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The Mortgage Interest Deduction Hustle

Y’all know the mortgage interest deduction hustle, right?

LOAN HACK:  Mr. Jones, your $1,500 payment only feels like $1,000 because you get to write the mortgage interest paid off of your income.”

JONES:  Your sure about that?

LOAN HACK: Ab-sa-tively.  ‘Course, my boss tells me that I’m required to refer you to your tax advisor for that question.

JONES:  Good idea.  Can we do a conference call tomorrow?

This is where loan hacks get into trouble.  You see, the mortgage interest deduction is  ONLY deductible from taxable income IF the customer itemizes his expenses.  The standard deduction, for 2009, is $5,700 for single filers and $11,400 for married people filing jointly.

Q: When does that get loan hacks  in trouble?

A:  Somewhere around a $200,000 loan amount for married people.

Even at $300,000, the savings aren’t what might appear.  While the customer might pay about $17,000 in mortgage interest, his MARGINAL benefit would only afford him a $6,000 income deduction  (he would still take the standard deduction if he continued to lease).  When loan hacks suggest that  the $2400 payment only FEELS like $1500, they’re practicing prestidigitation.  In fact, the mortgage payment really FEELS like $2200, after accounting for the MARGINAL tax savings.

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 and originators, ” Oh!  You get a write-off (but check with your tax advisor)”

Q: Is it important that you have this conversation with customers?

A: Only if you want to position yourself as a mortgage fiduciary.  Positioning the new breed of originator as a fiduciary is one of our goals at Mortgage Revolution.

N.B.- This is exclusive from the federal bribe to buy a home.  We’ll examine the affect of the legal bribe to buyers  when we ask “Are you explaining to your customers the cost of NOT buying a home?”, next week.

June 17, 2009 by · Leave a Comment

About Brian

Brian Brady is a financial services veteran and has been a residential loan originator since 1995. He is an author and speaker for the industry-acclaimed Bloodhound Blog where he teaches online marketing to real estate agents and originators.

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  1. Mark Green says:

    Brian, thanks for writing this.

    These are the EXACT types of issues we need to be talking about publicly. We, as consumers, have been conditioned – no, make that BRAINWASHED – into believing that we get to deduct our mortgage interest. The “if’s” and “but’s” rarely come up during the sales process – I certainly haven’t heard it in my travels.

    Indeed, this is inspiring stuff, long overdue. Thanks for sharing your unique perspective here.

  2. Mark Green says:

    Brian, this article is too strong not to be getting more comments and traffic. Takes time I guess. Thanks for publishing it here man.

  3. Brian Brady says:

    “The “if’s” and “but’s” rarely come up during the sales process – I certainly haven’t heard it in my travels”

    We’re gonna start chaning all of that, Mark..come November.

  4. Brian, I am with you 100% in that this should never be an across the board “and you get a tax deduction too”. Still, the thoroughly professional loan fiduciary needs to either do one of two things and that is- have the borrower consult with their tax advisor to review this as it relates to their specific and sometimes complicated tax situation or to take the time to review the whole of someone’s situation. As I see it, it’s not a matter of saying you’re losing your standard deduction as it is sometimes characterized. It’s much simpler and that’s that you have two choices. Either you itemize, or you do not. Clearly, the choice that supplies the greater benefit is the way you go. The complications come about in that for someone that will now benefit from itemization, there may be even more available to them than ever previously considered. Medical expenses (if significant), sales taxes, points paid, investment interest, charitable donations, employee business expenses, etc., and of course, if we’re purchasing property, there is always going to be the inclusion of real estate taxes that are also usually deductible (outside of AMT land). As well, an individuals or couple’s marginal bracket has to be considered as the higher this is, the greater the actual dollar value of reducing one’s tax liability. It is more rare for high bracket earners to use comparatively small loans but it happens often enough that it does have to be accounted for. Those are also the very same folks that will likely have the other deductions to add to their schedule A too.

    What’s ever more important is for buyer’s and their advisors to do is a comprehensive costs analysis specific to the property in question, their intended time of ownership, marginal brackets, income expectations, etc., and accordingly, to weigh all of the expenses and gains (the true net cost or gain) vs. the alternative of renting.

    Though the tax deduction can be mischaracterized, you are still either a renter or an owner. It comes down to net tax liability and total benefit. Renters have a guaranteed expense in exchange for shelter and no specific tax break. They have a standard deduction that would also apply to someone living for free in Mom’s basement. Owners have the option of tax deductibility or the standard deduction – whichever is greater. To discount the value of the deduction by the loss of the standard deduction is not really accurate because it’s either or.

    Where you are saying: “When loan hacks suggest that the $2400 payment only FEELS like $1500, they’re practicing prestidigitation. In fact, the mortgage payment really FEELS like $2200, after accounting for the MARGINAL tax savings.”

    As I see it, if you do purchase the home, your deduction will make your payment feel like $1500 because you didn’t lose your standard deduction, you expanded it from $11,700 to up to $1,100,000. To provide an example: Married prospects are renting at $2400 per month less their standard deduction of $975 = $1425 or they take on a mortgage payment of $2400 less $975 in deductible interest and real estate taxes OR their standard deduction of $975 which would still = $1425. So they’re not losing their standard deduction, they’re simply migrating from renting to ownership in this example with the same net cost.

    But again, I’m with you on your intent and need for education. There are many for which the standard deduction will overrule the benefit of itemization and in those cases, they should not be lured into thinking that the payment will be magically lowered or that in reality, their net tax liability will be less. I just think that loan officers should be saying – “and you get a tax deduction that if more valuable in your case than your standard deduction, may help to lower the real cost or to enhance the benefit of owning your own home.”

    And sorry, it’s just so like me to make a comment longer than your post…details, details..

  5. Marson Maynor says:

    Great post. I agree – The ability to deduct mortgage interest is definitely a benefit as well as educating the buyer is a very important element.

    The mortgage payment as it is calculated has to be made regardless of the so-called net payment after taxes. With the different configuarations of dependant deductions to affect net income, note rate, property taxes, possible points and any other personal write-offs, I firmly believe every FTHB should consult with a Tax Professional after meeting with me.

    Bottom line the mortgage payment has to be affordable every month.

  6. Brian Brady says:

    “To discount the value of the deduction by the loss of the standard deduction is not really accurate because it’s either or. ”

    I see where your going, Brian but I’ll disagree. We analyze the MARGINAL effect of an investment decision in financial planning. Now, if a taxpayer were itemizing deductions, I would be inclined to agree with you.

    Tax benefits are but a component of the decision to buy a home. I’ll address this later this week here when we look at the “cost” of renting vs owning.

  7. john glynn says:

    Excellent point, and well said.

  8. “Tax benefits are but a component of the decision to buy a home”. That’s the important point. I knew our principles had to be in unison. This topic can be looked at from many angles when taken out of the context of a particular buyer or situation.

    I understand the marginal concept/practice, my point could be most simply stated that if you had a choice of only one pizza and you opted for a large instead of the small, your marginal benefit may be just two slices, but you still had eight for dinner.

    Bottom line is that we agree that true net cost to own or rent has to account for many more factors and when making decisions, each and all must be weighed as applicable to the individual(s).

    I look forward to your next installment.

  9. Brian Brady says:

    We\’re on the same page, Brian L..

    \"I look forward to your next installment.\"

    …and I to your comments. I think this sort of critical thinking is the cornerstone to the Revolution. Glad you\’re here.

  10. I agree with Mark Green, this is a strong article and you would think it would be getting more comments. As more people read this article over time it will accumulate more comments. Good work.

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