My mother-in-law, my wife Nicole and I were standing in our kitchen the other day catching up on life. In conversation, Nicole brought up the fact that we're one year away from paying off our mortgage and we're excited to see what our life is like when we're completely debt-free. Our plans for annual vacations with the kids, starting a business and saving more for retirement all came up.
My mother-in-law was very interested in our decision and asked:
“Don't you need to keep your mortgage for the tax benefits?”
Most everyone who owns a home gets a mortgage interest tax deduction and those are pretty nice come tax time so I completely understood where she was coming from with the question.
I answered her question by saying:
The amount of money we will be saving not paying interest to the bank every year once the mortgage is gone will be more than the tax savings we'd receive from the IRS if we kept our mortgage.
The answer made sense to her, but after she left it got me thinking …
It has been at least 5 years since I've actually looked at these numbers and how the math breaks down.
Bye Bye Mortgage
I took a look at 2015 because it was our last full year of mortgage payments. I wanted to compare it to a full year of making no mortgage payments to make sure I was correct in my statement that the benefits of having no mortgage outweigh the tax benefits of having a mortgage.
|2015: With Mortgage|
|Tax Savings from Mortgage Interest Deduction||$859.04|
|Total Out of Pocket Cost||($2,208.96)|
|2018: No Mortgage|
|Tax Savings from Mortgage Interest Deduction||$0|
|Total Out of Pocket Cost||$0|
From the chart above you can see that even with the mortgage interest deduction we received in 2015, we're still paying over $2,000 per year out-of-pocket.
Comparing this to 2018 when our mortgage is completely paid off, we'll be paying $0 out-of-pocket.
In 2015, we were also making principal payments of around $12,300 annually. When you add in the $3,068 of interest, we're planning on having an extra $15,368 available each year!
Based on all of that information we've decided it makes more financial sense for us to pay off our mortgage. Right now, we're one year away from making it a reality.
Now everyone's numbers are different. Your interest rate could be higher and your tax rate could be different. But no matter how you slice it, paying off your mortgage will save you more money than keeping your mortgage.
I'd love to hear some commentary on this one since this is an often debated subject. I'm not a tax expert and I'm not a certified financial planner. Just a guy with a calculator.
What do you think? Pay off the mortgage? Or keep the tax benefits?