Paying a house in full costs you since you lose an income tax deduction (FALSE)
Assumptions:
I didn’t include a down payment because it’s not going to matter because the interest is only charged on the Outstanding Amount of the Loan every month.
Example:
Outstanding Loan Amount: $300,000 @ 4% on 30yr Fixed
Monthly Payment: $1432 ($432 Principal + $1000 Interest 70% of payment is INTEREST)
Annual Interest Paid: $12,000 due
Annual Household Income: $200,000 @ 28% Marginal Tax Rate = $ 60,568 Income Tax Due
Annual Household Income (After Tax Deduction): $188,000 @ 28% = $ 56,584 to Uncle Sam
Difference between Before and After the House Deduction = $3,984 Savings
Are you willing to pay $12,000 in interest per year to the bank in order to save $3,984 in Tax savings?
$12,000 $1
----------- = --------- Spend 1$ to save $0.33 cents does not make sense
$3,984 $0.33
________________________________________________________________________________
Monthly Payment: $1432 ($432 Principal + $1000 Interest 70% of payment is INTEREST)
Annual Interest Paid: $12,000 due
Annual Household Income: $200,000 @ 28% Marginal Tax Rate = $ 60,568 Income Tax Due
Annual Household Income (After Tax Deduction): $188,000 @ 28% = $ 56,584 to Uncle Sam
Difference between Before and After the House Deduction = $3,984 Savings
Are you willing to pay $12,000 in interest per year to the bank in order to save $3,984 in Tax savings?
$12,000 $1
----------- = --------- Spend 1$ to save $0.33 cents does not make sense
$3,984 $0.33
________________________________________________________________________________
I used this equation to calculate your monthly mortgage payment:
r(1+r)^n
M = P -----------------
(1+r)^n - 1
M is your monthly payment
P is your principal
r is your monthly interest rate, calculated by dividing your annual interest rate by 12
n is your number of payments (the number of payments you will be paying the loan)
Uncle Sam's Thievery plan this year:
r(1+r)^n
M = P -----------------
(1+r)^n - 1
M is your monthly payment
P is your principal
r is your monthly interest rate, calculated by dividing your annual interest rate by 12
n is your number of payments (the number of payments you will be paying the loan)
Uncle Sam's Thievery plan this year:
Rate
|
Taxable Income Bracket
|
Tax Owed
|
10%
|
$0 to $18,650
|
10% of taxable income
|
15%
|
$18,650 to $75,900
|
$1,865 plus 15% of the excess over $18,650
|
25%
|
$75,900 to $153,100
|
$10,452.50 plus 25% of the excess over $75,900
|
28%
|
$153,100 to $233,350
|
$29,752.50 plus 28% of the excess over $153,100
|
33%
|
$233,350 to $416,700
|
$52,222.50 plus 33% of the excess over $233,350
|
