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Is that tax break worth it?

  • By Michelle Singletary,
  • The Washington Post Writers Group
  • – 04/01/2014
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Q: I have enough money in savings to pay off my mortgage in full and still have a cushion for emergencies. The money in the savings account earns far less than the interest rate on the mortgage. People are telling me that paying off the mortgage will negatively affect my taxes since I will no longer have that deduction. But it seems to me that I only get a benefit of a portion of the money I pay out for the interest. I can live within my means without the mortgage payment, and I do not live large (no cable, no cellphone, etc.), but I can't with it. It is important to me to max out my retirement savings/401(k), and that takes up a chunk of my paycheck. By the way, I'm single with no kids and in my 50s. What do you think?

A: I know I'll get letters from people who will disagree with me, but I say go for being debt-free — with a caveat.

If you itemize your tax return, you can usually deduct the interest you pay on a mortgage for your main home. The mortgage-interest deduction is different from a tax credit, a distinction that is sometimes lost on people trumpeting the tax break as a key reason to get a home or keep a mortgage. A tax credit reduces dollar-for-dollar the taxes you owe. A deduction eliminates only a percentage of the tax. If you don't have a mortgage, you may pay more in taxes but not as much as you would have to pay in annual interest on the home loan, especially in the beginning years. You are right on the money to appreciate how illogical it is to keep a mortgage just for the tax break.

Because of the mortgage-interest deduction, many people are enticed into buying a home before they are ready. Yes, the deduction is a nice bonus. But it shouldn't be the primary reason to get a home or to hold on to the loan if you can afford to pay it off early. By the way, many people don't even take the deduction. "Close to half of homeowners with mortgages — most of them middle- and lower-income families — receive no benefit from the deduction," writes the Center on Budget and Policy Priorities.

Here's my caveat about paying off your mortgage. Be careful about getting rid of your savings in the current economy. Really think about whether you are vulnerable to losing your job, because if it takes you a long time to find employment, or you can't work because of health reasons, you could easily go through your emergency fund. I don't suggest you clean out your savings or sell all your investments to pay off your mortgage. You don't want to be house rich and cash poor, meaning all your money is locked into the equity in your home — equity, I might add, that you can tap only by borrowing on your home or selling it.

But since you have a good emergency fund and retirement savings, and you can still pay off your mortgage with money outside those two pots, I would do it.

I often ask people this question: If you had a home that was paid off, would you take out a loan just so you could deduct the interest?

I hope you would say, "Absolutely not, that's crazy."

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© 2014, Washington Post Writers Group
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