Don’t I Lose Tax Benefits If I Pay Off My Mortgage Early?
I think we have all heard that there are great tax benefits to home ownership, but is that accurate? For one, I’m not sure that you get any tax breaks for owning a home—at least not where I live. If you’re paying a mortgage, you do get a tax break for the interest you pay; however that means you don’t truly own your home yet.
I have heard people say they want to get into a home for the tax benefits. The problem is that the tax benefits aren’t that great. They don’t warrant buying a home, and they certainly don’t warrant never completely paying off the mortgage, which I have heard argued. To understand why, simply look at your income tax filings.
We recently did our taxes and paid over $6,500 in interest on our mortgage last year. Including that interest as a tax deduction in our tax filings made a difference on the taxes we owed. The table below shows the difference in what we would owe or get refunded based on whether we included the mortgage interest as a deduction.
| With Interest | No Interest | |
| Federal | $437 (refund) | $410 (owed) |
| State | $12 (owed) | $567 (owed) |
| Total | $419 (refund) | $977(owed) |
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The difference between what we would pay with interest and without interest is $1,396, basically $1,400. In a sense, paying $6,500 in mortgage interest saved us $1,400 in taxes, but it’s really not even that good. Which sencario would you prefer?
- Scenario A: Pay $6,100 ($6,500 in interest minus $400 tax refund—remember this is a refund of my own money)
- Scenario B: Pay $977 ($0 in interest plus $977 in taxes)
I’d rather have the home paid for and pay the $977 in taxes.
So as you prepare your taxes this season or if the illusion of great tax benefits are factoring into your consideration of buying a home, look at the real numbers of what the tax benefits will mean. If you don’t have a mortgage, it’s easy to figure out how much you would pay in interest using the Excel loan amortization calculator I showed last week.
Feel free to share your two bits.
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I'm Michael Crowther, and I'm passionate about sharing the peace of mind that comes from budgeting, saving (including debt elimination), and investing.
February 23rd, 2009 at 2:21 pm
Good point. I’ve heard the argument that its better to not pay off your house, but I’ve never agreed with the idea. Now I know why
March 2nd, 2009 at 12:03 pm
They’re trying to make it so if you make over a certain amount you can only write off 2/3 of your mortgage interest . . . just solidifies the fact that debt is always crappy, no matter how you play with the numbers.
March 13th, 2009 at 6:29 pm
In my state (PA), we can’t deduct mortgage interest, so in my case, the difference is even less…this is such a no-brainer, yet many people seem to miss it entirely. I don’t get why…
July 27th, 2010 at 9:31 pm
Of course, it is not wise to spend $6,500 to obtain $1,400. The points you are missing in this simple analysis are the lost investment opportunity and time value of money. If you have a low interest rate (as are available today), such as 4.5%, then the question becomes “can you invest the money that you would use to pay-off your mortgage early for a greater return?” If you can invest at a 10% return, for example, then you get the 5.5% gain plus the tax benefit. Also, recognize that the money you are paying for your mortgage is with future lower value dollars (time value of money, inflation takes its toll). Inflation figures average around 3.5 to 4%.
I’ve heard people make the discipline argument (that most people won’t invest), but if you use that same discipline that helps you make those prepayments, you’re better off.
If you don’t want to learn to invest, then that is your choice, but don’t try to convince others that the “peace of mind” is worth the trade-off of a better financial future.