In regards to the accelerated-mortgage concept, the nation’s financial gurus have it wrong. They have countered the effectiveness of accelerating the mortgage and have denounced early mortgage pay off. Their primary argument is that by paying off the mortgage, consumers will lose their mortgage-interest write-off. If financial gurus were held accountable for bad advice, this would equate to malpractice. Do the math. Better yet, I will do it for you…
Granted: It makes more financial sense (in most cases) to purchase a home rather than to rent a home for the simple fact that a portion of the purchaser’s payment (though small at first) inures to the benefit of the purchaser (in the form of equity), while the greater portion of that payment inures to the benefit of the bank (in the form of interest). The consumer also benefits from the tax write off created from the interest paid to the bank. Therefore, purchasing a home is often more beneficial than renting one.
However, to employ this same premise in order to convince consumers not to pay off the mortgage is wrong, based on the following math:
Let’s say, for example, that you are paying $10,000 per year in interest (just to keep the math simple); and, let’s also say that you made $60,000 for the year. At tax time, the IRS allows you to reduce your income from $60,000 to $50,000, because they are allowing you to “deduct” the interest that you paid to the bank. This, in turn, puts you into a lower tax bracket so that your tax assessment is lowered. It is important to know that the mortgage-interest write off is not a dollar-for-dollar write off, but only a reductive ratio of income and taxes through deductions.
Let’s simplify it another step: How much more tax would you pay on an additional $10,000 (as if you had lost the mortgage-interest write off)? Simple: If you are in the 30% tax bracket, you will pay $3,000 more, based on that $10,000; or, $2,000 more in the 20% bracket.
MORE SIMPLIFIED: Who wants to give the bank $10,000 each year in interest so that they can get $2,000 or $3,000 from the IRS? What kind of a trade-off is this? A VERY BAD ONE!
EXTREMELY SIMPLIFIED: Rather than paying the bank $10,000 to get $3,000 back from the IRS—pay the $3,000 to the IRS, and take the other $7,000 that would normally go to the bank, and GO PLAY! GO INVEST IT! Stop paying three-times your taxes to the bank to recoup one-third. To do so is financially insane. The “gurus” have it wrong.
The Scam of the 90’s, was based on a similar premise: Never pay your home off. Take the equity and invest it in the stock market. (They were wrong and companies are being sued for that concept.)
Pay your mortgage off early if possible, regardless of the mortgage interest write off, and bag the gurus!