is it wise to pay off my mortgage early,or for tax purposes to not pay it off so early?

Question

I could possibly pay it off in 5 years.but paying it off means I dont have the tax benefit, to claim
the interest on my tax returns.

Answer 1

From the position of total cash flow, you'll almost always be better off without the mortgage. You may pay a little more tax, but you'll have MUCH more total cash on hand without the mortgage payments in almost all cases. But there are other considerations as well. I'll get to that in a moment.

To figure the true tax advantage of your mortgage interest deduction, only consider the amount of the interest that brings your itemized deductions above the standard deduction. THAT is the deduction that you'll actually lose, not the total amount of the interest paid.

In my case, only about 30% of the interest I paid last year is truly deductible, the rest of it is below the standard deduction amount. The tax benefit I get from the mortgage interest is about $50.00 a month on my P & I of 625.00. If I paid off my mortgage early, I'd lose the $50.00 tax advantage but would still be $575.00 better off in total cash flow.

The other consideration is the rate of return that you might be able to get on your cash by investing it instead of using it to pay off the mortgage. If you can get a higher after-tax rate on the money than the rate on the mortgage it might be better to keep the mortgage and invest the cash in the higher-yield investment.

You'll have to crunch some numbers for your exact situation to make the best decision for you. Dumping a high-rate mortgage is almost always a good idea but if you have a very low fixed-rate mortgage you might get a better rate of return by investing the cash some other way.

Answer 2

This is a very facts and circumstances specific question. If you have any other debt (credit cards, car loans, etc.) I would suggest paying them off first. There are a couple of reasons for this: 1) You can't deduct the interest you pay on those types of loans, and 2) generally those loans are at a much higher rate of interest than on your mortgage.

That being said, you do not disclose what kind of mortgage you have and what kind of interest rate you are paying on that mortgage. If you have any kind of adjustable rate mortgage, especially one that was entered into in the past 5 years, I think it is a very wise decision to start paying down the principal on that mortgage as quickly as possible. The 5/1 ARMs that were entered into in 2002 are set to adjust to the new interest rate environment. As you may be aware, interest rates have gone up significantly over the past few years, so those individuals who have ARMs could be in for a nasty surprise when they are adjusted. I have heard some horror stories of P&I payments doubling after an adjustment.

But assuming that you have a low fixed rate mortgage that was locked in during the low rate environments earlier this decade, I agree with another poster that the cash flow benefits you receive by paying off your mortgage will greatly outweigh the lost of your interest expense.

Answer 3

In my opinion, you never want to pay interest just to get a tax deduction. I pay extra principal every month so the mortgage gets paid down faster. I would love to pay it off and not have that payment every month.