The Mortgage Interest Hustle and Why You’re Falling for it.


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.

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6 thoughts on “The Mortgage Interest Hustle and Why You’re Falling for it.

  1. NickS

    Very good article for starters, but you should also show a monthly amortization table to show when the mortgage payment “turns in your favor”, I.E. 50% of the payment goes towards interest and 50% of the payment goes towards principle. Let me give a basic example: I get a VA/FHA/USDARD loan with 100% financing and no downpayment for 150,000 for a home. I have monthly payments of around 800 a month at 5% interest. Looking at the amortization table, it will take paying off 1/3 of the total principle, 50,000 to reach the point where the mortgage payment turns in your favor.

    At this point, you will have approximately 10 years left on your mortgage loan, so you will have bought the house in 10 years.

    Moral of the story, when buying a house that you intend to live in, it’s ok to finance the entire house if you can immediately or very quickly pay of 33% of the principle and pay monthly payments from there on out.

    Even better idea: Make the minimum payments on the house as it’s an illiquid asset while saving the difference. When you have saved enough to pay off the house, do it! This method costs more, yes, but it provides a much needed cash margin of safety. If’ you lose your job and the bank forecloses on the house you lose the house and still have your money.

    If you had put money in the house while you were trying to pay it off, the bank forecloses, you lose the house, and you have no money saved.

    I recently bought a house I could afford that isn’t much more than rent, and have studied all available options. I am going with the second option I laid out above.

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    1. Very well thought out response, however there is no such thing as A. “a point where a mortgage turns in your favor” and B. “a house that doesn’t cost much more than rent”

      For one, saying you want to pay 3 times the market value on a house simply because you want take out a loan is not doing smart personal finance. And that is what happens when you look at the numbers broken down on 30 year loans- you end up paying almost 3 times as much for the home – amortization break down or not. People who live within their means and buy their places of residence outright are the only winners in this situation.People pay interest because they haven’t been properly taught how to manage their money and thats what we’re combating on this site.

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    2. Secondly, 9 times out of 10 the house ALWAYS costs more than renting somethin similar in that or the surrounding location. Too many times in my career have I seen folks look at the mortgage payment, compare it to the potential or previous rental payments then say “hey! we’re basically paying the same to rent!”. Please don’t be fooled- after taking into consideration property taxes, HOA, home maintenance (which would be taken care of for u by the landlord in a rental sitatuation), closing costs and downpayment simply to get you into the house, property insurance, hazard insurace and a billion other types of fees, it will be evident to you that you are paying tremendously more than you think. And those are just the guaranteed costs. Every smart financier takes into account risk/reward scenarios in every transaction they make. Take the real estate costs you are already paying then add that with the unseen risk premium you are paying should your property value drop in half and you really get a clear picture of just how bad real estate as personal property is as an “investment”. As a matter of fact, its not an investment nor is it an asset. Its a LIABILITY. Investments pay for themselves. A liability costs you 3 times as much as its market value simply to maintain.

      Folks, be smart. Only buy homes for sentimental value and after you understand that you’re going to pay out the anus for things you’ve never dealt with before by renting. Then as you’re doing this, prepare to buy the house in cash. No debt needed for the wealthy.

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  2. Its like you read my mind! You appear to know a lot about this, like you wrote the book in it or something. I think that you could do with some pics to drive the message home a little bit, but other than that, this is magnificent blog. An excellent read. I will definitely be back.

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    1. David Lance

      Paying interest for ANYTHING is the stupidest thing a person can do. Hey stupid Americans…………….WAKE UP. If you do not have the cash for it you DO NOT deserve to own it!

      Like

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