Y’all know the mortgage interest hustle, right? No? Well lets start with the tax deduction side of it first:
Broker: Mr. Jones, your $2,400 mortgage payment only feels like $1,500 because you get to write the mortgage interest paid off of your income every year!”
Jones: Your sure about that?
Broker: Ab-sa-tively. ‘Course, my boss tells me that I’m required to also refer you to your tax advisor for further information.
Jones: Good idea. Can we do a conference call with the four of us, including my wife tomorrow before we sign the loan docs?
Now this is where the scam broker gets into trouble. You see, the mortgage interest deduction is ONLY deductible from taxable income IF the borrower itemized his expenses. The standard tax deduction, for basically every citizen in America- home or no home- is $5,700 for single filers and $11,400 for married people filing jointly. So around what loan amount do brokers get into trouble with this statement? Somewhere around a $200,000 -$300,000 loan amount or below for single or married people.
Even at $300,000, the savings aren’t what they might appear. While the borrowers might pay about $17,000 in mortgage interest, their MARGINAL benefit would only afford them about a $5,600 income deduction (the $11,400 deduction everyone in America gets subtracted from the $17k that was actually on mortgage interest). When loan broker suggests that the $2400 payment only feels like $1500, 9 times out of 10 they are flat out lying. In fact, the $2,400 mortgage payment really feels like $2200, after accounting for the MARGINAL tax savings you’ve paid out the anus to obtain. This is because that $5600 isn’t a credit but rather a deduction as we’ve been mentioning. At the end of the day for most people, unless that extra amount you’re now removing from your taxable income now brings you down significantly to a lower tax bracket, you are basically still getting taxed the same, patna.
Why is this important? Well, at least half of the homes sold, in the past twelve months, were under that amount. How many of those home buyers do you suppose were told by their real estate agents, brokers and originators, ” Oh, don’t worry about how much the note is vs how much you were paying in rent. You get a huge tax write-off (but check with your tax advisor)”. This practice is extremely irresponsible and should be illegal as it has led many people into utter hell and misery come tax time and they get the rude awakening that the money they were planning on is basically null and void. (So much for paying of those credit cards down with this years tax return…)
But heres where it gets worse. Now that you’ve realized you were hustled on the tax deduction portion of the game, after you file your taxes and look at the numbers, it forces you to see just how little of the actual principle you have been paying on the banks..er…your home that whole year. Upset, you start to read the fine print in your loan documentation and realize another startling thing….you’ve just been front end hustled..
An article recently posted from a popular mortgage professor named Jack Guttentag, explains how you’ve just been set up for the front loaded mortgage interest trick. And unfortunately this is how almost ALL mortgages are setup these days. Trust me when I tell you these banks aren’t stupid:
It is often said that the interest on home mortgages is “front-end loaded”, implying that the way lenders charge interest is both unfair and self-serving — possibly even sinister. The following statement is typical.
“Did you know that on your typical 30-year mortgage, it takes approximately 21 years just to pay down less than half of the principal of your loan?”
The mortgage industry’s big secret has been kept away from the public since the Roosevelt administration. This little-known secret has been taking you (and every other homeowner) for a very costly ride. Your 6 percent low-interest mortgage is really costing you upwards of 60 percent or more.
You might be asking how you could possibly be paying that much without knowing it? It is because all mortgages are front-end loaded, meaning you’re paying off the interest first. So during all of those first years, you aren’t paying down the principle. Instead, you’re buying the banker a new Mercedes.
The Factual Foundation
Let’s begin with the factual foundation for this position, which is not in dispute. The standard mortgage contract calls for full amortization over the term with equal monthly payments of principal and interest. For example, a $100,000 loan at 6 percent for 30 years has a payment of $599.56. That payment, if made every month for 30 years, will retire the mortgage. For convenience, I will call a fully amortizing mortgage with equal monthly payments a FAMEMP.
A necessary consequence of full amortization with equal monthly payments is that the composition of the payment between interest and principal changes over time. In the early years, the payment is mostly interest; in the later years, it is mostly principal. At 6 percent, it does indeed take 21 years to pay down the balance of the $100,000 loan to $50,000. This is the factual foundation of the front-end loading argument.
So folks, please don’t fall for these blatant lies that these brokers and agents are telling you. Never accept debt or a mortgage as an option and always use CASH.
You can finish reading the professor’s article HERE.
Find out how to avoid the hell that is mortgage interest altogether HERE.