Would you give $1.00 to get 35 cents or 28 cents or 25 cents or even 15 cents back?

I had a conversation with a client last week that was debating if she should go ahead and pay down her mortgage. People were saying to her no don’t pay down your mortgage because it is a tax deduction. I would agree with that, if she had other outstanding debt that was not tax deductible, but her only debt left is her mortgage. I believe I have touched on this before but I figured I would bring it up again to help people understand what the “tax deduction” really means.

Having a tax deduction is better than not having a tax deduction but keeping the cash in your hand is better than a tax deduction in most cases regarding Mortgage interest, you should consult your tax accountant for more info on the best way to handle individual needs. But, I also want to interject some common sense as well. Just as the title says, why give $1.00 to a mortgage company to get 25 cents (whatever your tax bracket is) back on your taxes. I will put it in real numbers, let’s say you pay 10K in interest on your house, that will give you back 2.5K in real dollars on your taxes, so your net cost is still 7.5K. But if you had the ability to cut that interest down to 5K per year, you would get 1.25K back, your real cost is now 3.75K, keeping the other 3.75K in your pocket, which would definitely cover anymore tax liability you may have.

My own interest should be dropping significantly this year since interest rates dropped, which means I will be able to apply more towards principle and it will be a snow ball effect in the right direction. We will also be prepared that we may have to pay in for taxes but that tax bill should not be nearly as high as the money that we did not have give to the Mortgage Company in interest.


~ by debt2dreams on April 20, 2009.

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