My husband and I are on the debt-free journey and as part of our debt-slaying process we will be paying off the mortgage to our home. Whenever we tell someone this, we are usually met with “why would you do that? That is a huge tax savings”!
Before I became a stay-home-at-home, I was an accountant and therefore, I had to investigate this claim further. My speculations were correct, the oppositions to paying off your mortgage, for the most part are simply just a myth.
The Tax Benefit Myth
Do you take the Standard Deduction or do you Itemize your taxes? Have no idea what I’m referring to? Then you more than likely take the Standard Deduction. In fact, the majority of Americans take the Standard Deduction, which means that you are not writing off any interest paid on your mortgage. Even if you supply your mortgage interest information to your CPA or you input it in TurboTax or similar software, it does not mean that you are actually taking the deduction. Look at line 40 on your Form 1040, Form 1040A, or Form 1040EZ. This line is where you will see if you are taking the standard deduction or an itemized deduction. The amount will either come from your “Schedule A” (another page of your tax return) or will be the standard deduction that you qualify for. This article from the IRS is very helpful in determine if you should Itemize or take the Standard deduction.
True story. In fact, in the fours of our home ownership, we have only been able to write off the interest earned on our mortgage (which is very little due to us having a low interest rate) one time. In four years my husband and I have only taken an Itemized Deduction on our taxes for one year.
Therefore, for us, there is very little tax benefit to holding onto our mortgage for the next 26 years. This article from TurboTax goes into greater detail of the Itemizing your taxes and writing off mortgage interest.
The Interest Myth
The truth is, many people no longer have super high interest rates on their loans. The average interest rate is 4.750 percent for a fixed thirty-year loan. When you compare that to the average interest rate in 2000 was 8.05 percent for a thirty-year loan. What this means is that, you are not forking over thousands upon thousands of dollars every year in interest. Which, of course is a great thing for your budget, but is not so great when talking tax deductions. This is simply because you are paying less interest and if you do take an itemized deduction you are typically not writing off that much.
In fact last year, our mortgage paid was $3,949.89 and even though we were able to write it off this year, we actually gave more charitable contributions than the amount we paid in interest last year. In 2013, we paid almost $5,000 in interest and we were not able to write it off because our standard deduction was more than what we itemized.
The truth is, being debt free, means that we can do more with the time, talent, and treasures God gives us. We can provide a better life for our children by saving enough money to pay for their college education and maybe even their weddings. We can provide a better life for ourselves when retire by not holding onto debt and we can save enough money to live out our wildest dreams of traveling the world, owning our own homestead, and whatever other crazy ideas we come up with.
Maybe paying off your mortgage is not a big deal to you. At first, it was not a big deal to my husband and I. That was until we calculated our net worth and realized that we could and would get so much more out of our assets if we were debt-free.
If you are slaying the debt monster, I encourage you to keep reaching for hope and to never lose sight of why it is that you are on this journey because debt is not forever.
Have you paid off your mortgage? How long did it take it you?
If one of your financial goals is to lower your tax bill, you may want to avoid paying off your mortgage early. The IRS allows you to deduct the mortgage interest you pay from your taxable income, lowering your tax bill. You can take advantage of that deduction for the life of the loan.
Your home is considered a non-liquid asset because it can take months — or longer — to sell the property and access the capital. “If you start paying down your mortgage too fast, you risk depleting your liquidity,” says Amanda Thomas, CFP, a partner and director at Mission Wealth in Santa Barbara, California.
Paying your mortgage off early, particularly if you're not in the last few years of your loan term, reduces the overall loan cost. This is because you'll save a significant amount on the interest that makes up part of your payment agreement.
You can deduct the mortgage interest you paid during the tax year on the first $750,000 of your mortgage debt for your primary home or a second home. If you are married filing separately, the limit drops to $375,000.
Paying interest is no fun, but the interest on your mortgage could help you lower your taxes. The mortgage interest deduction (MID) lets you write off a portion of the interest on your home loan. That lowers your taxable income and could move you into a lower tax bracket and save you thousands at tax time.
The mortgage interest deduction is a tax incentive for homeowners. This itemized deduction allows homeowners to subtract mortgage interest from their taxable income, lowering the amount of taxes they owe. Homeowners can also claim the deduction on loans for second homes providing that they stay within IRS limits.
To O'Leary, debt is the enemy of any financial plan — even the so-called “good debt” of a mortgage. According to him, your best chance for long-term financial success lies in getting out from under your mortgage by age 45.
(Check with your tax assessor's office to make sure your home address is on the tax bill, so you are sure to receive it.) The way real estate usually works, as you pay down your mortgage, your real estate tax bill will continue to rise.
You will then be responsible for paying your home insurance premiums and property taxes on your own. Although maintaining homeowners insurance is no longer a requirement once your mortgage is paid off, it is still recommended.
It's typically smarter to pay down your mortgage as much as possible at the very beginning of the loan to avoid ultimately paying more in interest. If you're in or near the later years of your mortgage, it may be more valuable to put your money into retirement accounts or other investments.
In principle, if you're offered a higher interest rate on a savings account than the rate you pay on your mortgage, it could mean it's best for you to save. However, if you're paying a higher interest rate on your mortgage than you could earn from a savings account, it might be best to pay off your mortgage first.
Tax Implications: Sellers may be subject to tax implications, such as having to declare interest earned on the loan as taxable income. Property Tax and Insurance Burden: The sellers have to pay their own mortgage, property taxes, and insurance, until the buyer pays off the complete loan.
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Introduction: My name is Gov. Deandrea McKenzie, I am a spotless, clean, glamorous, sparkling, adventurous, nice, brainy person who loves writing and wants to share my knowledge and understanding with you.
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