An Overrated Tax Strategy – The Home Mortgage Interest Deduction
The mortgage interest deduction just might be the most overrated tax saving strategy there is, and however it is considered by many to be a dominant reason for home ownership.
Look, I present financial seminars for thousands of people every year. During breaks people will always come up to me and ask me questions about their personal financial situation. I tell them to do five basic things…
- Get out of debt and stay out of debt.
- Save 3-6 months of expenses for emergencies and emergencies only.
- Use the envelope budgeting system. It’s the best budgeting system ever developed.
- Open a Roth IRA so that you can have tax-free investments and tax-free income for the rest of your life.
- Pay off your mortgage so that you can own a home free and clear.
The one that always meets with the most resistance is the one about paying off a mortgage. People will often say, “I don’t want to pay off my mortgage because I need the tax deduction.”
That kind of logic gives me a headache. Here’s the deal: If you pay $1,000 a month in interest on your mortgage, and if you’re in the 28% tax bracket, you will nevertheless pay $720 a month in interest ($1,000 minus 28%). So it’s only a good deal compared to not getting any tax deduction at all or — in many situations — paying rent. A mortgage interest deduction does not “save” you money over not paying any interest at all.
In my complete career I’ve never heard anyone who owned a home free and clear say, “Gosh, I sure miss having that mortgage payment.” So once you’ve found a home that you want to live in for the rest of your life, work toward paying off your mortgage early. You’ll be glad you did.
(c) Larry Holmes