Quick Tax Question (Mortgage Interest Related

I was interested in seeing what the tax benefit would be for someone earning 51K a year, and having a 200k mortgage in the first year of the mortgage. Their projected tax liability would be about 8k, but their mortgage interest would be around 11k (200k Loan). assuming there are no more deductions besides this what would their actual tax burden be?

 

Assuming they were single, they would be able to itemize deductions and knock about $5000 - $6000 off their taxable income. Marginal tax rate would be 25%, so a savings of $1,250- $1,500. Assuming they were married, then not much savings at all since the itemized deductions wouldn't be much higher than the standard deduction. Property taxes would also be deductible, so a look at the closing statement might increase the itemized deduction.

 

lets throw a 401k with with 3800 dollars a year thrown in.

 

That reduces your base taxable income and assuming a marginal rate is still 25%, taxes is reduced by $950. At some point, your taxable income may slip below $31,850 (for 2007) and any additional dedutions save you 15 cents per deduction dollar rather than 25 cents per deduction dollar.

 

now lets just assume that you wouldnt be making any loan interest payments. also, can a loan for a downpayment have it's interest written off as mortgage interest?

 

The 401K will be worth it even with no Mortgage interest deductions as it is still like money you didn't make (comes out pre-tax.)

 

MRT144,

Seriously, you should just join the GRS forums community. Lot of financial folks there who will gladly answer your question.

 

I do not think so.
Again, I will gladly talk to you about this, or you can talk to folks on my website/forums

 

The 401(k) would contribution would be deducted from your taxable income and you would get the standard deduction instead of itemizing. The 401(k) contribution is not an itemized deduction, so you get it whether you are itemizing or taking the standard deduction. Unless the down payment loan is secured by the proprety, the interest is not deductable.

 

What is this "tax" you speak of?



Just wait until April 15th: my favorite day of the year!

 

so here is the debate i am having with someone on another forum

you make 51k per year and you are single. you have the chance to purchase a 250k condo near your office and near stores and everything you could want on a weekly basis. the terms of the loan would be identical except for;

do you
a. rent for 5 years to save up for a downpayment by utilizing your 401(k) then drawing 50k for the one time allowance of using it on a downpayment for a first time home purchase. the 401(k) would have an annual return of 7%. the company matches 100%

or b. take out a loan for 35k, save up for a 15k, and take out a 200k loan.

some mathematical information. 30 year fixed, 6% interest for the loan. in the second scenario you would have 15 year 10% loan for 35k. assume that 401(k) contributions are equal to the mortgage of scenario b, minus rent, which is 1000 dollars a month and increases 5% per year.

i argued that option a. would be better because not only are you getting tax benefits while saving, you're also going to have more income to spend than the person in scenario b. for at least 7-8 years that could be going towards a 401(k) or IRA instead of paying two loans at once. the counter argument was that one could capitalize handsomely by getting in earlier on the real estate and counting on a return to 4% appreciation per year. i think at the 15 year point the value of the home would be less than the value of the home + 401(k) contributions. at the 30 year point i would say even more so. at the end of the contest, 35 years or so, i would say i would be even more right.

 

It's part of the social contract and generally linked to the desire to enforce freedom, liberty, and representation (in modern society). Most societies add stuff that the average person would not pay for given a choice, but that's another matter.

I guess I can't blame someone for not wanting to pay for those things, if they aren't important to that person. Letting the King dole privledge, power and treasure collected via mythical tradition is much easier (especially when you're a trophy). That's why first worlders can't really fix the brain drain, but can address a symptom.

 

I think an area JH and I are consistently different on is taking risk and leverage. People always forget the benefit of leverage on real estate that needs to be minimized in most stock and bond portfolios.

I've learned from taking a core, alpha (max) and tactical approach (cat) to risk it's served me well. Young people take way too little risk. Their overriding criterion is the consequences of losing. Screw losing. When you're young you can afford to lose. When you're old you can not.

Shooting for the moon and losing is not life threatening. However, making a killing makes an enormous difference and I mean huge. Get over the fear of regret. Chances are you're weighting it too highly in life.

And read my Will Rogers quote for emphasis.

 

this isn't really about investing instruments but more about maximizing your financial position over the course of your lifetime.

anyway, I agree that young people dont take enough risks but then again most young people dont really know what risk is.

 

And what I'm saying is the leverage will power that return beyond what can be made in your 401k. Undoubtedly risker but leverage is huge in wealth creation.

 

i think you're wrong and I think where you're wrong comes from one easy fact. company 401(k) matching. even at 6% of gross, you would be getting free money from your employer. if you contributed 10% of net on 51k a month you'd wind up getting ~350 from yourself, and almost 210 from your employer. essentially a 60+% return on every contribution, compounded by the returns on the market, for a longer period of time than scenario b.

 

Actually you're right with matching assuming the company is that generous (most are not) and you're willing to accept the vesting handcuff.

 

what do most companies match on gross? 4%? what is the typical vesting scale? 5 years for 100%? (the one corporate job I worked for had 6% matching on gross after 90 days, and 100% vesting after 5 years.) heck, if you're at a company you like, you might even get promoted after 5 years and make more money.

 

@@mrt144

you make 51k per year and you are single. you have the chance to purchase a 250k condo near your office and near stores and everything you could want on a weekly basis. the terms of the loan would be identical except for;
100% financing means your pay to loan ratio is 5 to 1. That is higher than the 3.5 to 1 that was recommended before the housing market went willy-nilly. According to traditional measures, you do not buy.

a. rent for 5 years to save up for a downpayment by utilizing your 401(k) then drawing 50k for the one time allowance of using it on a downpayment for a first time home purchase. the 401(k) would have an annual return of 7%. the company matches 100%
I would not tap you 401K for a home loan. Compounding for retirement is your friend.

or b. take out a loan for 35k, save up for a 15k, and take out a 200k loan.
You could probably do a 80/15/5 loan. Those are not unheard of with the mortgage industry today, and is more proper. The 2nd position would have a higher rate.

some mathematical information. 30 year fixed, 6% interest for the loan. in the second scenario you would have 15 year 10% loan for 35k. assume that 401(k) contributions are equal to the mortgage of scenario b, minus rent, which is 1000 dollars a month and increases 5% per year.
I can tell from the rates you are stating that your FICO score is not considered great, and you're likely more towards the lower end of the good rating. Can you do things to increase your FICO score?

Don't raid your 401K. And don't assume the housing market is going to go up. It's likey flat-lined in many places for many years.

 

You're right, because we do disagree on the home-buying thought here. I'm quite risky when it comes to stocks, but when it comes to your primary home, I'm not in favor of 100% financing loans. I don't feel it accounts for the fact that we treat things that we put our money into better than things we didn't. That's human nature. I'm especially hesitant to tell someone to risk a lot of money on a highly leverage home in a housing market that will likely be flat for many years, and that downward pressure looms when the baby boom generation retires and these larger homes do not have the demand they had 5 years ago. I don't have issues with obtaining investment property and all that with fancy loans, but not your primary, which MRT is talking about. We know from his interest rate quotes that he has room to improve his FICO, as his rates should be around low 5% for the first and low 7% for the second if his FICO score was 750+. Does he have a cash buffer in case he loses his job (unless you're in the gov, that is a possibility in an economic downturn).