Mortgage Tax Benefit

Did you know that you can give yourself an annual raise of $4000 by having a mortgage?  Yes, it is true that you can give yourself a raise simply by owning a home and having a Mortgage tied to your property.  Mortgage interest is tax- deductable and, as a result, will lower your yearly tax obligations. Every payment made towards your Mortgage also requires a very large payment to be applied towards the interest.  You can deduct all of this interest from your taxes throughout the year.  And from your closing, you can also deduct origination points.  If you wish, you can ask me more on this subject at a later time.  Here is how your tax deductions work.  Let’s say you have a house payment of $1500.  The payment will be itemized on your Mortgage statement into several individual parts.  Depending on how your Mortgage payments are broken down, the statement will determine the exact amount of tax deduction allowable for you.  Anything that is taken out of your payment for interest would be the tax deductable portion of your Mortgage payment. Now let us return to the example of the $1500 house payment. On a $1500 monthly payment the interest portion will account for approximately $1200 of the payment.  When you multiply that out over 12 months it will calculate that you would have paid $14400.  Given the amount of Mortgage interest paid, and using a standard 30% tax bracket, you can then account for the amount of the $14400 that would be returned to you.  If you are in the 30% tax bracket your tax refund would be an estimated $4200. 

 As a result of your Mortgage interest another $4200 has been put into your pocket yearly, assuming that you are claiming zero or one on your W-4’s.  By claiming zero or one on your W-4’s you are putting yourself into the highest tax point for your income.  It might better serve you by putting yourself into a lower tax point and then agreeing to a lower yearly refund.  Your goal should be to spread out the Mortgage cash back over each pay period versus once a year.  You can accomplish this by increasing your W-4 deductions, which will lower the amount withdrawn in taxes.  This reduction will increase your net income every month.  You can quickly see how your Mortgage has opened up your income-related cash flow. 

 Here is how you can calculate the number of deductions to take for your interest paid on your Mortgage.  For every $3000 in interest you pay you can claim one addition deduction.  Every time you claim a higher number of deductions, your tax obligation goes down.  In this case ($14400 / $3000 = about five) you would then need to add one for yourself, which equals a total of six deductions that can be taken.  By having a Mortgage you could have a total of six deductions (including yourself).  These deductions would not be possible if you were not a homeowner.  By taking six deductions on your w-4 form you drastically reduce the tax amounts being withheld.  This will translate into more net dollars in your wallet, monthly versus yearly.  It is that simple.  So, the next time you look at buying and you have a maximum payment in mind, imagine what you can afford if you add $300 to your income; it could put you in the home of your dreams.