My wife and I are looking at buying a new home. Weíve been really blessed with our finances, and weíre at a point where we can pay cash for a new house and still have plenty of money in the bank. Should we do this, or is it a better idea to get a mortgage for the tax deduction?
I think the real question is this: Why wouldnít you pay cash if you have the ability to do so? I would never advise someone to get, or keep, a mortgage†just for the tax deduction, because these tax deductions are never 100 percent.
Letís pretend you had a $200,000 mortgage at 5 percent interest. That would be $10,000 a year in interest. If you take a $10,000 tax deduction and youíre in a 25 percent tax bracket, that would save you 25 percent of $10,000 on your tax bill -- or $2,500. So, you would never send $10,000 to your mortgage company just to avoid sending $2,500 to the IRS. You donít keep a mortgage just for the tax deduction. Thatís trading a dollar for a quarter, and you donít want to do that. Everybody thinks losing the tax deduction is an awful thing, but you could give $10,000 extra to your church -- something you donít have to be in debt†to do -- and get the same tax write-off.
There are numerous positive aspects to staying out of debt. One big thing it does is change your risk level. It gives you a level of peace and security youíll never have when debt is hanging over your head. All that money that was going out the door to the bank can be used to build wealth†and give like never before.
You canít fix it for her
I paid off my house a little over a year ago, and Iím completely debt-free. Thatís a good thing, because I recently had some large medical bills and I donít have quite as much cash as usual on hand. My younger sister recently received a tax bill from the IRS for $30,000. I love her to death, but sheís extremely irresponsible with money and in debt up to her eyeballs. I know how you feel about debt, and Iíve tried to teach her how to handle money, but considering her situation -- should I take out a home equity loan of $30,000 to help her?
Absolutely not. Does that mean you donít love her and care about her? It does not. But you told me she wonít behave with money. You donít give money to people who wonít behave with the stuff. That kind of behavior†doesnít help anyone, and it doesnít fix the problem. Itís like giving a drunk a drink.
ďHelpĒ would be aiding this lady in changing her ways when it comes to finances. If you just give her a fish, it will stink and go bad. You have to teach her to fish. That attitude is not about being mean to her, itís just where she is in her life. She needs to be educated, not enabled. And it doesnít mean sheís a bad person, either. It just means you canít endorse negative behavior or participate in her denial.
Keep trying to teach her, and pray for her. Make sure, too, that sheís in contact with the IRS about a payment plan. I know sheís your little sister†, but you canít fix this one for her. Sometimes the best help you can give someone is to help them change their behavior. That way, they will hopefully learn how to carry their own weight.
-- Dave Ramsey is CEO of Ramsey Solutions. He has authored seven best-selling books, including The Total Money Makeover. The Dave Ramsey Show is heard by more than 12 million listeners each week on 575 radio stations and multiple digital platforms. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.