Last month (November):
Years left: 7.25
P = $857.03, I =$357.37, Escrow = 621.66
This month (December):
Years left: 7.083333
P = $863.05, I =$351.35, Escrow = 621.66
One month savings: $2.62
When I was reading up on amortization, I came across this comment on mymoneyblog. Milhouse has just made the point that your effective interest rate is lower when you itemize and take the interest deduction with your mortgage.
<July 18th, 2009 at 7:40 am
I used to make that exact argument, but when I actually started doing my taxes, the math didn’t work out. The thing you have to keep in mind, is that you ONLY benefit from interest you pay above and beyond your standard deduction. I’m married, so my standard deduction is $11,400.
In other words, if I pay $11,000 in mortgage interest this year, I would be better off NOT claiming any of that as a deduction and taking the standard deduction.
To put that in real terms, If I had a $183K loan outstanding and was paying 6% interest (the aforementioned $11,000) I would see no tax break from the government. I would still be effectively paying 6%, not 4.5%.
This is something I had not thought about before. This past year, I paid about 5K in interest. Does that mean that we’re not getting a bigger break than if we hadn’t itemized? Of course, there’s also charitable deductions and other things that only count when one itemizes, and having a mortgage also makes those worth more, because otherwise they’d be included in the standard deduction. Is this an argument for doing more pre-payment as you get near the end of the loan as your effective interest rate changes with the loss of itemization? (Or perhaps an argument to do more charitable donation?)
I don’t do the taxes in our household (they stress me out), so I’m not quite sure what else we itemize and how much it all adds up to. But it’s something to think about.
Update: Our mortgage interest may be only 6K/year, but when you add that to the state tax deduction, that puts us over the standard deduction and thus makes any additional charity donations deductible.
What do you think of the mysterious Maury’s argument? Is it one you’d thought about before? Is he right, and if so, is it worth it to you to itemize?