Mortgage Interest

  

Categories: Mortgage

See: Mortgage. See: Mortgage Rate. See: Adjustable-Rate Mortgage (ARM).

What's the magic sauce in a mortgage? Rhymes with "shmax shmeductibility."

Yep, the interest comes right off the top. So if you have an interest-only mortgage of $300,000 and you're paying 5% interest, then you're paying $15,000 a year in fully deductible interest.

You make $100,000 as a forensic dentist, and on your last $30,000 in earnings, you pay 30% tax. But now, as far as the tax collector cares, you don't make $100,000. You make $85,000, because that $15,000 in interest comes right off of your taxable earnings. So whereas normally from $70,001 to $100,000, you'd pay 30% of that $30,000, or $9,000 in taxes, now, you pay 30% on the $15,000, from $70,001 to $85,000, or $4,500.

You save $4,500 in taxes. Or, said another way, instead of it feeling like $15,000 in mortgage interest, it feels more like $10,500 in mortgage interest costs.

Welcome to the American Dream. Pay at the window on the right.

Related or Semi-related Video

Finance: What is Interest Only Mortgage?17 Views

00:00

Finance allah shmoop what is an interest only mortgage Well

00:07

simply put it's when you only pay the rent on

00:10

the dough you borrowed you don't pay down the principal

00:14

you owe like if you have a three hundred thousand

00:16

dollars mortgage at six percent interest you're paying eighteen grand

00:19

a year to rent that money in six percent times

00:22

three hundred rands eighteen grand a year But the principal

00:25

you borrowed is likely due in thirty years So in

00:28

theory anyway if it were a normal mortgage you'd want

00:32

to pay down the principal little bit a month as

00:34

you go along like averaging ten grand a year in

00:37

principle pay down over thirty years That's times ten grand

00:41

right three hundred grand their total owning your home at

00:44

the end yeah yeah priceless that's what holmes work So

00:47

why would you want an interest only mortgage Well for

00:51

one thing the monthly payments or less so maybe you

00:54

could afford morehouse If on a thirty year three hundred

00:57

thousand dollar loan at six percent you're paying interest only

01:00

while you're writing a check each month for eighteen thousand

01:03

divided by twelve or fifteen hundred bucks maybe that's all

01:06

You can afford well the extra five hundred bucks arm

01:09

or you'd right toe pay down your principles Just not

01:12

something you can really do right now Maybe after three

01:15

years of scrimping and saving well you'll be able to

01:18

start paying down that principal reducing risk and making life

01:21

easier all the way around But right now you can't

01:24

afford it so the only thing you can do is

01:26

do the interest only dance Well the other reason you

01:28

might want an interest only mortgages that interest costs are

01:31

tax deductible Principal pay down costs are not so if

01:37

in a given mortgage payment of say eighteen hundred bucks

01:40

a month where three hundred of it is principal pay

01:43

down and fifteen hundred of it is interest well on

01:47

ly the fifteen hundred is tax deductible That three hundred

01:51

of pay down is not And if you're a forty

01:53

percent taxpayer the government is essentially picking up the tax

01:58

savings on the fifteen hundred times a forty percent at

02:02

six hundred dollars in interest You're paying such that they

02:05

quote feel unquote like the fifteen hundred is really only

02:10

about nine hundred a month in cost to you the

02:13

three hundred bucks and principal paydown feels like a full

02:16

three hundred dollars So some people seeking tio optimize their

02:19

tax deductions live in the world of interest only mortgages

02:23

and let the government for a change You know work 00:02:26.24 --> [endTime] for them How's that feel same all Take it

Up Next

Finance: What is a Mortgage?
345 Views

What is a mortgage? A mortgage is a loan on property. Obviously not many individuals, or companies for that matter, can or want to pay cash for the...

Finance: What is Adjustable-Rate Mortgage (ARM)?
17 Views

What is an Adjustable-Rate Mortgage (ARM)? An adjustable-rate mortgage is a mortgage that has a changing interest rate. Whatever it changes to is b...

Finance: What is a second mortgage?
4 Views

What's a second mortgage? Easy: it comes after a first mortgage. Hit play for more details.

Finance: What is a Reverse Mortgage?
6 Views

With a reverse mortgage, payments go in the opposite direction of a normal mortgage, where you pledge your home as an asset, and receive $ each month.

Find other enlightening terms in Shmoop Finance Genius Bar(f)