Why keeping your mortgage for a tax deduction is not the answer?

You will often hear people say, “You should keep that mortgage for the tax deduction.” In this blog post, we will break down why this is 100% misinformation. Let’s start with what it means to be able to write off your mortgage interest. Let’s look at the math

You have a $175,000 mortgage at 4.25% interest. You will end up paying roughly $6500.00 in mortgage interest. If you itemize and write off $6500.00 worth of interest on your home mortgage, and you're in a 25% tax bracket, it would save you $1,625.00.

You pay in $6500 to save $1625. I am missing the part where this is a smart financial choice.

The second part of this problem is that very few people itemize on their taxes. The tax foundation estimates that 90% of filers this year will take the increased standard deduction.

For the sake of argument, let's say that you are one of the few that will be planning to itemize and you need to reduce your taxable income. There are better ways to deal with your circumstances. You could instead put that money into an HSA. Save yourself some money that can be there as a rainy day for medical expenses, and if not touched and invested well this acts as a retirement investment vehicle.

Ok, so perhaps you are not able to open an HSA account until next open enrollment or maybe the idea of high deductible insurance is too much to take on. My recommendation is just to set aside money to pay the IRS what you are going to owe. Keeping money in a money market account or a savings account is still much better than spending money every month to the bank every month to only get some of your money back.

If all of that is not enough to make you rethink getting the mortgage off of your back, keep in mind what you can do with the money you save if you are not giving away all that money to the bank. Save it for a vacation, fix that deck, redo your kitchen, the possibilities are endless. The point is that the choice is yours when you are free.

Jennifer StrimbeckComment