Friday, May 1, 2015

Mortgage Interest vs. Mortgage Interest Deduction

I received this question twice this week from clients who are about to receive some 'extra' money (one by inheritance, the other from the sale of investment property) and are thinking about paying off their mortgages.

They ask: Should they NOT payoff their mortgage because it would mean losing the mortgage interest deduction.

Let's say you are paying $10,000 per year for mortgage interest. That means that $10,000 of your income is NOT being taxed. If you are at a 30% rate Federal and state, that means the Mortgage Interest Deduction has saved $3,000 in taxes. You saved $3,000, but you paid $10,000 in interest.

So, you wouldn't be ahead continuing to pay a mortgage just for the mortgage interest deduction savings.

Fine print: this is an example for general cases only. There could be circumstances where this would not be good tax advice. As always, you should seek the counsel of a tax professional about your individual tax situation.