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I really don't get this deduction, it is basically rewarding people to take risk and makes it better to take a morgage than buy the home outright?

AnimalMuppet 9y ago
No. If you pay $X in mortgage interest, you get $X * Y% back, where Y% is your incremental tax bracket. That is not a net win. It's just less of a loss.
- JustAnotherPat 9y ago
  if you put your money in something like crypto instead, you can come out ahead easily.
  - AnimalMuppet 9y ago
    If you put your money in something like crypto (I presume you mean Bitcoin?) instead, and if it performs like you expect, you can come out ahead easily. But if you put your money in Mt Gox...
  - thescriptkiddie 9y ago
    People are going to downvote you for mentioning cryptocurrencies, but your point is true even of much more conservative investment strategies. A home is not an investment, it is a depreciating asset. If you can afford to buy a home (in cash or on a mortgage), you will almost always come out ahead if you put the money into mutual funds and rent instead.
    - AnimalMuppet 9y ago
      I question your "almost always". If I buy a home, it's a depreciating asset. That is, I buy a home (via mortgage) for $300,000, and at the end of the mortgage, it's only worth $200,000. So I've paid $300K for an asset that's only worth $200K. But if I rented, at the end of the same time period, I have an asset worth $0, and still have to pay to live somewhere. But of course it's not that simple. I can often rent for less than I can buy; I can invest the difference. If I don't live in the same house until I pay off the mortgage, I don't wind up with a place to live for free. If I downsize, I can wind up with a place to live for free and a chunk of cash. And so on. Let's take one specific example. Suppose I have little cash. I could borrow $300K and buy a house. At the end of 30 years, I have a house. I've paid, what, $2000/month in payments. At the end of the deal, I have an asset worth $200K, in which I also can live for free (but I can't do both - I can get the $200K, or I can live in it for free). If I want the same deal putting the money into a mutual fund, I probably can't get it, because nobody's going to lend me $300K to invest in a mutual fund. The deal I can get is to rent for $1000/month, which gives me $1000/month to invest. At the end of the same amount of time, I have nothing to show for the $1000/month in rent except having not been homeless. For the $1000/month I've invested, I have... well, it's hard to say. What's your best guess about the rate of return of the mutual fund, and what's your variance around that best guess?
      - thescriptkiddie 9y ago
        The number I've always heard is 4% after inflation, but that assumes no capital gains tax. Here is an article [0] that claims 1.9% per year over 30 years after accounting for taxes and inflation. Plugging $0 starting capital, $12,000 addition per year, and 1.9% compounded annually into the compound interest formula yields $480,000 after 30 years. Then keep in mind that owning a home obligates you to pay for property tax, maintenance, and insurance. Of course, there are still some cities where buying is a sensible option [1]. [0] https://www.forbes.com/sites/advisor/2014/04/24/why-the-average-investors-investment-return-is-so-low/#5741bca9111a https://www.forbes.com/sites/advisor/2014/04/24/why-the-aver... [1] https://smartasset.com/mortgage/price-to-rent-ratio-in-us-cities https://smartasset.com/mortgage/price-to-rent-ratio-in-us-ci...

AnimalMuppet 9y ago

No. If you pay $X in mortgage interest, you get $X * Y% back, where Y% is your incremental tax bracket. That is not a net win. It's just less of a loss.

JustAnotherPat 9y ago
if you put your money in something like crypto instead, you can come out ahead easily.
- AnimalMuppet 9y ago
  If you put your money in something like crypto (I presume you mean Bitcoin?) instead, and if it performs like you expect, you can come out ahead easily. But if you put your money in Mt Gox...
- thescriptkiddie 9y ago
  People are going to downvote you for mentioning cryptocurrencies, but your point is true even of much more conservative investment strategies. A home is not an investment, it is a depreciating asset. If you can afford to buy a home (in cash or on a mortgage), you will almost always come out ahead if you put the money into mutual funds and rent instead.
  - AnimalMuppet 9y ago
    I question your "almost always". If I buy a home, it's a depreciating asset. That is, I buy a home (via mortgage) for $300,000, and at the end of the mortgage, it's only worth $200,000. So I've paid $300K for an asset that's only worth $200K. But if I rented, at the end of the same time period, I have an asset worth $0, and still have to pay to live somewhere. But of course it's not that simple. I can often rent for less than I can buy; I can invest the difference. If I don't live in the same house until I pay off the mortgage, I don't wind up with a place to live for free. If I downsize, I can wind up with a place to live for free and a chunk of cash. And so on. Let's take one specific example. Suppose I have little cash. I could borrow $300K and buy a house. At the end of 30 years, I have a house. I've paid, what, $2000/month in payments. At the end of the deal, I have an asset worth $200K, in which I also can live for free (but I can't do both - I can get the $200K, or I can live in it for free). If I want the same deal putting the money into a mutual fund, I probably can't get it, because nobody's going to lend me $300K to invest in a mutual fund. The deal I can get is to rent for $1000/month, which gives me $1000/month to invest. At the end of the same amount of time, I have nothing to show for the $1000/month in rent except having not been homeless. For the $1000/month I've invested, I have... well, it's hard to say. What's your best guess about the rate of return of the mutual fund, and what's your variance around that best guess?
    - thescriptkiddie 9y ago
      The number I've always heard is 4% after inflation, but that assumes no capital gains tax. Here is an article [0] that claims 1.9% per year over 30 years after accounting for taxes and inflation. Plugging $0 starting capital, $12,000 addition per year, and 1.9% compounded annually into the compound interest formula yields $480,000 after 30 years. Then keep in mind that owning a home obligates you to pay for property tax, maintenance, and insurance. Of course, there are still some cities where buying is a sensible option [1]. [0] https://www.forbes.com/sites/advisor/2014/04/24/why-the-average-investors-investment-return-is-so-low/#5741bca9111a https://www.forbes.com/sites/advisor/2014/04/24/why-the-aver... [1] https://smartasset.com/mortgage/price-to-rent-ratio-in-us-cities https://smartasset.com/mortgage/price-to-rent-ratio-in-us-ci...