Whether to pay off a home mortgage depends on many circumstances, and a lot of people *have* asked about it. Searching "pay off home mortgage" in this newsgroup using Google produced 474 hits, so you could read some recent discussions.
If the amount being paid in interest is greater than the tax savings (not the deduction, the tax savings only), seems like it would be wise to pay it off. Sure, you won't have the deduction anymore, but it doesn't make sense to keep sending the bank X thousand dollars a year to save 50% of X in taxes.
True, and Mr. Parmenter's rule is invalid because it ignores the possibility (there is no guarantee) of earning after-tax returns on investments that exceed the after-tax interest payments on the mortgage. Paying off a mortgage makes more sense when
(1) tax-advantaged opportunities for savings, such as 401(k)'s and IRAs, have been exhausted (2) one is not itemizing on the tax return and therefore not benefitting from the mortgage interest deduction.
Just to make sure I understand what you are saying. Let's say my income is 65K and my itemized deductions total 20K. Of the 20K, mortgage interest represents 9K. The itemized deduction reduces my taxable income to 45K, right? So, I pay taxes of about 6K (married, filing jointly). If I don't have the mortgage deduction of 9K, I still itemize with the remaining 11K because it's more than the standard deduction (9,700).
So, my tax is on adjusted income of 54K (tax is about 7,400) because the deduction is less.
So, it's more advantageous to pay the mortgage down even though I'm still able to itemize. I pay the government 1,400 more in tax in order to keep the 9K that I was paying in mortgage interest.
There are a lot of variables here, granted. My point is that it's not safe to assume that just because I am able to itemize deductions, it's more beneficial financially to continue paying a mortgage. Run the numbers and see what makes most sense for your specific scenario.
There are also emotional issues for many people when it comes to owing the bank money. I'd much rather be out of debt in case life hits me and I lose my job, become disabled, etc.
If you have a mortgage of any size you are paying thousands of dollars each year in interest.
If you have the cash on hand to pay off your mortgage are are just throwing away the money you spend on mortgage interest.
There are no tax negatives to paying off your mortgage. The mortgage interest deduction is just a government funded discount on your mortgage interest expense. You are also allowed to deduct medical expenses (subject to certain restrictions) from your taxable income; does that mean its a good idea to spend as much as you can on medical expenses to get the deduction?
I personally think that the only time it makes sense to not pay off the mortgage is if your money is in a risk-free investment which has a guaranteed rate of return that is higher than the interest rate you are paying on your mortgage (after taking into consideration the interest rate discount that the mortgage interest deduction gives you). Other people think it is better to keep your mortgage and put your money in the stock market, because they think it will do better than 6% in the long run.
I agree it makes sense to pay off the loan from a purely financial perspective. But also consider what can be done with the money in terms of improving the quality of your home/life. If you can easily afford the payments, why not embark on a home improvement project or buy a second vacation home?
Depending on your market (houses in this neighourhood appreciate
10-20% a year, which doesn't seem sustainable, and any improvements get more than 100% back immediately purely due to location), and if you're planning on selling, you might even come out ahead compared to paying down the mortgage. This is based on what I've seen in the last few years here, and I wish I had more perspective on how housing prices behave in the long term (like I do with equities). It seems so location and fashion dependent. I mean will the San Francisco always be so expensive?
--Ram
Andy wrote:
======================================= MODERATOR'S COMMENT: Please trim the post to which you are responding. "Trim" means that except for a few lines to add context, the previous post is deleted.
BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here.
All logos and trade names are the property of their respective owners.