Pay A Mortgage Off Early
Millions of homeowners in America are lead to believe that having a mortgage is a good thing. Mortgage brokers, bankers, and real estate professionals push the tax deduct-ability narrative. The story-line suggests that using mortgage interest payments as a deduction is smart. This costs homeowner’s tens of thousands of dollars in unnecessary interest payments. Either the adviser doesn’t know or they intentionally hype the benefit. In fact, these specialists have a vested interest in keeping you bound to a mortgage as long as possible. And they will do whatever they can to convince you not to pay a mortgage off early.
The sooner one loses the notion that the tax benefit is a good thing the better off they will be. In fact, I will show you that the mortgage interest you pay on your home does reduce your taxable income. Yet, the tax deduction doesn’t benefit you when it comes to spendable income.
It is Tax Deductible but is it Right?
When you buy a home, and take on a mortgage the prospect of paying it off seems far off in the distant future. Homeowners rationalize that the tax deduction provides them with more discretionary income. When in fact it is the complete opposite that is true.
Taxable income is gross income, less any allowable tax deductions. Discretionary income is disposable after-tax income, minus all payments to meet current bills. When you pay a mortgage off early you gain more financial freedom. Furthermore, I will show that having more disposable income is the key to this choice.
For example, when comparing two families, one with a mortgage and the other without, you can clearly see the difference. Both the Jones and Smith families make $75,000 per year and each is in the 15% tax bracket. The Joneses have a mortgage of $250,000 and the Smith’s do not. Each lives in the same area, so their real estate taxes are the same. For simplicity sake let’s say that both married couples file jointly and have no children. Here are the assumed IRS tax rate tables for both families.
When you compare the results, you discover the truth that the tax deduction benefit is a myth. It is true that the Joneses have a smaller tax liability. Yet, they made payments for real estate taxes, income taxes to the IRS and interest to the bank totaling $22,016. While the Smiths paid $11,218 a whopping $10,798 less than the Jones’s.
So Do You Really Benefit?
In this example, the Jones’s paid $1 dollar in interest and taxes and received a tax benefit of 25 cents in return. In comparison, the Smith’s got to keep 75 cents for every dollar they spent in taxes. So, which would you rather have? Imagine the discretionary income available to you once your mortgage has paid off. That is why you must pay a mortgage off early as fast as possible.
Yes, we all must have a mortgage when we first get started. In fact, having a mortgage is better in the long term than renting. Especially if you plan to stay in the house for a long time. Having said that, once you have the mortgage, pay it off as fast as possible. When you pay a mortgage off early, the interest you save can be considerable. The resulting spendable income allows you to be far better off. Besides, all kinds of other benefits accrue to you when you are finally free and clear from your mortgage. One major benefit is that you continue to build equity in your home. Also, the extra discretionary income allows you to invest and save more. Most important of all, there is extra cash available to enjoy the things you love to do in life.
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