The Times on Mortgage Repayment

I am sure nobody has noticed, but I have been making an effort to take The New York Times less seriously. This has been hard. This could be because of my New York upbringing or, more likely, the degree to which the Times takesNYTimesBldgByLuigiNovi-Nightscream itself seriously. But every time I criticize something in it there is a nagging wonder at the back of my head. Am I holding the Times to a higher standard than I would any other newspaper?

Saturday’s Your Money column When Not to Pay Down a Mortgage is a case in point. The basic thrust of the piece, that paying down your mortgage may not be the best use of your spare cash, is sound. But that point can’t be adequately made without some math and a discussion of the tax code and the article screws up on both. What’s more, what you see if you click on the link above is a corrected version. And it’s still wrong.

The dead tree edition of the Times that arrived in my driveway on Saturday morning walked through the calculation of the “real interest rate” on a mortgage thusly:

Let’s say you have a household income of $175,000 and are paying 35 percent of that in total to the state and federal tax collectors. If you pay $20,000 in mortgage interest each year on a loan that charges 5 percent, the deduction effectively brings your taxable income down to $155,000.

As a result, you’re paying $7,500 (35 percent of $20,000) less in taxes than you would have without the deduction. So ultimately, you’re not really paying $20,000 in interest at all; your net cost is $12,500 after you subtract the $7,500 tax savings.

How many errors did you spot? I suspect that somebody called the Times on Saturday and told them this passage was wrong, so the Times edited the on-line version. “$7,500” and “$12,500” was replaced by “$7,000” and “$13,000.” Problem solved.

35 percent of $20,000 is unequivocally $7,000 not $7,500. But although that may be the most glaring error in the passage, it is not the only one, and arguably not even the most serious one. It is one thing to print a sloppy discussion of an important topic, but quite another to explicitly revisit it and fail to correct it fully.

Here is my list of mistakes still in this bit of the article as of Monday night:

One, it is not a discussion of how to find a “real interest rate” as it is labeled in bold caps. A real interest rate is net of inflation. This is about after-tax interest rates.

Two, the average income tax rate paid, that is, the percentage of overall income that is paid in taxes, is not relevant to the calculation of an after-tax interest rate. As anybody with a rudimentary grounding in personal finance can tell you, income taxes in this country are progressive, meaning that a person paying 35% of his income in taxes is undoubtedly paying a much higher tax rate at the margin. What we care about here is the tax rate on the last dollar of taxable income, the dollar that will or will not be taxed depending on whether or not a homeowner reduces his deductions by paying off some of his mortgage. (In this case that dollar is number 155,000.)

Three, lumping state and federal together only makes sense if the state involved also allows a deduction for mortgage interest on its income tax. Some states, for example the one I live in, do not. Nor do New Jersey and Connecticut, both of which include areas the Times generally considers part of its hometown.

And four, the tax code is not nearly as simple as it should be and the relationship between a marginal tax rate and after-tax interest is not nearly as linear as the article implies. (Or would imply if it correctly used marginal rather than average tax rates.) As discussed here and many other places, if a taxpayer’s total deductions are small, the mortgage interest deduction may not be worth much. And if income is high, all deductions may be phased out. Neither of these messy details is mentioned in the Times.

I will give the Times credit for basically giving the correct answer to the mortgage pre-pay or not question. That answer is maybe, not the simple yes or no still seen from time to time in the personal finance world. But the thing about saying maybe is that you then need to provide your readers with an explanation of how to make up their minds for themselves, and that requires a correct walk through of an example with a discussion of the relevant issues. Perhaps the Times will correct it once again.

(If you haven’t already, check out the amusing photo chosen to illustrate the article on-line. I have great sympathy for the real estate agent pictured. Now consider that the same photo appeared in the print version in black and white. Cluelessness or an editorial prank?)

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