Are there benefits to keeping a mortgage?
What are the benefits of keeping a mortgage versus paying it off early? Many say that investing money rather than paying down a mortgage will achieve a greater return. That theory does make sense, but it could be argued that you could invest a LOT more if the mortgage was paid off early, thus building an even greater nest egg for retirement.
Another theory is actually a myth
Yes, a myth. Many will say that keeping a mortgage is a great idea because of the tax deduction. That is a load of HOOEY – and I’ll prove it. For this example we will be using a married couple with one child who earn $60,000 a year using the tax return (Form 1040) and tax rates from 2007. First, a couple of definitions:
- Taxable Income: The amount of income that the government will tax you on.
- Schedule A: A worksheet that calculates an amount for legal, allowable deductions.
- Deductions: Certain expenses, gifts, and other items the government allows us to use in order to reduce our taxable income.
Example of Schedule A using the Home Mortgage Interest Deduction
This family had real estate & property-type taxes totaling $6,500.00 and also paid the bank $10,000.00 in home mortgage interest. This makes a total of $16,500.00 that the government will allow them to itemize (use to reduce the amount of income they are taxed on). This total is then recorded on line 40 of Form 1040 (see picture below). Follow the instructions for lines 41 through 44 and this family’s tax for 2007 was $4,216.00.
If this family did not have the home mortgage interest payments, they may not have had enough other deduction items to use on Schedule A. But they would still be able to take the “Standard Deduction” of $10,700.00 (see note at on the side of Form 1040) to bring their Taxable Income to $39,100 with a tax liability of $5,079.00.
Did they really need to send the bank $10,000.00 in order to be able to itemize their tax return and reduce their taxable income by $863.00 (difference between itemized taxes $4,216 or standard taxes $5,079)??? My calculator says NO!
Home mortgages aren’t bad, and if you have one then by all means you should take the deduction. But to keep a mortgage in order to save on taxes is just bad math.