Mortgage as Tax Deduction

A while back I wrote a post on Living Within your Means that elicited the following comment on Facebook.

AJ wrote: I agree with you philosophically that people should be living within their means - but if by "renting money" you mean taking on debt, there are actually several times where debt is actually good. Mortgage debt - when acquired at a very good rate and within the limits that are deductible is almost always good debt. If a family is disciplined about saving/investing the money (instead of spending it), the return on the money they have "rented" each year can be far more than the cost of the interest - we achieve that every year. As such, we'll continue to find the point where the "lines cross" on the graph and strive to stay at the point where we maximize NET return (income minus interest). Essentially, we "make money" from our mortgage.

I replied on FB:

Scott Burgess: I guess I've never made enough money for it to make sense to pay interest on my mortgage. Even when I first had my mortgage, at what would be considered an exorbitant rate these days (8.375%), my annual interest was never high enough to give me any kind of tax credit at all.

Where I felt the mortgage was worthwhile was in the fact that it was less expensive to rent that money than it was to pay rent to a landlord, so as far as that is concerned, I'll agree, a mortgage can be a good thing. Since every dollar that went to the principal got me that much closer to not paying rent at all. But having a mortgage just for the sake of having one for a tax credit, nope, I just can't see it.

What it boiled down to was that the "rent" of the money to buy my house was lower than the rent payment to a landlord for the same house. But, now that the mortgage is paid off, there is no way I'll let myself get back into paying a bank rent for money. Instead, we'll save up for our bigger house, an let the bank rent the money from us while we save.

I did say in my rant that "the only things you should ever rent money for is something that is absolutely essential for survival", and housing fits that bill.

My main point being that if you have a choice to not have a mortgage, there is no reason to carry one.

Kristen uses a wonderful program for our finances called YNAB (You Need a Budget).  The makers have a video series, that I haven't watched, but Kristen sent me a link to this one,  Day Four: The Value Of A Deduction, that explains what I was trying to say about having a mortgage quite well.

Basically, if you don't need a mortgage, you're just throwing away (shredding) your money to carry one. The government never refunds you more than you paid in interest.  You do not make money from the deduction.  The only way you might make money would be if you were able to invest the money you aren't using to pay off your mortgage for a higher return than the interest on your mortgage plus the, I believe it's 15% tax rate on investment income?  That certainly isn't in a savings account, I believe those are currently paying around .5%. 

As the young man states in the video, if you have to have a mortgage, by all means, aggressively pursue tax deductions, but don't carry a mortgage just for the deduction. 

As AJ says in her reply to my previous post:

Mortgage debt - when acquired at a very good rate and within the limits that are deductible is almost always good debt. If a family is disciplined about saving/investing the money (instead of spending it), the return on the money they have "rented" each year can be far more than the cost of the interest - we achieve that every year.;

The key word being investing. 

If you have a certain investment, that is guaranteed to pay you 6% on your money, and you can get a mortgage for 5%, you might make a little money ... assuming your mortgage interest goes high enough to actually earn a tax credit.  Don't forget, the government is going to tax any income you might make from your investment regardless of how much, or little, it is, but unless your itemized deductions exceed a standard deduction, the interst paid on the mortgage doesn't mean a thing. 

My point being, it's not the deduction you should be looking at to make the money, it's the return on your investment. That's the trick, though.  Finding something that is guaranteed to return 6% or more on what you put into it. 6% being good at current mortgage rates, not so good when they were at 8%.

Personally, I don't know of anything that is guaranteed to make me 6% or more on my money.  If you do, please let me know, I would love to get in on it.

Photo by Images_of_Money