mortgage interest vs standard deduction

It depends. The 10,900 vs 8,800 means the first 2,100 of interest doesn't really benefit you, that it's the full rate. At some point, when the interest doesn't put you above the std deduction, you can look at it as if the rate is what it costs you to borrow. In my case, my real estate taxes and state income tax fill up that std deduction and all my mortgage interest is deductible.

I have to ask - what is your rate? $6,900 in interest on a $60K balance?

Depending on your income level. You have to do a comparison between the scenerios. Don't forget if you pay off your mortgage you no longer have to pay the interest.

Crude calculation:

Choice 1) Pay off mortgage. Costs you $500-$1500 more in federal taxes each year (depending on your tax bracket), because itemizing no longer benefits you and so you have an extra $5k or so a year of income.

Choice 2) Keep mortgage. Costs you around $3000 a year = $6900 a year in mortgage interest less say the net income from a 5% CD purchased with the $60k you would otherwise use to pay the mortgage. Net income from the CD being CD interest less the tax on the CD interest.

Pay the mortgage off or do the math on a possible re-fi and re- evaluate.

last couple of years, we paid down some of the principle and now it's sitting at about $60k. Was going to pay the rest off - until the market continued to crunch, so not sure if I want to throw the cash at it or not...

BTW - the best CD I've seen as of today - 3/24/09 - is about 2.85 %

A residential mortgage is virtually the cheapest money there is.

The sooner you pay off a mortgage, the higher the lender's effective rate of return -- and the higher the borrower's cost.

Unless you expect to earn less from your investments vis-a-vis the loan's effective rate, sticking with your monthly mortgage payment schedule will over time leave more in your pocket.

Nevertheless, do yourself a favor: roll up your sleeves, work the numbers, and see for yourself. With a spreadsheet program, one individual today has more computational power at his disposal than a bank with dedicated staff decades ago.

Some of my aquaintances use a tax technique called "bunching" to double deductions in alternate years and use the standard deduction in between years. That is you make all your state taxes, property taxes and charitable contributions in Jan and Dec in even- numbered years. The Dec contribution is for the subseqent odd-number year. You are credited at the time you pay.

Seems to me that generally lenders do not want borrowers to pay off mortgages, because the interest yada is so profitable to them. Unless you are talking about the transaction costs of getting the loan in the first place.

I do not care for the assumption that an investment in stocks is going to leave a borrower in better financial shape. Stocks are risky. If an emergency arises, the principal originally invested may not be there, for one. Hence I urge a low risk investment vehicle such as a CD as the tool for use in comparisons of pay off mortgage vs. do not pay off mortgage.

Snipped because we have to

It is always - let me repeat ALWAYS - better to pay the tax than get a deduction.

Assuming you are in the highest possible Federal tax bracket of 35% and assuming you are in the highest state tax bracket, which I believe is Montana at 11%, your total tax bracket hit tops out at 46%. And that's the marginal rate, the effective rate will be considerably lower.

So if you pay $1,000 in mortgage interest you save $460 BUT you are out $540.

If you paid no deductible interest you'd pay $460 in taxes BUT you get to keep the $540.

So having a deduction saves $460 while having no deduction saves you $540 - you are $80 better off with no deduction.

If all you want is a deduction, I can arrange that - simply send me $50K for tax advice! You can get a deduction for that - think of the taxes you'll save ;) !

In your particular situation, your standard deduction would actually be $11,900. Remember, under the current law you get your standard deduction PLUS up to $1,000 for real estate taxes..

Gene E. Utterback, EA, RFC, ABA

An extreme form of that same mode of thinking is advice to INCREASE your mortgage (or take out a home equity loan) in order to free up money to invest in the stock market. I have seen that advice offered in good times when the market is rising, frequently by sales people seeking commissions from the sale of mutual funds. I doubt if anyone would be foolish enough to suggest something like that nowadays when the both the stock market and housing market are in their present state. But when good times return those creative suggestions probably will be back again.

Gene, when you can borrow at 5%, and it's 3% after tax, but you can get

3% or greater in your Roth, or in your state's Munis, it's not so black and white.

I think it's alway better that one understand the effective rate they pay, be it the guy who can't itemize but thinks his mortgage is a deduction, or the guy who is prepaying his 5% mortgage while CDs are at 8%.

Joe

[...]

But this ignores the opportunity cost of paying off the mortgage. Currently, 30 year general obligation AAA rated munis are paying 4.91%, call it 5% to make the arithmetic easy. If my mortgage is 6%, my balance would be $16,667 to get your $1,000 in deductible interest.

Instead of paying off my mortgage, I buy $16,667 of AAA munis and start earning $833 per year tax free. I pay $1,000 in mortgage interest, deduct $460 for a net of $540 paid and $833 received. I win by $297.

All the usual qualifications about standard deductions, AMT, etc. apply. But certainly the investments are of comparable risk. I also know this is kind of special case in unusual times, but when you shout ALWAYS, I need to suggest otherwise.

-- Doug

It depends on relative interest rates. If they can re-lend the money at higher rates, they'd love to have you pay it off. -- Doug

Since when is a negative return on investment cheap?

You are confusing a mortgage with home value.

That makes it comparable to making additional payments to principal to pay down a mortgage early. I can't get that additional money back out until the after the final payoff without re-financing, and you can't necessarily refinance easily, or sometimes even at all, in an emergency.

It seems to me that the tool one uses for comparison should be exactly that thing which is the actual alternative. If the decision you are actually making is "Do I use this pool of X dollars to pay off the mortgage, or to buy CDs?" then or course CDs are the thing to compare. If the actual question is "Do I use this pool of X dollars to pay off the mortgage, or to buy an index fund", then using CD as the tool of comparison seems rather misguided.

If one does not have an adequate "emergency" fund cushion, then one should not be asking that second question in the first place. But you seem to be saying that no one ever has enough of an emergency fund and thus no one should ever put money anywhere but cash-like accounts.

Xho

SNIPPED

I'm not sure I follow your numbers, but I'll play along. Where do you get the $16,667 to buy the AAA Munis? Not with the money you're spending to make mortgage payments.

Gene E. Utterback, EA, RFC, ABA

The original question was

"Is it generally "worth" paying off the mortage if you can vs carrying it ?"

I was suggesting that it might be better to not pay it off as opposed to suggestion that

"It is always - let me repeat ALWAYS - better to pay the tax than get a deduction."

-- Doug

I think that both of your statements are correct. Gene's literal statement is correct in that in is always better to pay tax than get a deduction for an expense, if you're just going to spend the no-longer-needed interest payment.

But your point is also valid, that it may make sense to not pay off a mortgage and invest the pay-off amount.

-Will

william dot trice at ngc dot com