We own our 40 acres and we are thinking we might build a small house with a basement next spring. We are wondering if would we be better off getting a small mortgage to pay for the materials and write off the interest on our taxes or if we would fare better paying for it all out of pocket. We would appreciate any insight you all might have on the subject.

-- Dawn in Central MN (olsoncln@ecenet.com), November 19, 2001

Answers

Remember that sometimes you don't have enough in interest to write off. It happens each year with our house. Also, if your economic situation were to suddenly change or if we do, in fact, hit a severe economical crisis in this country, you will have the peace of mind in knowing that at least your home is paid for and you don't have to worry about how to pay the mortgage. In my opinion, less debt -- more freedom and more options you have available.

-- Karen (db0421@yahoo.com), November 19, 2001.

Do an estimation of your tax situation. if the addition will allow enough itemization to realize a tax deduction in excess of the interest on the mortgage . Also evaluate which you value more the savings or the structure. Also check to see how much property you would need to attach for the loan. Many factors must be considered and your decision will ultimately be unique to your situation.

-- Jay Blair in N. AL (jayblair678@yahoo.com), November 19, 2001.

not enough to write off??? ALL interest paid on your home IS tax deductable. I wasnt told there was a minimum. I wrote off 48 bucks the first year I bought the place,, that was the amout of interest paid for that year,, bought it in late OCT

-- stan (sopal@net-port.com), November 19, 2001.

Stan,

Interest on your mortgage is only deductible to the extent that it, along with other itemized deductions, exceeds your standard deduction. In other words you may not have enough other deductions to be able to itemize your mortgage interest. Unless you have a large mortgage, and hig taxes you probably can't find enough dedutions to total the $7300 which is the standard deduction for a married couple ($4400 single).

An old tax preparer

Talk to you later.

-- Bob in WI (bjwick@hotmail.com), November 19, 2001.

I have always deducted my interest,, no matter what other deductions I had,, been doing it for 10 years,, last 4 years, Ive been using a CPA for my taxes,, and am getting a ton back now

-- stan (sopal@net-port.com), November 19, 2001.

If you are building a house, a bank will not give you a mortgage. They will give you a construction loan and then when the house is built they will roll it over into a mortgage. Construction loans usually have higher interest rates. And many banks will not give a homeowner a construction loan to use themselves. They will give the loan to pay a contractor. I ran into this trying to finish up my last house. It was very frustrating.

-- pc (jasper2@doglover.com), November 19, 2001.

If your tax braket is say 30%, then you can actually writeoff 30% of the interest. And you're stuck with paying the other 70% out of pocket. Check the math, you'll see.

Now if this is the only way to get the building moving along, then do it wisely. As the other folks have said the bank will be your 'hostile' partner.

Be sure to look into 'alternative' methods and materials.
Just to name a few.
• hay bale
• scrounging / recycling
• cement stucko
• cargo containers
• steel / aluminum buildings: see CS ads
• PBP - pole construction.
• harvesting your own lumber from your land, log cabin
• cord word / concrete / bottles

-- (perry@ofuzzy1.com), November 19, 2001.

The part about the amount of interest and if you can write it off - explanation: One can either take the standard deduction or itemize deductions. If the amount of interest paid is more than the standard deduction, then there might a tax benefit of having the mortgage. It's best to figure it out both ways.

-- Joan Murray (alandjoan@juno.com), November 19, 2001.

If you need the money by all means get a mortgage. However if you think getting back 30cents of every intrest dollar spent is saving money again get a mortgage. If you want to make money don't consider your farm to be a business don't leverage it. When you consider that not having a mortgage payment is money in your pocket every month, and the money not spent on taxes would cost 3 cents for every one cent you don't pay uncle sam. The economy functions by passing paper many times the tax laws support that thinking. Since Regan tax cuts paying intrest hasn't been good financial planning.

-- Ed (smikula@bellsouth.com), November 19, 2001.

It also depends on what other plans you have for the money. If you can earn more money doing something else (say like investing in a business) then take out the mortgage, that money will be working for you elsewhere.

-- GT (nospam@nospam.com), November 19, 2001.

Considering that you will more than likely have to put up the land to get the construction loan, doesn't sound to smart to me. Build out of pocket, its a long road, but in the end worth it. No mortgage, no interest, no debt. If you can afford the mortgage, than use that money to build with monthly. Vicki

-- Vicki McGaugh (vickilonesomedoe@hotmail.com), November 19, 2001.

Mortgages are for homes, not for building them. Construction loans can be used but most lending institutions dont do construction loans for self built homes.

Depending on your idea of a small home is. For some its 3000sqft for others 1000sqft. You might look at a modular home as an alternative to building.

-- Gary (gws@redbird.net), November 19, 2001.

My personal preference is to build a very small starter home. Pay for it cash. I built my second house, made it 256 square feet. It cos less than $1000, as it was very basic. I took the money I WOULD have been spending on mortgage payments every month, and put it into a savings account. Then, when I had enough saved, I built an addition. Then I repeated the process. I did five additions over eight or ten years.

Yes, it was a pain in the ass, but it enabled me to own a house, free and clear, after eight or ten years. This enabled me to continue the process, after the house was done, to the extent that I now own five houses free and clear, and rent four of them. All five houses were completed after following this process for 18 or 19 years. It enabled me to be basically retired, except for being a landlord for the rentals, which is pretty easy, since all the rentals are first class places, and have almost no maintenance costs except paint.

Good luck!

JOJ

-- joj (jump@off.c), November 19, 2001.

I have a mortgage at a reasonable interest rate (about 6%), but I pay extra principle every chance I get. The sooner I own this house, the better.

Interest is tax-deductable, but it is still money down the drain. That is, if I pay $10 in interest & save $3 in taxes, I am still out $7.

-- Ted Holt (tedholt@tsixroads.com), November 20, 2001.

My opinion is that you are always ahead of you aren't paying ANy interest--don't borrow.

You are only writing off 30 cents on every DOLLAR. Sounds like a losing proposition to me.

We paid off our mortgage and it is amazing how fast you can build up savings if you aren't paying someone else interest.

If people would add up all the interest they pay to the bank for mortgage, car, education--they would see how much better off they would be if they (COULD, I know) wait to buy when they had the money. I'm guessing that we are ahead some twenty thousand dollars when you take into account all the interest we could have paid. This money invested is worth far more, and IT"S YOURS!

I wish I'd done like JOJ years ago, but I was too timid.

You may want to build with an eye to future additions (like a design that allows you to add rooms, or building two floors and a basement and only finish the main floor for now. Or building a porch but no breezeway for now.

Look into one of those salvage places and get doors, cabinets, lighting fixtures that are used. You'd be amazed what people tear out of places. Put an ad in the local trade paper that you'll haul off bricks, windows, cabinets if you can have for free.

-- Ann Markson (tngreenacres@hotmail.com), November 20, 2001.

Hi Dawn! I would agree on paying for it in cash. If you get a loan, you give the bank the right to take everything away from you if you get just three months behind. (really they could do it sooner I bet) So, if you get a loan, you are betting that you will never become unemployed, or never have to leave your job because of injury, etc. for the next 10-20 or 30 years.

During this time, any money you make in tax relief will not even compair to the interest you are paying on your loan. You can guess that most loans end up being three times the purchase value. On our car we bought for a window price of $7,000 - we ended up paying a total of $11,000 in just six years. You drag out a house payment longer, they get more interest out of you. Most $50,000 homes will cost $150,000 or so at the end.

True the interest rate is great right now, but you also need to include closing costs. These are costs just for the bank to do the paperwork, having a inspector out, etc. When we bought our house, we paid half of the closing costs and it was about $2,500. You might be able to find a bank that would finance the closing costs, but that is still $2,500 added to the amount you borrow that you will eventually have to pay back. The borrower is servant to the lender, and that ain't a kiddin'. :o)

-- notnow (notnow05@yahoo.com), November 20, 2001.

Hi,

You can go to a site like MSN.com or Yahoo.com and go to finances. They have a calculator on the site which will calculate your interest, payments, etc. Also, there are calculators which tell you if it makes sense to borrow, refinance, etc. and how long it will take you to "break even" if you refinance. That break even point will surprise you. After all the costs of closing, etc. are added in, depending on the size of the loan, you may have years before you can "break even" on refinancing. The bank is going to want you to put up your LAND for the mortgage. If you can't pay, you'll lose it all. Some banks will let you cut out an acre as long as it has water, and access to it from the road and use that and the home as collateral.

Me, I am almost paid out of my 15 year mortgage and if I had it to do over again, I would have been paying much more towards the principle as sometimes I get anxious that I won't make it to the end (economically speaking I might get laid off with only six payments left to go). So if you can do it the old fashioned way, I'd pay cash for the house. That is how we are doing the renovations for our stable house. That way we only have the mortgage on the land and once it is paid off, the whole thing is ours. Think long and hard about jeopardizing your land should one of you not be able to work or should get laid off. It takes a lot longer paying cash, but in the end, no one can take it away should an unexpected disaster hit.

Good luck, Cindy

-- cindy (colawson@mindspring.com), November 20, 2001.

If you can look at repos (many have no closing costs and even 0 down), and your income puts you in the right situation, buy houses for rentals, and your renters will pay your loans off. Of course, you want to have a 3-6 month emergency fund for each property in case you have a vacant spell so you can still make mortgage payments.

-- GT (nospam@nospam.com), November 20, 2001.

Thanks, everyone. We are now very clear on what we will do--build slowly with cash. Kind of feel silly for thinking of anything else!!

-- Dawn in Ctrl MN (olsoncln@ecenet.com), November 20, 2001.