patrick.net
An Antidote to Corporate Media
1,192,891 comments by 13,872 users - 6DOF, askmeaboutthesaltporkcure, richwicks online now
invite response« First « Previous Comments 41 - 44 of 44 Search these comments
HeadSet
2009 Sep 22, 7:07am
Asset diversification is one reason
You have tied up your assets in the house when you bought it, whether through lump sum amount or obligated stream of payments. Unless, of course, you include walking away from a non-recourse loan.
as well as reducing your marginal tax rate
It does not really reduce the marginal tax rate, it just deducts the interest from the taxible income. No real advantage to a married couple until the standard deduction of approx $11,400 is reached. I guess you could say that in some cases the marginal rate is reduced, but only for those who were near a bracket cutoff.
Consider for a $650k house:
Married Couple 25% bracket pays cash - pays no interest but gets $11,400*.25 or $2,850 off taxes
Married Couple 25% bracket $650k mortgage at 6% - pays $38,792 interest to get $9,698 off taxes
This calculus gets worse for the mortgager as the years go buy, as the tax deduction goes down while the standard deduction tends (so far) to go up.
HeadSet
2009 Sep 22, 7:21am
EBGuy,
Most of the people in the country are likely looking at a $200k mortgage rather than $650k. At 6%, a mortgage of $200k or less has no tax advantage at all, as the standard deduction (married) will match the itemized deduction. At 5.5% (more likely at the non-jumbo principle amount), the cutoff is about a $240k mortgage.
Headset, In case my post was not clear, I AGREED with all of your "average joe" advice (for the reasons you elucidated in the subsequent post).
However, I still take issue with paying cash for a half million dollar+ home.
It does not really reduce the marginal tax rate, it just deducts the interest from the taxible income.
It does if it puts you in a lower tax bracket. And let's not forget to add in property taxes and another, I believe, 5.75% to the Commonwealth of Virginia. This will definitely put you "over the top" for the standard deduction. At that point, you can also add in any charitable giving to itemized deductions. Admittedly, from what I can gather, an "implied put" in Virginia is not as valuable as in California as the banks can still get a deficiency judgment on non-judicial foreclosures. What I find slightly humorous about your position, is that you are advocating putting all your assets in real estate. As an end game (see FABs parents) this is not necessarily a bad idea (inflationary hedge). Not so sure about middle age, though...
HeadSet
2009 Sep 23, 2:31am
Headset, In case my post was not clear, I AGREED with all of your “average joe†advice
Actually, I was the one who wasn't clear. I should have mentioned I was adding to your statement most people don’t itemize anyway so there is no “tax advantage†on the interest payments.
What I find slightly humorous about your position, is that you are advocating putting all your assets in real estate.
I will sell my current residence ($300k) before buying the up to $650k home. That way I will still have at least $300k cash, plus IRAs, plus military retirement, and if I don't get caught blogging too much, my job.
You are correct about being "over the top" for the standard deduction, especially when Virginia (interesting that you know VA is a Commonwealth as opposed to State) tax thrown in. But since I only invest in CDs, and never again in Wall Street Churn and Commission, I do not see the tax deductions as being worth paying the mortgage interest. That is, even with the tax benefits considered, the adjusted mortgage rate is still higher than the insured savings rate. Also, lets not forget the typical "Origination Fee" of 1%, or a cool $6,500, and another $6,500 per any point that gets thrown in.
« First « Previous Comments 41 - 44 of 44 Search these comments
Now that the housing bubble has popped, many who wisely rented throughout the runup are waiting to buy when conditions match their personal criterea. But what to buy? We have seen some changes in the last decade or so that should concern a new buyer.
For example, should the buyer be concerned about homes built between 2003-2006? During that period, so many homes (and entire neighborhoods) were built sacrificing quality for speed of construction. The sheer number of new units also hampered the building inspector's ability to do a thorough job, some skipping whole homes completely. And we have all heard about the Chinese drywall. Would you even want a house build long ago, but then renovated during the boom years? The same attitude of quickly satisfying demand applied here too, resulting in so many renovated homes being little more than paint and veneer covering wear and rot.
Perhaps one could have a new home built. But the builders tend to want bubble prices for any "custom" home. Building a new home has some choices also. For example, one can have a "poured" home. In this case, the entire house, including all stories, walls and gables, is poured concrete. When completed, the house looks no different than a stick built home, but is tornado proof and has a very high R factor. I saw several of these during a "Parade of Homes" in Omaha. Another choice is the factory built home, which is a far cry from the old prefab. For the factory built home, all walls are built in a large indoor facility. Everything is square. Even the foundation the house is set on must be trued out to a far higher degree than a stick built home. You can buy a factory home from basic ranch to very upscale multi-story.
Another option would be to buy an older home that is in need of rehab, and supervise the rehab yourself, taking all the time needed. You could be sure that all the appropriate materials were actually removed, and not just covered up. You could also put in more modern plumbing electrical, and HVAC. The actual structure of many old homes is actually quite good, as long as you don't mind the smaller rooms, lack of large bedroom closets, or only 1 to 1.5 bath.
I have a question for many on this blog. I have read so many posts where people are offering "$500k" or "$750k" or even more. Just what do you do for a living? I plan to pay up to $650k cash for a new home in about 2 years (in my opinion, people should plan to be mortgage free by age 45, that really helps the freedom). I do not plan on my new $650k home being an old 1200 sqft "drop out abode" either, but something much more luxurious. I would flinch at a $750k price tag, and I am a middle age life long saver with two paid for homes, over $650k in local credit unions, and have had a 6 figure income for the last 10 years. What kind of job do so many of you younger folks have that allows you to buy such expensive houses? And so many of you wealthy youths in the Bay Area that such austere homes on tiny lots would be bid up to the half million mark or more?
#housing