The great fallacy of mortgages: the "tax advantage".
Put simply, you're throwing away $7 to save $3.
Get a $100,000 mortgage.
On top of principal, you'll pay somewhere around $100,000 in interest - money that doesn't actually get you anything.
The mortgage deduction means you don't pay income tax on that extra $100,000, saving you maybe $30,000.
Upshot: you just threw away $70,000 so you wouldn't have to throw away $30,000.
Yeah, that's smart. You just turned $100,000 into $30,000 and got zippo for it.
Better to take that $100,000, pay the $30,000 tax, invest the $70,000 at 10%, and come out somewhere well over $150,000.
(The exact numbers probably vary, but you get the idea. I hope.)
Yes but you’re forgetting that it’s not that simple. You’re failing to realize that you have to have a place to live. If you either pay the mortgage or pay the rent on something, you ARE better off in your exact scenario to pay a mortgage than rent.
You also forget that the $100,000 cash that could have been used for the home purchase instead is also sitting there earning money, putting you ahead.
If Fred has $400,000 and he puts $100,000 of it down on a house, he has a $300,000 mortgage that must be paid off over time. But he also has $300,000 in his pocket that can be invested elsewhere. So if he's paying off a 6% mortgage and getting a 6% return on his investment, he's at least breaking even in a nominal sense -- and he's coming out ahead if his 6% mortgage interest is tax-deductible and the 6% return on his investment is taxed at a lower dividend/capital gains rate.
So where do you live in the meantime? You’re either paying rent (not tax-deductible), or you’ve paid cash for your home and thus can’t invest it elsewhere.