many assets to decrease or decend simultaneously; i.e., some form of "Armageddon".

Should that happen, there'll be no safe haven!

I can't see housing prices falling more on their own with an economy that's keeping its head 'above water'. Can housing prices drop in sync with a slowing economy? Certainly! But in a recovering economy? Possible, but unlikely.

But at worst, I won't have to make that decision to mail in the keys. Peace of mind is indeed a big factor.

I mentioned to notehound how the apartment rental market has boomed, at least around here. The demand for rentals is driving rents up. Mortgage rates are low. It's a matter of practicality. There should be enough traffic to keep housing prices stable, (either side of even).

I'm investing a sizable portion of my savings in what I consider the lowest risk asset available. It's a beaten down market. In my eyes this is the proverbial buying opportunity. The remainder of my capital falls under the heading of sensible, careful investing and keeping a fair cash position.

After weighing this out, I know that I can "beat the bank" in the mortgage game at these rates. On the other hand, I have a lot more flexibility and cash in hand by not playing that very long term game.

When I think about it, I might beat the bank, but the bank will out live me.

The big issue is not so much the mortgage interest deduction as it is that tangled knot of an over lobbied system. It's an absurd situation: the tax system must raise taxes to make up for lost revenue because of all the loopholes it created!

Your cyclic Fool,
FM

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Author: MadCapitalist Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409859 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/28/2012 3:27 PM
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Today, mortgages cost 3%, but the investment with the same level of surety as that debt is a bank CD, and a 5 year CD only pays 1%.

Steve


Yeah, but if you talking about a holding period similar to a mortgage, you are pretty much guaranteed to get a decent spread by investing in the S&P 500.

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409862 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/28/2012 4:10 PM
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Hi Yoda,

1) The folks loaning out money for 30 years at ~ 3.45% make an assumption that inflation will be “well contained” for the full term.
Not true. The folks loaning out the money for 30 years are the taxpayer-backed government agencies, and there is no such 'long-term market logic' behind their rate suppression at all. The current 3% rates are entirely a short-term attempt at intentional market distortion; Making loans artificially cheap to encourage borrowing/spending in the hopes it will counter-affect the cyclical market recession/depression from the prior induced bubble exhaustions.

There is zero logic-underwritten lending going on in the sub-8% rate range.

My bet is that inflation will average >= 3.45% over the next 30 years. So taking a 3.45% loan is pretty low cost.
I propose we are already approaching *DOUBLE* that rate in real inflation;
http://www.shadowstats.com/alternate_data/inflation-charts


4) I never diminish people’s desire for the peace of mind that comes from having a free and clear house. In many cases, this overrides any financial consideration. I have no problem with this path.
I never diminish actual *people*... but the idea that a free & clear home is *LESS* risky than an optimally leveraged home (at today's permanently lockable 3% interest rates) is an uneducated perspective. I believe knowledge trumps blind faith/fear and helping those who want to get beyond the blind risks is paramount.

I kinda suspect you do too... no?

Dave Donhoff
Leverage Planner

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409864 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/28/2012 4:28 PM
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Hi Steve,

There are few investments that would yield a guaranteed return in excess of what you are paying on a mortgage.
"Few" is true... but not "none."

IULs can offer a net* 4%+ tax-free fixed return on the same timeframe of a 3.25% tax-deductible mortgage... but let's ignore any strategies seeking actual face value growth for the moment.

The burden of a mortgage will decline (even though the balance may stay the same) at the same rate of real inflation. That is to say, the real costs of everything else, and the real income cashflows across the population, will rise at the rate of inflation while the mortgage balance in pre-defined dollars remains uninflated... creating a default *DEFLATION* of the real burden of the mortgage.

RULE OF 72;
At a 3.6% rate of real inflation, (assuming zero amortization, balance stays unchanged as with interest-only terms,) the real mortgage burden is *HALVED* in real cost in 20 years. At real inflation of 7.2%, the mortgage real burden (balance unchanged) is halved in 10 years.

Further, the depreciation of leveraged money is a TAX FREE NET WORTH BENEFIT!

As a *BONUS*, inflation "rolls downhill." That means that all expense inflation ultimately reflects to the hard assets (dirt, improved/occupiable dirt, and metals.)

Without "investing" a single dime, all you need to have happen in order for it to make sense to hold a mortgage balance is;
1) The real rate of inflation is greater than your real after-tax cost of interest,
2) You have the reserves & cashflow to support the inflation-hedging "counter-investment" of carrying a depreciating mortgage balance,
3) You understand finances enough to be emotionally comfortable with the underlying facts of the trade (the "sleep at night" factor.)

*IF* you also put your leverage capital to work earning more than the expenses of your investments, its simply additional growth to your net worth.

Cheers,
Dave Donhoff
Leverage Planner

PS. do all the above on real estate that itself generates a yield (i.e. rents) which climbs on real inflation... and you have the trade of our times!

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409865 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/28/2012 4:54 PM
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After weighing this out, I know that I can "beat the bank" in the mortgage game at these rates. On the other hand, I have a lot more flexibility and cash in hand by not playing that very long term game.

When I think about it, I might beat the bank, but the bank will out live me.


This part confuses me.

If you pay for the home in cash, you will no long have the flexibility and the cash in hand by not playing the game.

Nothing says you need to take out a 30 yr mort. Take a look at a 15 yr or even a 7yr ARM. I think you will out live either of the terms of those two.

I relate this to my education loans - yes I still have some. When given the opportunity to "consolidate" back about a decade ago, I picked the longest term they offered - 30 yrs. My rate was a fixed 2.x%.

I will be paying on my ed loans long after my home is paid for - but that cost is basically inflation or less - so there was no reason for me not to jump on it and use my cash flow for other things now.

None of us know what the future holds so I think cash (or items easily converted to cash) will remain king for a long time. I remain convinced that keeping your liquidity, even if you think you have too much, is a great problem to have.

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Author: FastMike Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409874 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/28/2012 6:48 PM
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"...Take a look at a 15 yr or even a 7yr ARM..."

Dear 'hawk' :

Pre approved for a 7 year ARM at 2.5%, just in case something comes up sooner than I'm planning for;-) I hope I don't need it, though. I'm figuring it'll take a few months from contract to closing.

My view is that if I'm going to make a long term investment, do I really need a partner? Because that's what a mortgage really is. The home buyer is splitting his long term return with the bank, and the bank gets their share, first.

Fiddlesticks, I say.

I totally agree that cash is king! I see every other asset class as way too risky, in these central bank supported markets. My choices are limited. Also, the cost of living in New Jersey is rather high, and the pace here is rather intense, to put it one way. Time to go.

Here's an interesting comparison :

Using a mortgage interest calculator, assuming 20% down on a $200,000 home thus borrowing $160,000 for 30 years at 3.45%, I will have paid $97,044.78 in interest payments. So now, in 2041, just shy of 90 years old (insh'Allah) I'd have to ask $257,089.56 to break even. The bank thanks me and pockets that 97G.

Using a compound interest calculator, if I had $97,044.78 to invest at 3.45% compounded over 30 years, I will have earned 171,419.82 in interest. Hence $97,044.78 + $171419.82 = $268464.60 and I've had my home free and clear all that time and it will have, hopefully increased in value.

So now that you've got me figuring all this out, you've made me realize that I can then build a mausoleum that would rival the Caesars! (I'll get a mortgage for that;-)

All this does not take into account inflation. But I hasten to add that Japan has been in a liquidity trap for the past 20 years. It's not beyond the realm of the possible for the EU recession to go on for many years to come, possibily a decade. So there is a powerful push back against inflation.

IMHO, I think that there's too much inflation worry. Not that we should discount an inflation because as you noted, the future can not be predicted. However, I see many global counter inflationary pressures 'at work'.

Lastly, the U.S. Federal Reserve has been virtually dumping "bales of money from helicopters" to prevent deflation with moderate success. And the same is true for the EU. They've dump as much if not more and they're sliding back into double dips and outright depression in some areas!

My bet sides on stagnation or dis-inflation for at least several more years, based on what happens with the EU, Japan, and the cooled down PRC.

You're situation is sophisticated. You've long term debt, but your utilizing your current cash flow. Great thinking!

Your bank-free Fool,
FM

P.S. : Compound Interest Calculator :

http://math.about.com/library/blcompoundinterest.htm

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Author: ngcpa Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409884 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/28/2012 7:41 PM
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I am surprised nobody has mentioned that one is allowed to deduct mortgage interest and taxes on 2 homes (not just one). I used to have an individual tax practice and researched this many times. Under the rules, a second home could include a timeshare or even a boat under some conditions (it had living quarters, bathroom, etc.). Clearly two should never have been allowed or should be changed now to only one. However, I can guarantee that this will never happen, as most of our representatives have a house in the DC area and one in their home state. I suspect that is how it became law in the first place. Anytime I hear folks in congress talking about chnagung the tax code so it is more fair, I always have a good laugh.
Norm

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Author: mauser96 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409896 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/28/2012 9:31 PM
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"two should never have been allowed" Not so clear to me. Why is having two $300,000 homes bad, but having one $600,000 home is fine? All the people I personally know that have two homes are well off, but not rich. Most don't even reach Obama's definition of "rich".

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409923 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/29/2012 8:56 AM
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Using a mortgage interest calculator, assuming 20% down on a $200,000 home thus borrowing $160,000 for 30 years at 3.45%, I will have paid $97,044.78 in interest payments. So now, in 2041, just shy of 90 years old (insh'Allah) I'd have to ask $257,089.56 to break even. The bank thanks me and pockets that 97G.

Using a compound interest calculator, if I had $97,044.78 to invest at 3.45% compounded over 30 years, I will have earned 171,419.82 in interest. Hence $97,044.78 + $171419.82 = $268464.60 and I've had my home free and clear all that time and it will have, hopefully increased in value.


Please forgive my ignorance, but why are you compounding interest, on your interest?

Should you not instead compound interest the $160,000 that, instead of financing, you paid in cash?

In other words, using a compound interst calc, if you had $160,000 to invest at 3.45% over 30 years.

The home would increase in value the same amount regardless of any mortgage on it so I don't see how that figures into your solution.

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Author: twopairfullhouse Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409937 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/29/2012 11:39 AM
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Anytime I hear folks in congress talking about chnagung the tax code so it is more fair, I always have a good laugh.
Norm


Norm, what are you talking about? Congress always changes the tax code for the better... from their perspective. They're always more able to manipulate voters into thinking that they're getting one over on all the other taxpayers, and there's no evidence that they won't be able to continue doing this.

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Author: FastMike Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409972 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/29/2012 2:57 PM
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"...why are you compounding interest, on your interest?..."

Dear Hawkin :

I'm just making a comparison, that's all. If I mortgaged $160,000 for 30 years at 3.45% I would end up paying the bank $97044.78 by the time the thing is paid off.

So what if it were possible for me to plunk down $200,000 on a home and then, assuming I had the cash, take any remaining amount of my savings, say it happens to be that exact same amount of the calculated interest payment over 30 years, $97044.78, and set it up to reinvest the dividends assuming the same rate : 3.45%.

The point I'm making is that I can do a lot better by not having a mortgage and investing my capital, reivesting the dividends over that time.

I don't see the logic of playing chicken with the bank, at my age. Even if I mortgage at these rates, by the time that the note matures, I'll be near 90 years old! And that's if I'm very lucky! And what will I have to show for it? There's no real way to predict!

Also, what surprised me in this thread is the assumption that inflation is a given. This is not necessarily the case. I think that you were the only one in this thread to mention the unpredictability of future events.

Under the most basic definition, inflation is always and everywhere a monetary phenomenon. It's like a rising tide : it lifts all prices,...everywhere and at the same time. We do not have inflation at this point. There have been price spikes in sectors, but that isn't inflation.

In my opinion, we're in a liquidity trap, now. China, the one time dreaded fire breathing manufacturing dragon, is sputtering smoke mainly because of the deep recession in the EU. Japan is in a rut now for 20 years. This global economic crises is not going to suddenly go away and everything return to the way it was. When this finally does clear up, the world will be different.

(As a side note, one of the issues with the Greek resolution this week was that holders of Greek debt still do not want to take the hit! Amazing! It's back to square one in Europe....again!)

Anyway, just to stick to the main point, not everyone benefits by low mortgage rates. If I were 30 years younger, I'd buy with as little down as possible.

This is not the case for me. I can do better without a mortgage.

Your independent Fool,
FM

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Author: brucedoe Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409982 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/29/2012 5:08 PM
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Yoda

As Oldsters, we get to deduct $2,500 more than the $11,600. I spent hours totaling up our medical expenses only to find out it was wasted time.

You are quite correct.

brucedoe

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Author: synchronicityII Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 409994 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 11/29/2012 7:16 PM
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Yeah, but if you talking about a holding period similar to a mortgage, you are pretty much guaranteed to get a decent spread by investing in the S&P 500.

It's always fun when I run across posts like this from MadCap where I actually agree with him 100%.

-synchronicity, OK, maybe 99% agreement, but yeah, pretty much what he said.

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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 410340 of 455792
Subject: Re: Mortgage Interest Deduction Debate Date: 12/3/2012 11:57 AM
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I've been saying this for years. Even 4-5-6% mortgage rates result in substantially the same thing.

Not to add politics, but people who purport to want to increase taxes on "the rich" yet oppose limiting (or in my opinion eliminating*) this particular deduction are disingenuous to the extreme. It proves that they are solely pandering to their constituency rather than proposing policy that is good for the nation as a whole.

* And, in fact, I support eliminating *ALL* deductions and exemptions. If person A earns $X and pays $Y income tax, person B earning the same $X should pay exactly that amount, $Y, as well.

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