Friday Financial Tidbit: The Mortgage Interest Myth

Many financial experts and gurus advise against paying off your mortgage.  One of the many reasons they give against paying your mortgage early is because of the mortgage interest tax deduction that you receive each year when you file your taxes.  Today I am going to explain why that reason is a total myth.

In our example let us assume you have a mortgage balance of $200,000 at 6.0%.  That means you will pay $12,000 of interest during the year.  If you itemize your deductions on your tax form at the end of the year, you would be able to deduct the $12,000 from your taxable income.  If you are in a 25% tax bracket, you would have a tax savings of $3,000 ($12,000 x .25).  So you would be paying the bank $12,000 to avoid paying the IRS $3,000.  It does not take a math genius to realize that is not a winning financial strategy.

With that being said, if you have a mortgage and are able to deduct the interest on your income taxes then do it!  It is a nice benefit to have come tax time.  However there is absolutely no reason to keep the mortgage simply for the tax deduction.  So next time you hear that you should not pay your mortgage off because of the tax deductions, smile and take comfort in knowing that you are reducing risk by becoming debt free!

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