payoff mortgage vs IRS deduction

By itself, the tax deduction probably isn't sufficient reason to have a mortgage.

But the mortgage can also be viewed as part of an overall money management strategy. The money you would have to use to pay off the mortgage can be invested. If you have a 6% mortgage, it's costing you only 4% after the deduction. Meanwhile you can invest the money, and stocks have historically returned 10%. Even if you think the days of such high returns are gone, 7-8% is still a reasonable expectation. The net return is then 4%.

Home equity is a fairly illiquid investment. It takes a while to get that money out if you have an emergency. It makes sense to me to keep a useful chunk of money in a more liquid investment such as an insured money market account. After that, do the analysis Margolin suggests for what ever cash is left over.

And by not paying off the mortgage, how much did you pay in interest to save $856 in income tax? $4300?

Not really. If you pay off the mortgage, you will presumably take money that's now invested elsewhere to pay it. So are you now making more on that money than you're paying on your mortgage? It's the interest rate that matters, the principal payment is just exchanging cash for the same value of mortgage paper.

Mortgage rates are pretty low, 5% to 6%, and if you were in the market this year, you made way more than that. Next year, who knows?

R's, John

I think he was asking (and I answered comprehensively at MIFP) how being so close to the standard deduction impacted all of this. But as you point out, Barry, a 6% mortgage costs as little as 4% if fully deducted. So even if the deduction is less valuable, it's still a 4-6 range compared to the long term 7-8% return I'd expect from here.

the other thing that I noticed with the Standard Deduction, (which I've never really taken for as long as I can remember), is that "everything" in the itemized deductions goes away. Some you can't control, but some are your choice - like Charity -

It was never an issue, and we pretty much spread it around to several groups, and that won't change - but I just noticed that Charity is sitting there with all the other "payment deductions".