Home Mortgages -- Good Tax Deductions?
- 2004 1 Oct
Despite changes to the IRS tax code over the past several years and the repeal and limitation of many non-housing itemized deductions, mortgage interest is one of the tax deductions still available to the typical middle-class taxpayer.
According to IRS Publication 936: "For you to take a home mortgage interestdeduction, your debt must be secured by a qualified home. This means your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. The interest you pay on a mortgage on a home other than your main or second home may be deductible if the proceeds of the loan were used for business, investment, or other deductible purposes. Otherwise, it is considered personal interest and is not deductible."
Often, people who borrow to purchase houses believe that the tax break they receive justifies the interest they pay. In fact, the most common argument against paying off a home mortgage early is the loss of the tax deduction for the interest. But is it as good a deal as it's made out to be?
Not As Good As It Looks
The great 19th-century British author Charles Dickens said, "It has been my experience that if a thing sounds too good to be true, likely it is." In the case of mortgage interest deduction, Mr. Dickens' admonishment may need to be heeded.
A home mortgage interest deduction is often misunderstood. In order to recoup all of the interest paid on a mortgage, a person would have to be in the 100 percent tax bracket. However, most people pay around 30 percent of their income in taxes. Therefore, the IRS deduction they receive is 30 percent of the interest paid on the mortgage.
As an example (remembering that the tax rates are graduated and based on a lower or no percentage at lower incomes), assume that a person is in a 30 percent federal tax bracket and a 6 percent state tax bracket. That means for each $1,000 in interest paid on a home mortgage, 30 percent or $300 of the interest paid could be received back from the IRS and 6 percent or $60 could be received back from the state. This would net the taxpayer $360 from the federal and state governments for the $1,000 interest payment.
But, wait a minute -- what happened to the other $640 you paid in interest? Well, of course, the mortgage company kept the $640. Consider what would happen if a homeowner simply paid the taxes instead of paying interest on a mortgage; the owner would owe $360 in federal and state income taxes but would keep $640. Get the picture?
Most Americans accept long-term debt on their homes as normal. Understandably, with the prices of homes being what they are today, most couples need extended loans to lower their monthly payments initially when buying a house -- nothing wrong with that.
However, couples could pay their homes off in 10 to 15 years if they would simply control their lifestyles and prepay their mortgage principal a little bit each month. Then, when they have no mortgage, they might have to pay some additional taxes, but the point is that they also get to keep what they would have had to pay to the mortgage lender.
Investing In A Home
A simple investment strategy for any homeowner to follow is this: Make home ownership an investment priority. Prepaying on the mortgage principal makes home ownership sense. Then once the home is paid off, the monthly mortgage payments that were being made to the mortgage company can be used for other debt elimination, saving for education, the Lord's work or retirement.
A fairly accurate guideline for prepaying on the mortgage principal is to make at least one additional monthly payment on the mortgage principal every year, along with the regularly scheduled payment, and a 30-year mortgage would be reduced by at least seven years. Another method would be to pay as much as $100 extra each month on the mortgage principal, and a 30-year mortgage could be reduced by at least 10 years.
Nevertheless, if a home mortgage cannot be paid off within the next five years or so by adding additional payments to the principal, the homeowner might want to consider investing any surplus funds and accumulating the funds until they can pay off the mortgage with one lump sum payment. However, the downside to that approach is that investments always carry some risk. Therefore, each family must pray and determine what is right according to God's specific plan for them.
Free Up The Lord's Money
Without question, the best overall investment for the majority of Americans is home ownership. And an excellent plan is to pay off a home mortgage as soon as possible, because you'll not only save the interest, but you'll also be able to accumulate savings.
This makes sense and seems to outweigh by far any tax deductions received from paying mortgage interest.
One of the primary reasons that God brought Crown Financial Ministries into existence is to teach people God's principles of finance so that they can be free of debt in order to help fund the Gospel of Christ worldwide. "Remember this ... the person who sows sparingly will also reap sparingly, and the person who sows generously will also reap generously" (2 Corinthians 9:6).
Once Christians become financially free of personal debt, we believe that they will have a greater abundance with which to fund the Lord's work. William Carey, the "father of modern missions" as a Baptist missionary to India, said, "I was once young and now I am old, but not once have I been witness to God's failure to supply my need when first I had given for the furtherance of His work. He has never failed in His promise, so I cannot fail in my service to Him." Carey gave so that the Gospel of Christ could be preached throughout the world, and God rewarded him all of his life.
Consider paying off your mortgage as soon as possible so you can free up God's money. Remember, the very best investment a person can make is an investment in the Kingdom of God. "Seek first the Kingdom of God ... and all these things will be provided for you" (Matthew 6:33).
Howard Dayton is CEO of Crown Financial Ministries. Dayton and the late Larry Burkett joined forces in 2000 when Crown Ministries led by Dayton merged with Christian Financial Concepts led by Burkett. The new organization became Crown Financial Ministries, on the Web at www.crown.org.
© 2004 Baptist Press. Used with permission. All rights reserved.