The topic for this blog is…The Mortgage Deduction myth
When I advise people to pay off their house prior to retirement, I often hear that they feel they need the mortgage deduction and they do not want to pay if off right now. I call these people…wrong! You do not need a mortgage deduction. Here is the math…
Let’s say you have a $100,000 mortgage left to pay off. Let’s also say that your interest rate is 3.5%. Your mortgage interest will be a little less than $3500 for the full year. If you fit into the highest marginal tax rate of about 40%, your taxes will be reduced by about $1400…maybe more depending on which state you file in. That means you will have effectively paid about $2100 for the mortgage, after taxes.
If you have no mortgage, you will have effectively paid zero for the year. Zero is $2100 better than $2100.
Oh…you say that you were going to take that $100,000 and earn 10% or more with it by investing it in a REIT or some other high dividend or income paying investment. Two things…any interest rate that is equal to or higher than the prevailing mortgage rates comes with a nasty little sidecar called RISK. The higher the return, the higher the risk. Risk is not the friend of those of us who are retired. If you lose all or a sizable part of the money you put at risk, you do not have a bunch of those good earning years to rebuild the war chest. You are what is known as SOL…Seriously Out of Luck. The second thing…if you do manage to earn money above and beyond the cost of the money you got from your mortgage…you will end up having to pay taxes on it, as well. So, why take on risk when you can save money and have the peace of mind that comes along with a mortgage burning.
I have no debt of any kind. I’m not rich…but I am rock solid financially. And, it feels great.
So the formula is this…pay off high interest rate debt first…like credit cards. Then, pay off the mortgage. When you have been debt free a year…think of my advice and smile. You will be happy you spent a few moments with this blog.