# payoff mort vs IRS deduction

I know this topic comes up every so often,
and I've read thru the previous threads,
but as I was filling out TurboTax
I could easily play the game with the payoff.
Here's the set of basic numbers from TT
real estate taxes - \$7,200
mortgage interest - \$4,300
the overall itemized deduction is - \$15,260
and our current refund happens to be - \$3,953
if we had paid off the mortgage,
the interest of \$4,300 would not exist
and the itemized deduction is now - \$10,960
which is below the standard deduction - \$11,400
adding the built-in real estate taxes of \$1,000,
and the standard deduction total is - \$12,400
with the refund now reset to - \$3,097
SO - the difference is \$856 - is it worth it - ?
I guess the larger question, is the return
on the total yearly P&I payment - \$9,200 ?
Is that \$856 / \$9,200 = 9.3% ?
The amount of your refund is not really part of the math. And I suspect this is the last year you'll see the \$1000 extra standard deduction, but even if it stays, we're looking at \$12,400, so of the \$4,300 interest, less than \$3000 really matters. One way to look at it is if your interest rate is 6%, and you are in the 25% bracket, only about 2/3 of that \$4300 is 'deductible*' and so your effective mort rate is not 4.5%, but 5%.
Worth it? If you have the \$70K or so to pay off the mortgage, why not? So long as you have no higher interest debt, it's always good to be fully debt free.
*
by this, I mean that with no mortgage at all, your standard deduction is about \$1500 less than your itemized deductions.
Joe
In Texas, property taxes are billed in October and due at the end of January. So you have a choice of which year to pay them. So pay last year's taxes in January and this year's taxes in December. This will let you itemize in alternate years and take the standard deduction in the other years.
We also tend to group our charity contributions the same way so we can deduction them in the years we itemize. Watch out for the AMT in years you are itemizing. It can reduce the benefit of this approach.
-- Doug
SNIPPED
First, I'd go about this another way, but I'm a tax specialist first.
You're spending \$4,300 (interest) to save \$856 (taxes). But you're laying out \$9,200 (total payments).
So from a cash flow perspective you disburse \$9,200 and get \$856 back.
If your house was mortgage free you'd HAVE \$9,200 from which to pay \$856.
Which sounds better to you?
Gene E. Utterback, EA, RFC, ABA
I realize there are other things to consider here (opportunity costs, etc.), but as I see it, you paid \$4300 to get \$856 back. That math is not in your favor.
If you can make more than the cost of borrowed funds, you are better off borrowing.
There are some charities that I want to support continuously, so I use Fidelity Charitable Gift Fund as a buffer. In the years that I pay property taxes for two years, I also fund my contributions for the next year by making a contribution to my Gift Fund account. I make distribution requests throughout the year to my favorite charities. It works great.
Dave
I can tell you from experience that having a house that is paid for is great. To me having no mortgage is worth much more than having the possibility of making a little money on the difference between the return I _might_ get and what I certainly will have to pay out.
Dave
I agree. Paying off the mortgage is like a 100% certain investment, but getting even a slightly higher yield in something else is far from certain. And getting a vastly higher yield is pie in the sky.
I have had the same experience. Pay off the house then keep making those mortgage payments into your retirement fund. In addition, the reduction in your living expenses gives you a big cushion should you suffer a job loss, medical problem or other financial reversal.
The other little nit - is the payment of the real estate taxes & insurance.
At this point, the P&I is actually less than the taxes + ins. So... we would have to make sure we have those funds when payment is due.
Sorry, you've lost me. You have to pay the real estate taxes whether you have a mortgage or not. You do not have to have insurance if you own the house outright but that is more risk than most people can take so in most cases the insurance expense exists whether you have a mortgage or not.
It was just a budgeting / checkbook concern.... The monthly coupon payment has all that, vs the lump sum payments all at once...
The old fashioned solution still works. Open a separate savings account and deposit a check every month for 1/12 of the insurance and taxes.
It would be a shame to make an important financial decision, such as whether or not to pay off a mortgage, on the basis of convenience in writing checks or keeping track of a bank account. In all kinds of financial and legal matters, there is always someone prepared to do something for you because of the inconvenience of "doing it yourself," but usually, if you do a few calculations, you will find the cost is very high for the amount convenience you are buying.
My annual payment versus balance mortgage is now 8% ten years into a loan. And that number increases annually, since the payment is fixed. At some point it makes sense just pay it off.

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