Is The Mortgage Interest Tax Deduction Really a Big Deal?

What Are Mortgage Interest Write-Offs?

Each year, when you pay interest, or your mortgage payment, if you have 12 payments to your mortgage company, usually at the end of January, when you get your W-2 form from your income, you're going to receive a 1098 for any mortgage interest that you paid to the bank. That form will tell you how much interest you paid to them, and that's the amount that you get to tell the IRS, “Don't tax me on this amount.”

What the government says is, “Listen, if you make X amount, we're going to charge you tax on that.” But if you pay interest on a mortgage, you can actually take your X, you can deduct it. This allows you to reduce the taxable income you have because you pay interest on a house.

A Home Mortgage is an Incentive to Save on Taxable Income

Mortgages are an incentive to purchase a home. The government has used the home purchase as an incentive. They want people to have homeownership for various reasons, and the way they incentivize is by putting money in your pocket.

Many people don't know how much money is going into their pockets. Sometimes they're overestimating or underestimating. In this episode, we're going to try to give four examples, for different people. These are just examples of their income and their loan amount size, and we're going to quantify the savings, the daily savings, what that looks like.

Example 1: Someone with a taxable income of $50,000. They're typically going to be in a 12% tax rate, okay? That's what we're going to base this off of. They have a home that's about $208,000. They have a mortgage of about $195,000. They pay really close to $8,000 in interest, based off of that 4% that we're using, the 4% is just an example. For $8,000 in interest to the bank, they save $950 a year, and that calculates to be $2.60 a day. And what can you buy for $2.60 a day? We decided you can purchase a 6-pack of brand named soda each day. Which ends up being a $900 savings. Before the house, you had to pay us $960 more in taxes, then because of the interest write-off, you paid $960 less.

Example 2: A person or persons making $75,000 of taxable income. Okay, they're going to be in a house of about $315,000 worth. They're going to have a loan just under 300,000. Their annual interest payment will have been close to $12,000 a year. Remember we're taking the loan amount, we're multiplying it by the interest rate. We're coming with that on an annual basis. Assuming the same tax bracket, 12%, they're going to have tax savings, this is less money to pay the government every year, of about $1,400, okay? That equates to almost $4 a day. It's like 3.90 a day. What can you get for 3.90 a day? Dutch Bros or Starbucks coffee every day just because you have that mortgage interest deduction or write-off.

Example 3: Someone with a taxable income of $100,000. Let's assume that they have a loan amount of around $395,000 with a house worth $415,000. With the loan amount, $395,000, paying that interest, 4% would be around $15,800 a year. Now in this tax bracket, or this category, with the $100,000 in taxable income, they'd probably be in about a 22% tax bracket, and that would save them about $3,500 a year, which is about $9.54 a day. With that, you could buy a decent bottle of wine each day.

Example 4: A person making a taxable income of $150,000. This person based upon our assumptions would probably be in a house a little over $600,000. They'd have a loan of just under $600,000 paying an annual interest rate of about $23,000 a year. So it really does escalate with these bigger mortgages. Same tax bracket as the previous group, about 22%. So their tax savings is about $5,200 a year. $5,200 less you would have to pay the government because of the big interest payment that you can write off or deduct. And what does that equate to on a daily basis? About $14.50 a day, okay? And what can you get for $14.50 a day, besides a lot? I'm saying two pizzas.

Now, we're not tax experts, but again, look at your taxes, figure out what your tax bracket is. That's not too hard to do. If you ever need any help just talking about this stuff, brainstorming, you're thinking about a new mortgage, Tom and I, and our team, that's what we're here for. If you have questions, that's what we do every week. We try to answer your questions about mortgages.

Transcript of the Mortgage Brothers Podcast