There is no doubt that renters experience a tremendous tax benefit or subsidy when they buy a house. This is b/c they can deduct all of the interest and property taxes they pay from their income before calculating their tax liability.
But, we often have borrowers who are confused about the nature of tax deductions, believing they benefit from higher mortgage interest payments b/c their “deduction” will be larger. Borrowers also often believe they need a mortgage b/c they “need” the write-off.
We had a borrower last week tell us that he wanted to keep his 5% rate and not refi b/c he “needed his deduction.”
The fact is that the mortgage interest expense always exceeds the tax savings resulting from the deduction. Interest is only deducted from income before a tax liability is calculated. Interest is not deducted directly from taxes owed.
More interest equates to more out of pocket expense no matter how high one’s tax bracket is.
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