Debunking Importance of Mortgage Interest as a Tax Write-off

We’re in the process of refinancing our mortgage down to a 15-year, 3.0% interest rate.  Three – point – oh.  Insane!  Our previous rate was a crazy-low 4.375%, but when looking at how much money we’re going to save over the lifetime of the mortgage, it’s a no-brainer.  I highly recommend everyone looks into this!

However, I’ve heard a few people who thought the 15-year mortgage was unnecessary (as opposed to 30-year) because of the tax write-off.  It’s surprising people would want to stay in debt just for the tax write-off, but let’s take a look at the math…

                                   Scenario A    Scenario B
A - Taxable Income                   $100,000      $100,000
B - Interest Paid (tax deduction)     $10,000            $0
C - Final Taxable Income              $90,000      $100,000   (A - B)
D - Taxes Paid (30% rate)             $27,000       $30,000   (C * 0.3)
E - Final Cash on hand                $63,000       $70,000   (C - D)

So, after examining Lines B and D above, the people that want the tax write-off would rather pay $10,000 to the bank in order to pay the government $3,000 less in taxes?

I know this is a simplified scenario, but you see how obvious it is to pay off your house asap, right?!

Here’s some more helpful info on mortgages from the best financial resource out there, Dave Ramsey: The Truth About Mortgages.

29 Ways to Leap Out of Debt

As much as I like sharing my own thoughts on this blog, I often can’t say things better than the experts do, so in those cases, I just want to pass along the great information I’ve discovered.

I wrote a few years ago that, except for our mortgage, we’re debt free.  The hard work was done by my wife and I, but we owe all of the planning and motivation to Dave Ramsey.  I’ve written about him before and I’ll write about him again because he’s a fantastic resource on finances, insurance, and other important disciplines.  I’ve read his first book, attended two of his live shows, and listen to his radio show/free podcast on a regular basis.  He’s funny, straight to the point, and very motivational.

People may disagree with my eating habits, but can’t we agree money is a common problem we all have?  If you’re not out of debt, trust me, it’s the best decision you’ll ever make.  It’s such a relief to not have that burden, plus you can more nimbly handle any financial / life problem that comes up.  There are many excuses out there as to why people can’t get out of debt, but just listen to his radio show and hear all the amazing sacrifices others make to get out of debt.  It’s incredibly encouraging.  And as Dave says, “if you don’t like being debt free, you can go right back into debt if you want to.”

Here’s a link to his 29 Ways to Leap Out of Debt.  My favorite part is that only one of those 29 suggestions would make him any money at all.  He’s not in this make money off of people – he passes on proven ways to win with money.  Check out the list and make yourself more familiar with Dave!

29 Ways to Leap Out of Debt (Dave Ramsey)

We’re Debt Free and YOU can be too!

My wife and I recently became debt free (except for our mortgage).  Simply put, it’s one of the best things we’ve ever done.  We never had that many debts, but it’s still so relieving and freeing to do so.   No more student loans, car debt, or installment loan (2nd mortgage).  I’m a HUGE believer in Dave Ramsey, his books, and his radio show.  Here’s the key points that we lived by these past 2 years:

• Budget. Know what you spend and live off of a budget.  You’ll be amazed at how much money you’ve been blowing once you start keeping track of how much you spend and what you spend it on.  After you do that for a little while, then write out a monthly budget.  “Every dollar has a name” as Dave says.  Spend every dollar on paper before the month starts and that way you know where everything fits.  Stick to it!  (and use cash… keep reading…)

• Credit Cards. Don’t use credit cards for any reason.  Along with the previous point, when you start using cash along with budgeting, you’ll feel like you’ve gotten a raise.  Spending cash is a painful & emotional experience, especially when compared to using plastic!  Use the envelope system to help you stick to your budget.  Plan accordingly or you’ll end up with about $15 for groceries the last week of the month (it’s happened to us before and it forces you to get creative!).  For any utility bill payment or for any online purchases, use your debit card.
  • Note: Everyone wants to use credit cards “for the rewards”.  Think about it: you typically get ~1% back.  Well, you know what?  You generally spend much more than you intend to when you use CCs compared to cash.  So, the 15% more you spend (according to studies) compared to the 1% back doesn’t look so good!

• Snowball Method. Pay off ALL your debt using the snowball method.  Except for your mortgage, all of your debt should be written out in the order of least to most based on current BALANCE (NOT interest rate).  Continue to pay all minimum balances.  The key here is to attack your smallest debt with all your available income as quickly as you can.  Once you do that, then you get an emotional pick-me-up.  Then, you take the money you were putting towards that (plus the newly eliminated minimum balance), and attack your next debt.  Get this snowball running downhill and there should be no stopping it!  (More detail on Dave’s site)

• Cars. Don’t lease or finance or buy new!  Dave’s rule of thumb is to only buy a new car if your net worth is in excess of $1,000,000.  Otherwise you can’t take the HUGE depriciation hit when you drive that thing off the lot.  Plus, if you finance (or worse – lease) a car, you’re just throwing money away.  Say it out loud: “finance a depriciating asset”.  Bad idea!  Instead, buy as reliable a used car as you can with the CASH you have.  Then, you can save money every month (see: budget) and eventually sell the used car, add that $ to your saved up cash, and buy a better used car.

• Your health will improve. Follow the progression: trying to spend less… less money on groceries… less eating out… more healthy meals at home… more time at home… more time with family / exercising… eventually no more monthly debt bills in your inbox.  Result: weight loss, less stress, and better overall health!  Woo hoo!

Imagine…

If you’re not currently debt free… just think about what life would be like if you were.  Minus your utilities (and for a while, your mortgage) you will  have ALL of your paycheck at your disposal!  Can you imagine how quickly you can save up for vacations or cars as well as how much you can invest towards your kids college and your own retirement?  It’s a great place to be.  And MUCH less stressful than the alternative!

Dave’s Quotes:

“Personal finance is 80% behavior and 20% head knowledge”

• Think about it… if it was all head knowledge, then we wouldn’t go deeply in debt in the first place?!  Once you get your heart into getting your money situation resolved, you’re on your way.  Once you start spending less and attacking your debt, THEN you will start to win.

“Live like no one else, so later you can live like no one else”

• Make sacrifices in your life now (only buying used cars with cash, don’t overspend, live off of a budget, etc) and your finances will open up a few years down the road.  You’ll be able to enjoy your later years with a paid for house, plenty of money to invest / travel, and then you can retire with dignity.  Just imagine!

“No”

• We don’t say this word enough anymore.  Not to our kids.  Not to ourselves.  We don’t need to go out to dinner all the time nor do we need every new piece of technology.  Show some self control and all of the above tips will come easier to you!

Finally…

Please leave questions or tips or suggestions in the comments!  I really enjoy discussing this topic.  Oh yeah – and listen to Dave’s radio show!  He’s great and all of the people who call in are super inspiring.  1050AM from 4pm – 6pm in Cincinnati.  Out of Cincy?  Check here.