Tuesday, May 24, 2011

Flashback Tuesday: Why Should Everyone Pay Off The Mortgage Early

The below post was originally posted on May 5, 2006

Ever since I started listening to John Cummuta and Dave Ramsey, I keep hearing people say but, "I don't want to pay off my house. I would lose my tax deduction on mortgage interest. Besides I can invest the extra money and earn more money."

I say Horse Hockey!" As Ramsey says, only his "broke financial advisers" teach that. Let me try to explain to you the truth as both Ramsey and Cummuta tell it. First let me ask what tax bracket are you in? Let's say you, as Cummuta was, are in the 28% tax bracket. That means for every one dollar ($1) of interest you pay to your bank, you get to save 28 cents in taxes."

Now, let me say you will still get your tax deduction the entire time you are paying off your mortgage. It only ends when the mortgage is paid off. OK back to my explanation.

Each dollar of interest you pay to the bank (or mortgage company) is deductible from your taxable income, which saves you the 28 cents you would otherwise have paid to the government on that dollar as income tax. But think about that. You're giving up a full dollar to save 28 cents. Whereas, if you pay off your mortgage, you will indeed have to pay 28 cents federal income tax on each dollar not going to mortgage interest...but your getting to keep the other 72 cents (72%)! Ask yourself, would you rather pay a dollar (mortgage interest) to save 28 cents, or pay 28 cents (tax) to keep the dollar?

Does it still sound like a good deal? If so you can send me $100,000 and I will send you $28,000, as soon as your check clears in my bank account.

In the typical scenario, a full dollar is leaving your life on its way to the bank and Uncle Sam is giving you a 28-cent tax break to ease the pain. However, in this scenario, the only thing leaving your life is the 28 cents. You ARE 72 cents ahead on every dollar.

Paying off the mortgage early is better, because 72 cents will always be more than 28 cents.




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