I was just reading a comment by a guy, let’s call him Joe, who said “It’s good to have a long-term mortgage because the interest rate is typically lower than what you can get on your investments AND it’s tax deductible”.
Christie and I currently have a mortgage, and yes we do take the mortgage tax deduction. We’d be foolish not to. But let’s look closer at Joe’s logic…
Our particular mortgage balance is $83,000 and our interest rate is 4.5%. How did we get the balance so low? We have a 15 year fixed rate mortgage, which is all I recommend. If we don’t pay a dime extra on it the loan will be paid in full in about 7 years. *
Our current annual interest amount paid is calculated
as 83,000 * .045 = 3735. We are paying the bank $3735 a year in interest. But as we know, that interest is tax deductible. What that really means is, we don’t pay income tax on that amount of interest. It is not a one-for-one tax credit, it’s a deduction. In a 25% tax bracket, the calculation is 3735 x .25 = 933.75.
Translation: we save $933.75 on our tax bill, and we pay $3735 in interest. In our case, we owe on the mortgage (and are getting it paid off as fast as we can, on track for about 4-5 more years * ) so yes we do take the tax deduction. But if I was sitting on $83,000 cash it would be paid off by the end of the day. To make the choice, to choose to keep a “low-interest” mortgage because of the “tax deduction” is just stupid. You are literally trading dollars for quarters. If you are making the choice to stay in this scenario, the net result is you are sending the bank $3,735 to keep from sending the IRS $933.75. It makes no sense to keep it, if you can pay it off.
And we are, just as fast as we can.
OH…and to address his comments about keeping cash in the market (outside of retirement accounts) vs paying off the mortgage…ask yourself this question: If you had a completely paid for home, would you take out a $100,000 mortgage and put it into the market? Of course you wouldn’t (if you would, you have no risk meter). To the extent that you are not paying off your mortgage with money you have invested in stock or other non-retirement accounts, it’s the same thing.
I would love to refinance it again at the current rates of about 3%. I just haven’t gotten around to it yet! But there’s a very real possibility that it’s too small of a loan for a traditional mortgage and any other personal-loan type product would be as high as or higher than what we have now. I am looking into it.