In another article I discussed "The Power of a Coach" – and how people who…
When you think of an illusion, you may think of watching a magician perform some sleight-of-hand trick, such as pulling a rabbit out of a hat when it appeared there was no rabbit just moments ago.
This is an illusion, the appearance of a reality that isn’t really true.
Thesaurus.com gives other synonyms for the word “illusion,” such as “confusion,” “deception,” “delusion,” “fallacy,” “misconception,” and “myth.”
The opposite meaning, the antonym, is “reality.”
Many ideas are stated over and over so often that people will soon accept them as truth, even if they are truly illusions like pulling a rabbit out of a seemingly empty hat.
Don’t let yourself fall prey to these illusions, because it could be at your financial peril.
Here is the third of three mortgage illusions.
Knowing the truth and acting accordingly will help your loan payment freedom plan and your ultimate financial freedom.
Mortgage Illusion #3: Don’t Pay Off Your Mortgage, It’s the Last Tax Break You Have Left
This is a common objection to paying off a mortgage loan.
Even some accountants and financial planners who should know better will tell you this. Don’t fall for this illusion.
People sometimes become so blinded by saving money on taxes that they forget the goal is to reduce their total cost. Look at a simple example below.
|The Truth About the Mortgage Tax Deduction|
|Keep the Mortgage Tax Deduction||Pay Off Mortgage|
|You Save||$0.28 (Tax Savings)|
|Your Cost||$0.72 (Interest After Tax Savings)||$0.28 (Tax Paid)|
Let’s say that you would have to pay 28% of your income in taxes. Therefore, by paying $1.00 in interest, you expect to save $0.28 on your taxes (see chart). This means it still costs you $0.72.
On the other hand, once you are completely out of debt, you do not have to make a mortgage loan payment. Your interest cost is now zero, $0.00 (see the “Pay Off Mortgage” column). But you likely will pay the $0.28 in tax. Now your cost is $0.28. Compare that to $0.72.
Which one would you rather pay, the $0.28 in tax or the $0.72 after the deduction?
Pretty basic, isn’t it?
Wouldn’t you think that people would know better—especially many accountants and financial planners?
Many of these financial advisors still say to keep your mortgage forever so you can have the tax deduction. Even worse, sometimes they tell you to buy a bigger house so you can have a bigger tax deduction. But what about the bigger total cost you will pay?
This is such a strong, widespread illusion that many people blindly believe it without seeing the truth.
But there is even more to it. In order to deduct mortgage interest on your taxes, you must itemize deductions.
If it should happen that your mortgage interest plus other deductions is not more than the standard deduction you get to use anyway, then the mortgage interest does you no good at all in reducing taxes.
And note that the standard deduction almost doubled starting in 2018 with the new tax law. This means that it is even less likely that people will even get to use the mortgage interest deduction.
This means that if you are so fortunate as to get into the payment period on the mortgage where the actual interest cost is low, the mortgage interest deduction would not benefit you anyway. You are simply not paying enough interest for it to matter since you can merely use the standard deduction instead.
Furthermore, once you are completely out of debt, you will have the money that was going to the mortgage loan payment to invest.
The first place you will want to consider investing is in tax-deferred or tax-free investments. This could have the benefit of reducing that $0.28 in tax to an even smaller amount. The truth is that people who invest generally pay the least amount in tax.
Therefore, forget about the so-called mortgage interest tax benefit and pay off your mortgage as quickly as possible.
That is true financial success.
Don’t be deceived.
These three mortgage illusions are so commonly believed that people fall for them and blindly follow along, whether it is really good for them or not.
Don’t be one of those people who are deceived.
Contact us instead.