Have you asked yourself this question, “Is my home mortgage interest deduction a good idea? You might not or you might have. The interest deduction on your tax returns is important. However, do not fall victim to the “I am not going to payoff my mortgage early because I’ll lose my tax deduction” fallacy. It is much more costly to keep the mortgage than to pay the taxes owed without the interest deduction. See the example illustrated below.
The Mortgage Interest Deduction
If you paid $5,000 in interest on your mortgage last year and your income is $45,000, you reduced your taxable income by $5,000 when you took the deduction. However, you receive back the tax rate on that home mortgage interest deduction. If your tax rate is 30%, you will receive a refund of $1,500 because of the home mortgage interest deduction (30% of $5,000). The bank on the other hand gets to keep the $5,000 you paid in interest. Uncle Sam received 30% of your taxable income, which is now $40,000 because you were able to reduce your taxable income by the $5,000 interest you paid. Between your bank account and Uncle Sam you paid $17,000!
The Paid-Off House Scenario
If you have paid off your home, you no longer pay interest to the bank. You will be taxed on your full income of $45,000. If your tax rate is still 30%, you only paid Uncle Sam is $13,500! So let’s see, if you had not paid off your mortgage you would spent $17,000. You see that the NET RESULT of eliminating your mortgage, gives$3,500 more money! You were also able to invest that extra money throughout the year and earned interest on it. See why the interest deduction is not such a great deal? So, if you can payoff your mortgage, then do it!