Mortgage Interest and Your Tax Liability

Author: Tony Robinson

As you begin your search for the perfect home, and you research your mortgage loan options, the tax consequences of a mortgage loan with mortgage interest doesn't ever cross the minds of most consumers. But as you decide which product you need, or think you need, the tax repercussions and benefits should play a role, even if it's a small one, in the final decision.

For many consumers, the first thought that's given to their tax return, and tax liability, comes from the mortgage lender. Quite often, mortgages are touted as being one of the best venues for reducing your tax liability at the end of the year. Yes, your mortgage interest payments will reduce your tax liability, but is that your ultimate goal? Is that why you're looking at mortgage packages? No. Your ultimate goal in choosing a mortgage is to pay for your home. Every situation in this case, and this case would apply to the average consumer shopping for a mortgage loan, is probably not going to get that much benefit from the tax deduction that comes from their mortgage interest payments. The average consumer should first look at their monthly payment and choose a mortgage based on affordability, not tax liability.

The smart consumer will not allow the flashy ads displayed by many mortgage lenders to influence their mortgage loan decision. The smart consumer will examine the interest level, the term of the mortgage loan, the affordability of the monthly payment, and base their decision upon their ability to pay in relation to the mortgage that achieves their primary purpose: the payout of the loan.

You and I rarely consider the impact of any financial decision on itemized deduction statement; however many of those decisions do affect itemized deductions. Our itemized deductions and major portion of our tax liability? No. Do they contribute to a reduction in tax liability? Yes. The relativity of the contribution when contrasted to the required time in examining the actual benefit we derive from the itemized deduction calculations warrants the point mute. It's just not worth the effort. If you happen to be in your mid-40s and your purchasing your first home, I would suggest that you consult a financial adviser prior to making a mortgage decision; however most individuals in their mid-40s would already realize the benefit of a financial adviser. A young couple purchasing their first home would truly benefit from the interest deduction, not to the extent however off more than $40-$50 of the bottom-line for their tax liability. As you age, and your way to earning power increases, the benefit of the itemized deduction decreases. Does the average person understand how tax is configured? No. The only person who can truly enlighten a consumer would be a tax professional, and many average individuals would spend more money in the determination of the benefit than they would reap.

The new guy on the mortgage loan law, known as the interest only mortgage loan will bring the greatest benefit to the consumer. The interest-only lawn in the amount of interest you can deduct on your tax return are one and the same, but does the benefit of the mortgage interest deduction outweigh the added expense of an additional five years on the mortgage loan?

What about the mortgage loan refinance? Any equity you remove from your home in the form of cash that can be used to pay down or pay all high interest credit card accounts will transfer a nondeductible expense to your deductible expenses. However you should remember the trade-off you now owe more against your home, and you have used your equity reserves. Was the deduction worth the trade? Many times the answer is no. For many consumers, paying off high-interest credit card debt only increases the probability of additional credit card charges. In other words, not only have use your equity, you've returned to high-interest debt.

Prior to a final decision of your mortgage along product, take a moment to review your tax situation. Each situation is unique. The lower your income, the greater the benefit, but rarely is the benefit worth the cost. Behold, the Tax Man, cometh.

About the author: Tony Robinson is a Real Estate Investor, Webmaster and International Author. Visit http://www.ezy-mortgage.com/ for his tips on mortgages.