Looking at the Mortgage Interest Tax Deduction

When listing the benefits of home ownership, one of the most often cited "benefits" is that of the mortgage interest tax deduction. In the United States, individuals that itemize deductions on their tax return can include the interest payments for mortgages on their primary residence. This tax savings, many claim, is just one of the untold reasons why YOU NEED TO BUY A HOME TODAY!!!!1!1!!!!1!! In fact, some people are remiss to pay off their mortgage (and instead use their home like an ATM, refinancing to fund vacations, home improvements, pay bills, and so on) in part because they do not want to lose this precious deduction.

While any reduction of tax burden is nice, realize that this benefit is only seen if you itemize your deductions. The tax code provides a standard deduction for non-itemized returns (the amount varies on the year and the filer's marital status; for married couples it's near $10,000). Therefore, it only makes sense to itemize your deductions if they exceed this threshold. Deductions can come in the form of charitable giving, business expenses for the self-employed, alimony and child support, various educational expenses, and so on. While there are a number of deductions that might make it worthwhile to itemize, the plain fact of the matter is that many do not, meaning that they do not see any benefit from the mortgage interest tax deduction. (For example, if your annual mortgage interest is less than the standard deduction, and you have no other deductions, there's no benefit to itemizing.)

And even if you do itemize, you're still paying more than if you more quickly paid down your mortgage. For example, imagine that you paid $10,000 of interest per year to the mortgage company. You get to deduct that $10,000 from your stated income, meaning that if you made $70,000, you can now pay taxes on just $60,000. If you are in the 30% tax bracket, you just saved 30% of $10,000, or $3,000. However, you had to pay $10,000 to save that $3,000, meaning that you're down $7,000. Granted, being down $7,000 is better than being down $10,000, but the point is that the mortgage interest tax deduction is NOT free money and is NOT some wise investment move.

In my opinion, the wise move is to aggressively pay down your mortgage so that, sooner than later, you're paying $0 in interest payments to the bank. Granted, you'll be losing $3,000 in tax savings from when you were paying $10,000, but I'd rather lose $3,000 for free than have to pay the bank $10,000 in order to save that $3,000.