I’m currently house hunting for a townhome in HCOL area in the $1.2M – $1.4M range. Like many, I’ve always operated under the "Standard Rule": Put 20% down to avoid PMI, then keep the rest of your cash in the market (S&P 500) to outpace the mortgage interest, especially since the interest is tax-deductible.
However, I just had a "lightbulb moment" regarding the IRS limits that changes the math significantly.
**The Realization:** The Mortgage Interest Deduction (MID) is capped at **$750k of principal**.
If I buy a $1.2M home with 20% down:
* **Down Payment:** $240k
* **Mortgage:** $960k
* **The "Tax Gap":** $210k of that mortgage receives **zero** tax benefit.
Essentially, I’m paying the full 6.5% interest (or whatever the current rate is) on that top $210k without the "subsidy" of a tax write-off. Meanwhile, my "guaranteed" return on cash in a HYSA is only \~4.5% (pre-tax).
**The Pivot:** I have enough liquidity to potentially put down $460k (roughly 38%) to bring the loan amount exactly to $750k.
**The Question:** Does it make more sense to "overpay" the down payment to hit that $750k sweet spot?
By doing a 38% down payment:
- **Guaranteed Return:** I’m effectively getting a guaranteed 6.5% return on that extra $210k by not paying interest on it.
- **Tax Efficiency:** 100% of my remaining mortgage interest becomes deductible.
- **Cash Flow:** My monthly DTI improves significantly.
**The Trade-off:** I’d have to liquidate some taxable brokerage assets to make this happen.
Am I overthinking the $750k limit, or is this the standard "pro move" for HCOL buyers to avoid holding "expensive" non-deductible debt? Would love to hear from anyone who has run these numbers or chose one path over the other.
**TL;DR:** Should I stick to 20% down and hold a $960k loan, or put \~38% down to cap the loan at the $750k tax-deductible limit?
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source https://www.reddit.com/r/RealEstate/comments/1pxlfe5/hcol_home_ownership_is_the_mortgage_tax_ceiling_a/
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