Aside from fake news published every day across the internet, it should come as no surprise there's also very bad financial advice being spread on various popular financial websites. We stated in our first blog post that our mission is to separate financial fiction from financial fact. Well, let’s begin…
'Fool'ish Financial Advisor/Author says:
…don't pay off your home because...
1. You'll lose out on that interest deduction
Paying all that mortgage interest has a benefit, and it comes in the form of a potentially sizable tax deduction. If you're in a high tax bracket, losing out on this deduction could mean paying more in taxes, especially if forgoing it pushes you into the next higher bracket. Let's say you're in the 25% tax bracket and currently pay $24,000 in mortgage interest per year. That's a $6,000 tax break you'd be giving up by paying off your mortgage.
The link to their non-sense: The Motley Fool: 3 Reasons Not to Pay Off Your Mortgage.
This is bad advice and here's why:
By paying $24,000 in interest to a mortgage company to get $6,000 back in income taxes means you LOST $18,000 dollars.
Let's do the math and say the extra $24,000 in income you show from not having a mortgage payment is taxed at the 35% bracket.
Okay, $24,000 extra income in a 35% tax bracket means you pay an additional $8,400 in Federal Income Tax because you don't have the mortgage deduction, but you have $15,600 cash in your pocket!
So who's better off? The person with the mortgage who spent $24,000 in interest to get back $6,000 in tax or the person without a mortgage who showed $24,000 more income, paid $8,400 in tax on that money but has $15,600 in his pocket because he has a paid off home?
I suspect the Motley Fool author doesn't understand how U.S. income tax brackets work. For a simple illustration watch our video.
Also understand this mathematical fact:
Since the person without the mortgage has $15,600 more money to spend every year, year after year, do you know how much money you would have to have on deposit at 3% interest to earn $15,600 dollars per year?
It's $520,000 dollars cash on hand at 3% interest.
Anyone who tells you not to payoff your mortgage because you'll lose the tax deduction doesn’t know what they are talking about.
The bottom line... being debt free is financial freedom. Pay off your mortgage and don't use your home as an ATM. Pay off your credit cards. Use them only to take advantage of rewards, but by all means, don't pay interest on balances. Finally, pay off your vehicle, and continue to drive it. Just because your car is paid off, doesn't mean you should go finance another one. In terms of "personal" finance, there is no good debt.
(Note: I said personal finance. Debt can certainly be useful to grow a business.)
James Spicuzza may be reached at 727.939.9465 or by e-mail.
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