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Interest Vs. Taxes

January 24, 1993

In his Jan. 10 "Real Estate Q&A" column ("15-Year Loan Saves Interest but Raises Taxes"), Robert J. Bruss states that while "you will save thousands of dollars of interest" with a 15-year mortgage loan compared to a 30-year loan, the 30-year loan is preferable because with the 15-year loan "you will lose most of your mortgage interest tax deduction after about 11 years. . . ."

Bruss is saying that it is a good idea to pay $1 in interest to save, say, 31 cents in taxes (the tax saving on a deductible dollar at the highest federal income tax rate). It isn't. It makes no more sense than arguing that you should pay a higher interest rate rather than a lower one because you can deduct more interest.

Bruss' error is his obsession with the tax deductibility of interest, to the neglect of the cost of the interest after the tax savings have been considered. If followed, his advice would cost your readers thousands and thousands of dollars, cash.

For example, at a tax rate of 31%, the interest cost, after the tax savings for the first 15 years on an 8.5%, $100,000 loan would be $80,377 on a 30-year loan and only $53,305 on a 15-year loan. For the full 30-year period, the interest cost on the 30-year loan, after the tax savings, would be $122,003. (For years 16-30, the additional interest cost on the 15-year loan, of course, would be nothing.)

There are a number of reasons for preferring a 30-year loan to a 15-year loan--the most obvious of which is lower monthly payments--but having a bigger mortgage interest tax deduction is not one of them.

JAY S. BERGER

(The writer is a professor of real estate at Cal State Northridge.)

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