Mortgage Interest Paid
Contents
The relationship between mortgage principal, interest and tax deductions. |
In our $100,000 illustration, one will have actually paid about $264,155 over the 30-year period. This represents both the interest and the principal payments. Since the mortgage was for $100,000, the balance or $164,155 was the interest transferred to the bank for the privilege of using their money. The point is that interest transferred reduces the actual size of our Circle of Wealth. More importantly, those transferred dollars are lost forever. Many people are bothered by the total amount to be paid when reading the bottom of the truth and lending statement on their mortgage agreement. Without sufficient funds, they have little choice but to the terms. To avoid giving away that much money in interest, it would seem logical to make extra principal payments. The logic is that drastic interest transfers will be avoided. While early principal payments can reduce interest paid, it also increases taxes paid with the loss of itemized interest deductions. It is easy to see that by making early principal payments, the bank will get less money and the construction of the banks house slows down. Not many understand the effect those early payments have on their taxes. Although they kept the bank from getting more, they ended up giving more to the government. The interest paid on ones mortgage is currently deductible. So, when one pays on the principal they are reducing their deductible amount and thus will pay higher taxes. |
Mortgage Interest paid is calculated as follows: The monthly mortgage payment is first calculated with the following inputs: •Rate: Monthly mortgage interest rate. •Periods: Mortgage term in months. •PV: Initial mortgaged amount. •FV: 0. •Payment at End of Period. Next, the total amount paid equals: •calculated mortgage payment * mortgage term in months. Finally, the interest paid equals: •total amount paid - initial mortgaged amount (which is equivalent to the sum of all principal payments) |