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This may well prove to be a re-iteration of other messages that have been posted on this board. I didn't diligently scroll back and look for relevant headings.
I just wanted to share this cautionary note with the world. (Sorry for the long-windedness, I thought perhaps this could be a fribble candidate)

I just finished a rough first calculation of my taxes for '97. I was anxious to do this since '97 was our first full year in our new house and I was rubbing my hands together in anticipation of our Big Home-Mortgage-Deduction Tax Bonanza. You see, when we took the big plunge and bought our lovely home, we knew we were taking a hefty step up in monthly expenses from our previous rental. It was a stretch, but we loved the house, and what's more, the bank was willing to lend us the money. I remember sitting down with our lender and watching her fingers clicking on her calculator as I rattled off the details of our financial situation: income, student loans, outstanding credit card balances, etc. I remember her smiling Wisely as she told us that her calculation revealed we could afford the home of our dreams. I had read something about the home mortgage interest deduction and it amounting to something in the neighborhood of $200/mo. You see, that was back in my pre-Foolish days, and "something in the neighborhood" was good enough for me then. I mentally hacked off that $200 from our monthly payment and figured that we could swing it.

Back in the present, my adoption of the Foolish philosophy has filled me with zeal to save as much as possible and watch our sound investing strategy and the power of compound interest make us slowly but inexorably rich. Unfortunately, I find myself asking where all of our money is going and why even a rather austere lifestyle is not leaving us with much excess to tuck away. The answer is, of course, our lovely home.

As for the Big Bonanza, here's how it worked out for our family. Interest and property taxes were about $10,000. Our only other meaningful deduction is state taxes for a total deduction of around $11,000. Now the standard deduction for a couple filing jointly is $6900, so our extra deduction was about $4100. We're in the 15% marginal bracket, which makes the Big Bonanza 4100x.15 or $615. That's right folks, slightly over $50/mo.

The moral of this story is, when shopping for a home, it is easy to fall into the mindset of buying the most house for which the Wise folks at the bank will lend you the money. After all, the more expensive homes ARE nicer. For us, I'm afraid this has proven to be most un-Foolish. Do the math yourself. Work out a budget. Will your monthly payments leave you with anything to save, after you figure in a REALISTIC home mortgage interest deduction? If not, ask yourself whether you really need those 300 extra square feet, or whether that smaller place perhaps had a certain cozy charm.
You may thank yourself later.

-Ray Richardson
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