“I want to pay off our mortgage, but am not sure I should. Shouldn’t I keep my mortgage for the tax deduction?”
If you’re asking that, I’ve got an emotional answer for you, followed by two questions about facts for you to consider.
Here’s why we definitely did not keep our mortgage
First, we never took that tax deduction. More importantly, without a mortgage or any other debt hanging over our heads, we have freedom.
I don’t want to owe money to anyone, anywhere. I want to have a place of our own that’s really ours. A place that we can enjoy, and that will sit here waiting for us if we’re off traveling around.
Arranging our life so that we have the freedom to easily do what we want is important to me. And I don’t want to be worried about owing money to anyone, let alone potentially losing my house.
If you’re wanting to pay off your mortgage, chances are you feel the same way.
Now for some logic. You’ll need to consider these two questions:
- Do you actually get a tax deduction for your mortgage interest?
- If you’re getting a tax deduction for your mortgage interest, is it worth it financially?
Let’s talk about those next.
Do you actually get a tax deduction for your mortgage interest?
Many people don’t, because they benefit more from the standard deduction instead. They don’t even take that mortgage interest tax deduction. It’s not worth it to pay more in taxes just so you can get that deduction.
(Remember, if you don’t itemize on your taxes, you’re definitely NOT getting a mortgage interest tax deduction.)
We never took it when we had a mortgage, because we always paid less tax using the standard deduction. Now we definitely don’t, because we went ahead and paid our house off 10 times quicker than normal.
And we’re not alone.
The percentage of people who actually claim the mortgage tax deduction was never very large to begin with. Starting with the 2018 tax year it’s likely to be even less due to an increase in the standard deduction.
Don’t assume. Check with your tax preparer to see if you actually claimed it or not.
Chances are you didn’t.
If you are getting a tax deduction for your mortgage interest, is it worth it financially?
If you do get to deduct your mortgage interest, of course you’ll lose that deduction if you pay it off. That means you’ve got to figure out what the real value of your tax deduction might be.
Now consider this. If you are currently taking advantage of the mortgage deduction, would you pay me $10,000 if I agreed to pay, say, $2500 of your federal taxes for you? Probably not, right? (If you said yes, let me know and I’ll tell you where to send your check.)
But in effect, if you’re only keeping the mortgage “for the tax deduction”, you’re doing something similar: paying the mortgage company a big chunk of change in order to pay a little bit less in taxes. Chances are you’re paying more money that way! (It doesn’t matter who you’re paying it to. You’re still paying it.)
An example for the numbers-oriented
Of course, every situation is different, but let’s pretend you’re married filing jointly, and then look at an example using real numbers from the U.S. 2009 tax table. (Since that’s what I used when I originally looked this up long ago, and I’m being lazy right now. You can easily do it yourself with the most recent tax table and your real numbers though.)
Suppose your taxable income prior to any mortgage interest deduction was $98,950. You’d have owed $17,119 in taxes. If the amount of mortgage interest you paid increased your tax deduction by $10,000 more than the standard deduction of $11,400, and left you with a taxable income of $88,950, your tax would be $14,619. That means that you’d have paid $2,500 less in taxes, but you’d have spent at least $10,000 just in mortgage interest in order to do so. (Plus you’d have spent an amount to pay down principal; unless you have an interest-only mortgage.)
Me? I’d rather pay $10,000 less in interest than $2,500 less in taxes if I were in that situation. Money is money, and I want to keep more of it.
It’s important to look at the whole picture in your actual situation. And remember, emotions matter too.