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Saturday, December 18, 2010

Tax savings? Not so much. . . .

I'm obsessed with my second mortgage these days (as you might have guessed if you've read the past few blog entries. . . .). A couple of weeks ago, I discovered that I had only paid about $1,500 in principle on my high interest (8.9%) second mortgage in the last four years! Last week I decided to torture myself further by adding up all of the interest that I've sent to my second mortgage holder; money that I'll never see again.

During the past four years, I've paid CitiMortgage over $10,000 in interest! Granted, I would not be quite so upset about this if my house were actually gaining equity - unfortunately, it isn't, which is just adding to my feeling that each month for the past four years I've been flushing money down the toilet.

"But wait", I thought, "what about that tax deduction that is saving me so much money on my taxes each year? Isn't THAT a benefit to home ownership? Certainly, it's on every real estate agent's blog as being one of the best reasons to purchase a home".

"THIS will make me feel better," I thought to myself. So I booted up my 2009 tax return, and learned that I saved a whopping $1,700 last year as a result of my mortgage interest payments.

And guess what? Since I paid $2700 to CitiMortgage last year in interest payments, only about 20% of my total tax deduction was a result of my second mortgage payments. Which, by my math, means that of the $1700 I "saved" on my taxes, about $330 of it was due to my second mortgage interest. I paid $2700 in (mostly) interest in order to save $330? Sigh. Doesn't really seem worth it, does it?

Again, if my home were gaining equity (aside from the artificial equity I'm creating by throwing money at my principle balance) I wouldn't be quite so perturbed by the falseness of this ridiculous tax deduction argument. I guess the silver lining is that realizing this will help me in two ways as I go forward: first, I will think twice before purchasing another home based even partially on the argument that it will "save" me money on my taxes; and second, it makes me even more committed to getting myself out from under my second mortgage at this point (and eventually, out from under my first mortgage as well!)

Much as I love my cozy house, it's just not sustainable given my income and future goals. I would rather rent an apartment for $500 less than my mortgage payments and pay that additional $150 or so per month in taxes.


Cassie said...

I wouldn't call it artificial equity, I'd call it smart equity. Not only are you paying your balance down faster, you're saving yourself tonnes in interest by doing so. I wish my mortgage interest was tax deductible, that would be a real treat. Keep it up, you'll get there :)

Anonymous said...

I've always figured that the interest deduction was way to little to even consider as helping out.

But for me - the icing on the cake is WHEN THE HOUSE is PAID OFF!!!! There is NO mortgage payment and NO rent payment.... and less you mention taxes and insurance, folks are going to have renter's insurance anyway, and the total monthly bill for my property taxes and insurance is $95/month.... I can't rent something for that! That's where the golden egg for retiring comes home!

If you can rent for $500 less than the mortgage tho, that is a huge cash flow difference. Everyone is going to have a different situation - and being frugal, means, being frugal for what's best for you! :) Happy savings!


FB @ FabulouslyBroke.com said...

It's kind of why I really don't want a house. At all.

Anonymous said...

I really think you should consider a roommate. I am in a nearly identical situation. I am 100,000 underwater, have a second mortgage that's 34,000. I have a roommate & have had a roommate for the majority of the 7 yrs I have lived in my condo. It's not always ideal, but it sure helps. My second was originally 70,000. I have made a lot of extra payments with the rent from a roomie. I'd try to rent to someone you know, or check the local hospital to see if they have any traveling nurses looking for a short term rental. Most of my tenants have been traveling nurses. They are responsible, background checked & most of them own homes of their own in another state (homeowners tend to take care of things).

I also wonder if you shouldn't consider staying in your house. Once your second is paid off it will feel a lot better. Think of all the money you're throwing at your second. You could start to pay 1/2 that amount towards your first & have your house paid off early. i know it's hard & depressing, but I'd hate to see you throw out the baby with the bath water. It sounds like you have a nice place. Hang in there & try not to focus on your plummeting home value, it will make you crazy! I actually got my first positive Zillow report in ages. Hang in there, you're not alone! You're doing an awesome job.

your bad mortgage twin

P.S. I am planning on having my second paid off by May at the latest. WOO HOO! Goodbye sixty hour work weeks!

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