Before 2018, the perfect mortgage amount was a cool million. Why? Because that was the max you could get and still write off the interest. But then the Tax Cut & Jobs Act came along and changed the game. Now, the sweet spot for a mortgage is $750,000, assuming you can swing it.
Back in 2002, a million-dollar mortgage would set you back about $50,000 to $65,000 a year in interest, given the rates at the time. So, you’d need an annual income of around $150,000-$195,000 to manage such a loan. Fast forward to 2024, and a million-dollar mortgage costs about $65,000 a year in interest, thanks to the current 6.5% rate for a 30-year fixed mortgage.
Mortgage rates took a nosedive in 2020 due to the pandemic, but they’ve been on the rise since the Fed hiked rates 11 times since 2022 to combat inflation. But don’t worry, rates should start to drop again as inflation peaked in mid-2022. So, if you’re planning to own a property for more than five years, now’s a good time to buy.
So, why is $750,000 the magic number for a mortgage? Here’s why:
-
It’s the law. The IRS says you can only write off the interest on a mortgage up to $750,000. So, if you have a $1.5 million mortgage that costs $70,000 a year in interest, you can only deduct about $35,000 of that from your income.
-
It’s the max government subsidy. The home mortgage interest deduction is a big government subsidy that’s available to everyone. It’s a way for the government to help subsidize your lifestyle and lower your taxes.
-
It keeps you disciplined. If you live in an expensive city like San Francisco or NYC, a $750,000 mortgage limit can help keep you from buying too much house.
-
It’s a balance of risk and reward. In America, if you borrow a ton of money and can’t pay it back, you don’t get stoned to death. You just hand back the keys to the bank.
-
It’s closer to the ideal income. In the past, how much mortgage interest you could fully deduct was based on how much money you made. If you or your household make between $250,000-$300,000, you’re in the sweet spot to take on a $750,000 mortgage.
The ideal mortgage amount will vary for everyone. If you live in parts of the country where you can get a great house for $500,000, then there’s no need to borrow $750,000. But if you live in an expensive coastal city, then $750,000 should be your cap for borrowing to buy your primary residence.
Once you’ve done that, consider investing in lower cost areas of the country through real estate crowdsourcing. Your goal should be to diversify your real estate investments and take advantage of long-term trends.
Some of you reading this might have liquid assets north of $1 million dollars. In that case, a $750,000 mortgage is nothing to be afraid of because everything is just accounting.
Your goal in this low interest rate environment is to minimize your debt interest expense by refinancing your mortgage. You should also maximize your government subsidies with the ideal mortgage amount.
The ideal mortgage amount may change with Joe Biden as president. Perhaps he will do away with the SALT cap deduction limit and raise the maximum mortgage indebtedness amount for deductions. However, we’ll just have to wait and see.
In an inflationary environment, you want to be long real estate. Inflation eats away at the cost of your fixed-rate mortgage while boosting the value of your property.
