Quote:
Originally posted by Replaced_Texan
I've never really understood this. Why is paying interest to get the tax break on the interest better than not paying any interest at all? I suppose if the deduction knocks you down a tax bracket, there's some wisdom there, but I don't really see how paying, say, $18,000 to a bank a year in order to get $6,000 back in taxes is better than paying nothing to the bank.
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The tax break effectively lowers the interest rate you are paying by whatever your tax rate is (e.g. if you are in the 35% federal bracket, multiply the interest rate by .65 to determine your actual interest rate after taking the tax break into effect -- a 7% nominal rate would be a 4.55% after-tax rate). That makes it more likely that you could take the same money and invest it at an interest rate that is higher than the rate you are being charged by the bank.
This benefit is obviously greater for people in higher tax brackets, and is of no benefit for people who don't earn enough to pay taxes.
