Tuesday, April 15, 2008

FPU Session 13: Real Estate and Mortgages

This session was all about real estate. Ramsey certainly loves real estate. I'll just be honest, I was way too tired and stressed from the day to sit through his story telling this time. I was the most disengaged from this session than all the rest.

Ramsey covered the ins and outs (his ways) of buying and selling real estate. He approaches all of it like either a retailer or investor. There were some good tips but they were not relevant to my present situation because I am not planning to sell or buy a home right now.

As far as mortgages go, Ramsey strips away all consideration for any type of mortgage other than a conventional 15 year fixed. Also, payments should be no more than 25% of your income. Again, this session contained good information that can be tucked away for future use.

I did really appreciate one part of the session as it attacks a widespread myth.

Why keeping your mortgage for a tax deduction is a bad idea.

Baby step 7 is Pay off Mortgage early. What's the first thing that comes to your mind when thinking about this step? What about the tax deduction? The benefit of keeping a mortgage just to get a tax deduction is a myth - the math does not add up. Yet, financial professionals advice against paying off your mortgage early all the time (I was one of them.) Yes, there is a tax deduction for mortgage interest if you itemize but what does it really mean. Here is an example of the bad math:
  • You have a mortgage of $200,000 at an interest rate of 5%. So, each year you are paying the bank $10,000 in interest.
  • At tax time you would get to deduct $10,000 from your adjusted income. Depending on your tax bracket, you are only saving a percentage of this amount.
  • Let's say you are in the 25% tax bracket. You would then be saving 25% of $10,000 - or $2,500.
  • You sent $10,000 to the bank so that you wouldn't have to send $2,500 to the government?
  • The math does not work. It doesn't make sense.
  • You can get the same tax deduction by making a charitable donation instead.
Ramsey skipped an entire section from the workbook in this lesson on refinancing. Looks like he would have just covered a simple break even analysis on closing costs.

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