The Perpetuated Myth
- Don’t pay your mortgage off early, you need your mortgage for a tax write off!
How many times have you heard that you should not pay your home mortgage off because you won’t be able to write off the interest on your yearly taxes? Maybe you’re one of those people who has said this. If so, let’s do some simple math to prove or disprove the validity of this statement.
Let’s first address the tax write off myth. I feel hypotheticals are the best way to examine a statement. Let’s say you have a home loan of $250,000. As of this writing, the current interest rate for a 30 year fixed mortgage is 4.8%. So at the end of the year, you would have paid $12,000 in interest to the bank. Let’s say your income is $95,000 a year, which would put you in the 24% tax bracket.
How do tax write-offs work?
The way tax write-offs work is you deduct the total write off from your taxable income. So the $95,000 you would normally claim in taxable income, drops down to $83,000 due to writing off the mortgage interest of $12,000. So if you paid off your mortgage, you would be paying taxes on $12,000 more taxable income each year because you wouldn’t have the write-off. $2,880 is 24% of $12,000.
So by paying off your mortgage, your tax bill would go up by $2,880 a year. Your tax bill went up $2,880, but you no longer pay $12,000 in interest to the mortgage company.
This myth states it makes more sense to send $12,000 a year to the bank rather than sending $2,880 to the IRS. Does this make sense to you? If you have friends who refuse to change their minds about this myth, maybe you could sell them some blinker fluid.
What happened when you paid off that mortgage? Your tax bill went up by $2,880 but your interest bill went down by $12,000. That’s $9,120 in savings!
Order Of Debt Payment
Keep in mind, your home should be the last debt you pay off due to the lower interest rate of the mortgage. Your vehicle, credit card, and student loans need to be paid off before you tackle that home mortgage.
The hypothetical above makes it extremely clear that if you have the ability to start pounding away at that mortgage, get it done rather than settling for a minimal tax deduction. I’m all about tax write-offs, but let’s not fool ourselves into thinking that paying interest to a mortgage company makes more sense than paying off the loan.
If you need a refresher on how to pay off those other debts, please read my debt payoff article: Simple Steps To Start Your Debt Free Life!
What other mortgage myths have you heard?
Please leave a comment below and let me know what other mortgage myths you have heard! If you haven’t signed up to receive future articles by email, please add yourself at the bottom of this page. If you have topics you would like future blogs about, let me know and I will add them to the agenda. Stay safe my friends – ENOUGH IS ENOUGH!