Mortgage or Cash

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<p>It depends on many factors. The mortgage interest deduction decreases as one's income increases above certain treshold levels. Any levereaged position, (20% equity), is advantageous on an appreciating asset, and theorectically, if one can invest at a better rate of interest than one pays, it is better to borrow to invest. Bottom line, one is borrowing on the equity in one's home to invest at a better rate of return than the interest rate one has to borrow at; kind of what banks do, eh?</p>

<p>I say theorectically, because the scenario as you and I are portraying disregards human emotions and unforseen financial events. In my experience, 70% of the success of investing is due to controlling one's emotions and only 30% is due to the actual investment and the circumstances surounding that investment. And in my estimation, the best way to remove emotion from financial decisions is to remove leverage and debt.</p>

<p>Example : Let's say I own a home with a market value of $1 mil with no mortgage and I also have $100,000 to invest. I can invest the $100k with no pressure due to the thought that if I don't have a particular ROI, I will have to move or borrow more or ...</p>

<p>Let's say I own the same $1 mil home and I borrow $800,000 on it to add to my $100,000 for a total of $900,000 to invest. I posit the decisions I now make regarding the investment of those funds will now be clouded by the pressure of the threat to my living situation. I now am pressured to stay employed, not fall seriously ill, make an ROI greater than my mortgage interest, etc.</p>

<p>If you know anybody who is wealthy, ask them if they think you should pay off your home or invest in other asset classes, and ask why. People borrow because they have to, not because they want to, imo.</p>
 
<p>I would also add that investing in a home at the moment is a pretty big risk unless you get some sort of major discount. What home are you thinking of getting?</p>

<p>-bix</p>
 
<p>"The mortgage interest deduction decreases as one's income increases above certain treshold levels."</p>

<p>Actually, the opposite is true.</p>
 
<p>People with higher incomes get the greatest benefit from the mortgage interest deduction. The deduction does not decrease as one's income increases. As long as the amount borrowed is $1m or less, you can deduct the full amount of mortgage interest paid. Assume for sake of simplicity that there is a high earner in the 35% bracket and a low earner in the 25% bracket, each with a $500,000 interest only mortgage at 6.5%. Both will pay interest of $32,500 per year, but the mortgage interest deduction will be worth much more to the high earner -- an $11,375 "rebate" to the high earner compared with a $8,125 "rebate" to the lower earner.</p>
 
<p>I've always found that interest deduction is a farce. Let's spend $1 in interest to get 10 cents back? If you can live mortgage debt free. you are the better person for having done so. </p>
 
<p>marty mcfly and awgee are both correct. The higher your tax bracket the more your deduction is worth. However, if you exceed $150,500 in adjusted gross income, your overall itemized deductions are reduced by the LESSER of 80% your itemized deductions or 3% of the excess income over $150,500. So theoretically you could lose up to 80% of your deduction. </p>

<p>I agree with Anteater Alum that it's better to have the cash in your pocket then the tax deduction.</p>
 
<p>joehomeowner -- sorry, you are incorrect (as is awgee). You are speaking of the AMT. Qualified home mortgage interest is not subject to the AMT (specifically deductible under the AMT is "interest paid on a debt incurred to buy, construct, or substantially rehabilitate your principal residence or qualifying second residence.") In other words, your itemized home mortgage interest deduction will not be reduced as your income increases.</p>
 
<p>Joehomeowner is mostly correct and marty is mostly incorrect. The mortgage interest deduction deduction decreases per Joe's post, unless the amount of certain deductions, including mortage interest exceeds certain threshold levels which incur AMT and then the mortgage interest deduction decreases because of AMT. Either way, AMT or just high income, the mortgage interest deduction will decrease. Marty is correct about one thing. One may not deduct any interest on a loan amount over $1mil. There are also interest deduction restrictions on 2nds, and helocs for interest on amounts not used to purchase or improve your personal residence, and there are even some restrictions on amounts used to purchase or improve your personal residence.</p>

<p>Again, mortgage interest deductions and other deductions, (even dependency exemptions), are subject to a decrease in deductible amounts due to high income whether one is subject to AMT or not. Very high income earners are not subject to AMT because they are already pay at the highest marginal tax, thus negating the need for AMT. Very high income earners not only pay at the highest marginal tax rate, without being subject to AMT, plus they lose deductions.</p>

<p>Tax loopholes for the high income earners are a myth. High income earners pay huge amounts of federal income tax.</p>

<p>Marty - When tax code or interpretation says mortgage interest is specifically deductible under AMT rules, that means the deduction itself is subject to AMT, not excluded. It is IRS taxspeak. For non-tax-professionals, that means just about everything you read in tax code is exclusionary and reads the opposite of how we normally speak and communicate.</p>

<p>In normal speak, about the only schedule A deductions not subject to AMT or high income thresholds are charitable donation deductions.</p>
 
<p>awgee -- I'm sorry, there really is a lot of misinformation being spread here. I really can't make sense of your convoluted attempt to explain the AMT, but the fact is that the federal AMT allows the deduction of home mortgage interest <strong>and</strong> all charitable contributions. In other words, mortgage interest, as long as it is used to buy or improve one's primary residence (or secondary residence, in some cases), is <strong>not</strong> one of the deductions that gets disallowed under the AMT.</p>
 
<p>To mostly mirror awgee, it is my understanding that mortgage deductions phase out at high income levels and is based on income only or primarily. It is gradual, but very real, </p>

<p>Marty, I thought the whole point of AMT was that it didn't care what type of deductions you had, it is the nearly agnostic contrast to your itemized deductions.</p>

<p>SCHB</p>
 
Marty - It does not get disallowed. It does get reduced. Almost all deductions get reduced under AMT, except for charitable donations. I have not spread any misinformation. Everything I have explained is accurate. I don't know if it makes any difference to you, but I am an enrolled agent.
 
<p>marty mcfly - I am not talking about the AMT. Go to <a href="http://www.irs.gov/">www.irs.gov</a> and go to forms and download Form 1040 Schedule A. Look at the bottom of the form: "Is Form 1040, Line 38, over $150,500? If Yes - Your deduction may be limited. See page A-7 for the amount to enter" </p>

<p>Then download the instructions for 1040 Schedule A and look on page A-7. There you will find the calculation for the limitation on the deduction.</p>

<p>Even if you are not subject to AMT, you are still subject to this limitation</p>
 
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