Mortgage Interest and Your Tax Liability
As you begin your search for the perfect home, and you research
your mortgage loan options, the tax consequences of a mortgage
loan with mortgage interest doesn't ever cross the minds of most
consumers. But as you decide which product you need, or think
you need, the tax repercussions and benefits should play a role,
even if it's a small one, in the final decision.
For many consumers, the first thought that's given to their tax
return, and tax liability, comes from the mortgage lender. Quite
often, mortgages are touted as being one of the best venues for
reducing your tax liability at the end of the year. Yes, your
mortgage interest payments will reduce your tax liability, but
is that your ultimate goal? Is that why you're looking at
mortgage packages? No. Your ultimate goal in choosing a mortgage
is to pay for your home. Every situation in this case, and this
case would apply to the average consumer shopping for a mortgage
loan, is probably not going to get that much benefit from the
tax deduction that comes from their mortgage interest payments.
The average consumer should first look at their monthly payment
and choose a mortgage based on affordability, not tax liability.
The smart consumer will not allow the flashy ads displayed by
many mortgage lenders to influence their mortgage loan decision.
The smart consumer will examine the interest level, the term of
the mortgage loan, the affordability of the monthly payment, and
base their decision upon their ability to pay in relation to the
mortgage that achieves their primary purpose: the payout of the
loan.
You and I rarely consider the impact of any financial decision
on itemized deduction statement; however many of those decisions
do affect itemized deductions. Our itemized deductions and major
portion of our tax liability? No. Do they contribute to a
reduction in tax liability? Yes. The relativity of the
contribution when contrasted to the required time in examining
the actual benefit we derive from the itemized deduction
calculations warrants the point mute. It's just not worth the
effort. If you happen to be in your mid-40s and your purchasing
your first home, I would suggest that you consult a financial
adviser prior to making a mortgage decision; however most
individuals in their mid-40s would already realize the benefit
of a financial adviser. A young couple purchasing their first
home would truly benefit from the interest deduction, not to the
extent however off more than $40-$50 of the bottom-line for
their tax liability. As you age, and your way to earning power
increases, the benefit of the itemized deduction decreases. Does
the average person understand how tax is configured? No. The
only person who can truly enlighten a consumer would be a tax
professional, and many average individuals would spend more
money in the determination of the benefit than they would reap.
The new guy on the mortgage loan law, known as the interest only
mortgage loan will bring the greatest benefit to the consumer.
The interest-only lawn in the amount of interest you can deduct
on your tax return are one and the same, but does the benefit of
the mortgage interest deduction outweigh the added expense of an
additional five years on the mortgage loan?
What about the mortgage loan refinance? Any equity you remove
from your home in the form of cash that can be used to pay down
or pay all high interest credit card accounts will transfer a
nondeductible expense to your deductible expenses. However you
should remember the trade-off you now owe more against your
home, and you have used your equity reserves. Was the deduction
worth the trade? Many times the answer is no. For many
consumers, paying off high-interest credit card debt only
increases the probability of additional credit card charges. In
other words, not only have use your equity, you've returned to
high-interest debt.
Prior to a final decision of your mortgage along product, take a
moment to review your tax situation. Each situation is unique.
The lower your income, the greater the benefit, but rarely is
the benefit worth the cost. Behold, the Tax Man, cometh.