If mortgage payments are deductible, how much of my income is left over each month after the mortgage

Question

I'm currently renting and thinking of buying a house. Say I make 8k/mo. After rent (1000) and taxes (2000) I'm left with 5k/mo. If I were to get a mortgage at (say) 2500/mo, how much money is actually left over. My understanding is that I would now be paying taxes on only the 5500, so an extra 1300, leaving me with 4200/mo. Not sure how much on top of that I'd have to pay for HOA or whatnot, but I want a good ballpark of the monthly changes to my finances.

Even better would be a mortgage calculator which takes all this into account, so I could play with the numbers a little bit more.

Answer 1

A $500K mortgage at 4.5% is $2533, right near the $2500 in your example. Interest the first year would be less than $22K, and your tax benefit (taking littleadv's answer into account, of course) would be $5500, max.

The tax benefit is the least of the reasons to get a mortgage. On your hypothetical $100K income, and too-high mortgage, a $5500 benefit is nothing. If one needs this tax benefit to make the numbers work, they are budgeted too tightly.

If you are considering trading a $1000 rent for a $500K mortgage with a $2500 payment, I'd look very carefully at the numbers. Search this board for the associated expenses of homeownership.

Answer 2

In the US, mortgage payments are not deductible. What is deductible is the mortgage interest (to a limit). That, as well, is not deductible unconditionally, but rather as part of your itemized deductions on Schedule A of your yearly tax return.

So if you're married and have a standard deduction of $12600 a year, live in a state with no state income tax, and your property tax and the mortgage interest are less than your standard deduction - you will not be getting any tax benefit whatsoever. That is, in fact, the case for many, if not majority, of the US mortgage payers.

So in order to get a proper estimate, you need to take into account all the aspects of your tax calculations, which are by nature quite personal, and simulate the changes with the mortgage interest deduction. Most tax preparation software will allow you creating multiple files, so you can run the numbers for different scenarios.