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The Math of Move-ups

February 22, 1987

The article by John Betz Willmann, "Move-up Housing Cashes in on Tax Law" (Jan. 11), is grossly misleading. It was not what Mr. Willmann said; what he left unsaid that misled.

The cost of obtaining $75,000 of cash for which the interest is deductible must be compared to the value of the interest deduction. For most of us, selling our home requires that we list it with a realtor. And there are significant loan initiation costs when obtaining a mortgage either on a purchase or on a refinance.

Using Mr. Willmann's data as my starting point, I estimate that the move-up would cost Bill and Linda about $26,000 consisting of:

Sales commission, $14,400; mortgage initiation costs, $4,000; Other costs (appraisal, title insurance, recording fees, etc.), $1,600; moving costs, $1,000; cost of personalizing new home (paint, drapes, carpets, etc.), $5,000, for a total of $26,000.

A 9% interest rate on Bill and Linda's new mortgage means $19,300 a year of payments. In the first year, about $18,000 of those payments will be interest, which would save about $5,900 of federal taxes. Thus, net interest expense would be $12,100.

A refinancing or second mortgage to obtain $75,000 of cash involves much less up-front costs. In order to leave the present first mortgage in place at what is probably a 7.5% interest rate, I would recommend a second mortgage. I have assumed the interest rate on the second will be 10% and that the payoff will be over 15 years.

If Bill and Linda had a 7.5% original mortgage and the new second mortgage is for $77,500 ($75,000 plus $2,500 of costs), their mortgage payments will total about $15,000, or $4,300 less than if they moved up.

Interest on the old and new mortgages will total $11,500, of which $5,750 would be tax deductible, thereby saving about $1,900 of federal taxes. The net interest expense with a second mortgage, which is only partly tax deductible, is $9,600. A savings of $2,500 a year, plus the $23,500 of up-front costs.



Adams is a certified public accountant.

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