Just finished my taxes and realized that I’m paying a significant amount of post-tax money to the interest. Want to ask the blind community to see if there’s anything wrong with my logic. I owe $1.1M in mortgage principle. That comes out to about $45K in interest per year. Given that I bought my home last year, the cap for mortgage interest is $750K. That means I can only deduct 750/1100 * $45K = $31K; the remaining $14K is post tax money. The above means that (at 50% tax rate) I’m paying the gov another $14K in taxes per year (so $14K to the gov and $14K to bank in interest). This is more than what I can make in mutual funds. I’m thinking of just paying down the principle as fast as I can, by also putting all my vesting stock into my mortgage payments. Do you agree? If not, let me know why in the comments. Thanks!
Your interest rate is only in the 4% range no? You should easily be able to earn more than that regardless of the tax benefit (750 federal, 1m ca). Regardless don't put all your eggs into a single basket (your house)
I think it makes sense. The biggest benefit of a mortgage is that interests are deductibles. But if a part isn’t, then might as well pay it off ASAP.
it depends how much you think RSUs are worth. If you think RSUs will only go up 4% then sell. But I doubt that this is the case. You’re only paying 4% in interest over 30 years. Unless you sell your house soon, then you’re paying interest at the beginning of the loan. So if you intend to sell within next 5 years then, then cash your RSUs
You’re ignoring the point of the question, which is around how to optimally come out ahead AFTER taxes. I’d have to (a) assume an 8% growth, and (b) assume that for 10-12 years (under the standard mortgage payments), and (c) consider how much I’m coming out ahead after accounting for the money lost through interest payments.
8% very high and not likely to get that return in a bear market over the next few years.
Peace of mind of a paid off primary mortgage is way higher than any returns you may or may not get. If this was a second investment property then I would not worry but for a primary residence it makes no sense with current laws to hold onto mortgage. It is a guaranteed 4% return paying it off which no govt bonds can offer
Sell all your RSUs and buy index funds
I would pay off mortgage for the peace of mind. Then again, I am a single earner with a family to support so paying off mortgage has higher value to me over other things. If God forbid something happens, at least my family has a paid off roof and won’t be on the street.
You're probably better off carrying a comparable amount of life and disability insurance.
No. Just rent the house and live in a van in the google parking lot. Shower and eat at work.
Paying off the mortgage will not change the tax rate on the $14K income that you can't deduct. What you should be comparing is the rate of return on your money. To make the math easy, assume 4% mortgage and 25% tax rate. Paying off the deductible portion of your mortgage is basically a 3% return. Paying off the non-deductible portion is basically a 4% return. If you can make more than 4% on that money (adjusting for the fact that the mortgage return is no risk), and you're disciplined enough to invest and not spend that money, you should. If you don't think you can make 4%, or you think you'll spend it if you have it, then pay down the mortgage.
Deductible portion is not fully deductible since OP would get $24k standard deduction anyway. If we assumed $10k salt then the first $14k of interest gives no benefit even for $750k mortgage
Fair. But point stands - non-deductibility bumps it from 3% to 4% effective return. At no point do you get <tax rate>% returns by paying early.
I’ve found the type of financial advice people give on blind not to be super relevant to people in the top tax bracket with net worths well over $1M. Some of the comments on this thread are ridiculous. The poll result seems reasonable though.
Sell the house. This isn’t sustainable. You bought a house you can’t afford.
This is a stupid answer, OP made no indication to his financial situation and was asking how to minimize his tax burden. Large mortgages can be a part of a tax strategy if you have the requisite emergency fund to cover job loss.
Needing to sell RSUs to cover a mortgage should be clue enough.