For years, we've bought into the theory that we should always have a home mortgage such that, we can take advantage of the interest deduction on our income taxes.
There's a whole other thought process regarding this and, it makes a lot of sense if you break it down and truly look at the numbers - it's a matter of analyzing your entire financial picture instead of just one piece of your finances.
Here's an example to break it down: Primary Mortgage amount $200,000, 30 yr fixed @ 4.
97% = $1069.
98/month, $185,192.
55 cumulative mortgage interest paid 15 yr fixed @ 4.
26% = $1505.
57/month, $71,002.
46 cumulative mortgage interest paid Let's look at the $200,000 mortgage from a different perspective, not from the monthly payment but, from the cumulative interest paid.
It's obvious from the example that over the life of a loan, the shorter the loan term the less you will pay in mortgage interest ($71K vs $185K).
What could you do financially if you only paid interest on a 15 year or less mortgage? Current tax codes allow homeowners to deduct mortgage interest from their adjusted gross income.
In our example, you pay approximately $10,000 in interest payments to the mortgage lender to be able to deduct approximately $2500 from your taxes paid (in a 25% tax bracket).
So, in essence, you are paying $10K to a bank so that you can save $2.
5K in taxes.
Is that a good deal? Are you really better off? Who is really benefiting? What could you have done differently with the $10K in interest payments? Contribute to your church or other charity (and get a tax deduction), save for retirement, save for the kids' college, invest in your business, etc.
There's some talk in Washington about a change to the mortgage interest tax deduction.
As the country's debt increases and our government's need for revenue increases (a whole other topic), the mortgage interest deduction for primary homes will probably be in the mix when tax change considerations are discussed.
The amount of money involved in new tax revenues for the government by removing the deduction is substantial (100's of billions of dollars).
So, the questions we should be asking ourselves are; (1) "If I don't receive any tax benefits from my mortgage interest payments, then how fast can I pay off my mortgage"? and; (2) "How can I benefit from the monies that I no longer send to the mortgage lender as interest payments?"