Payoff the House or Keep the Mortgage?
September 22, 2011
By Bhupinder Shergill
Mortgage payoff use to be very common for our past generations and they usually didn’t wait to pay the home off for 30 years. Times have changed for our generation, now growing older and retiring with a mortgage is the norm.
For those of us who are 10, 20, 30… Years away from retirement, should we pay down extra towards the principle and pay off the mortgage off early?
- Why should I pay the mortgage off early, what about my tax deduction?
- Can I find another investment that pays more than interest I am paying to the bank?
Let’s do a trade – I’ll pay you back 35 cents for each dollar you pay me. Would you like to make this trade? If so, I’ll gladly be the counterparty and take the dollar Joke aside, that’s what mortgage tax deduction is doing for an average family.
Assuming $100,000/year taxable income, single person in 28% federal* bracket. For a loan amount of $500,000 at 4.5%, $22,500 is the amount of interest per year you will be paying to the bank. Since mortgage interest is tax deductible, you can write off all $22,500, which will give you $6300 in federal tax refund.
If your mortgage is paid off, you don’t get $6300 tax deduction, but you also don’t pay $22,500 in interest in the first place!
I am not advocating that there are no benefits to mortgage tax deductions. It has a place, especially where a buyer has to take on a mortgage in order to purchase the home and they can certainly use the much needed extra cash for paying that interest to the bank. However, keep paying the interest for 30 years when you can weigh in the difference for your situation is question you can ask yourself – what route should I take for my financial well being?
Not paying off the mortgage:
Certainly there are advantages to not paying off your mortgage early. It is a personal choice when you look at all options. The tax break can be used to your advantage when you can invest in some other vehicle, where the return is higher than the interest you are paying on the mortgage.
Bhupinder Shergill | Avise Capital, LLC | www.avisecap.com