Quote:
Originally Posted by saversaba08
Hello everyone,
DH and I are now seriously considering purchasing our first house and all along we had assumed that 20% down was the way to go. However, after running some of the numbers, we realized with the price point that we are looking at, 20% down would mean annual interest payments totalling about 4K less than the standard deduction. So the tax advantage goes out of the window...should we consider putting down less and pay PMI and potentially higher interest rate?
Both of us have FICO scores in the upper 700s and no other debt so hopefully 10-15% down should not disqualify us for the mortgage. Then again, does it make sense to pay a higher int rate, larger monthly pmt and PMI just to lower taxes?  In 2007, we were in the 25% tax bracket.
Thanks in advance,
saversaba08 |
Don't pay PMI to get a deduction, that is silly.
The way mortgage interest works is if you pay $10000 in mortgage interest, 25% of that ($2500) would be deducted from tax liability.
This assumes:
you earn income in 25% tax bracket (if you make less than $66100 the benefit is only 15%)
you have more itemized deductions (such as property taxes) which exceeds the standard deduction of $10900 (assumes married filing jointly).
On a 100k mortgage at 6.125% interest, you would pay $6000+ in mortgage interest the first year.
Here are options to consider- a larger mortgage (which pays more interest) for a bigger house. Pros and Cons. You will get a bigger asset and a much larger tax deduction. There is a reason high income earners like living in a larger house. Most people in this situation will want to keep the mortgage for as long as possible.
Keep same size mortgage and skip the deductions. Consider a strategy in event you wanted to pay off mortgage sooner (because it is costing you interest with rewards for deductions).
I have a larger house with a higher deduction. This deduction lowers my overall tax burden (into 15% territory) which really helps my investments (with Roth IRA paying taxes at 15% level). If I ever get out of Roth eligibility (based on income), then I will look to pay off the mortgage sooner.