You're getting a decent tax deduction. If it's deductible, the mortgage interest may make your effective tax rate even lower. You have other high-interest debt. Money that “costs” more than your mortgage should get higher priority for early pay off.
At a personal tax rate of 24%, this implies tax savings of $3,566 in just the first year of the mortgage. In effect, the government is paying homeowners to take on debt. Paying a mortgage off early reduces the interest expense and the corresponding tax shield.
The key benefit of taking the mortgage interest deduction is that it can decrease the total tax you pay. Let's say you paid $10,000 in mortgage interest and are in the 32 percent tax bracket. You'll lower your tax bill by $3,200 after subtracting the $10,000 deduction from your income.
Mortgage Interest Deduction
Homeowners who itemize deductions may reduce their taxable income by deducting interest paid on a home mortgage. Taxpayers who do not own their homes have no comparable ability to deduct interest paid on debt incurred to purchase goods and services.
Paying a large lump sum toward your loan balance lowers your overall interest costs and helps build equity. Once you have 20% equity in the property—meaning you have paid off 20% of the total loan—you can cancel your private mortgage insurance (PMI) and lower your monthly costs even further.
What is the most significant downside of paying off your mortgage early? The biggest drawback of paying off your mortgage is reducing your liquidity. It is far easier to get money out of an investment or bank account than it is to get money from the equity you've built in your home.
You should aim to have everything paid off, from student loans to credit card debt, by age 45, O'Leary says. “The reason I say 45 is the turning point, or in your 40s, is because think about a career: Most careers start in early 20s and end in the mid-60s,” O'Leary says.
If you have a mortgage on your home, you can take advantage of the mortgage interest deduction. You can lower your taxable income through this itemized deduction of mortgage interest. In the past, homeowners could deduct up to $1 million in mortgage interest.
Paying off your mortgage early can save you a lot of money in the long run. Even a small extra monthly payment can allow you to own your home sooner. Make sure you have an emergency fund before you put your money toward your loan.
Today, the limit is $750,000. That means this tax year, single filers and married couples filing jointly can deduct the interest on up to $750,000 for a mortgage if single, a joint filer or head of household, while married taxpayers filing separately can deduct up to $375,000 each.
Misconception 1: You Will Get a Tax Break
Despite the hype, the overwhelming majority of homeowners receive no tax break at all from the mortgage interest tax deduction. Keep in mind that to even qualify for the deduction, homeowners must itemize their deductions when determining their income tax liability.
Dave Ramsey is certainly one of America's leading voices on finance. Ramsey is averse to debt of any kind and believes you should pay off your mortgage as fast as you can. In fact, he recommends that people only take out a 15-year mortgage that is no more than ¼ of their take-home pay.
Paying your mortgage off early, particularly if you're not in the last few years of your loan term, reduces the overall loan cost. This is because you'll save a significant amount on the interest that makes up part of your payment agreement.
One of the pros of paying off your mortgage is that it is a guaranteed, risk-free return. One of the cons of paying off your mortgage is reduced liquidity, as it is much easier to access funds that are sitting in an investment or bank account.
With your mortgage paid off, you do not have to send the mortgage company any more money. Send discharge of mortgage letter to your county: Your mortgage company should send all of the required documents to your county clerk's office notifying them that your home is no longer bound by a mortgage.
Income Phaseout
There is an income threshold where once breached, every $100 over minimizes your mortgage interest deduction. That level is roughly $200,000 per individual and $400,000 per couple for 2021.
There are certain expenses taxpayers can deduct. They include mortgage interest, insurance, utilities, repairs, maintenance, depreciation and rent. Taxpayers must meet specific requirements to claim home expenses as a deduction.
Kevin O'Leary, an investor on “Shark Tank” and personal finance author, said in 2018 that the ideal age to be debt-free is 45. It's at this age, said O'Leary, that you enter the last half of your career and should therefore ramp up your retirement savings in order to ensure a comfortable life in your elderly years.
When you have no debt, your credit score and other indicators of financial health, such as debt-to-income ratio (DTI), tend to be very good. This can lead to a higher credit score and be useful in other ways.
When you pay down your mortgage, you're effectively locking in a return on your investment roughly equal to the loan's interest rate. Paying off your mortgage early means you're effectively using cash you could have invested elsewhere for the remaining life of the mortgage -- as much as 30 years.
When you pay your mortgage off in full, the loan servicer reports the balance paid in full, ceasing the ongoing credit benefits. Paying off your mortgage in full does not directly hurt your credit score, as long as the rest of your accounts are paid as agreed in a timely fashion.
Funding Your Retirement First
Unfortunately, while it's better to pay a mortgage off, or down, earlier, it's also better to start saving for retirement earlier. Thanks to the joys of compound interest, a dollar you invest today has more value than a dollar you invest five or 10 years from now.
If the loan is not a secured debt on your home, it is considered a personal loan, and the interest you pay usually isn't deductible. Your home mortgage must be secured by your main home or a second home. You can't deduct interest on a mortgage for a third home, a fourth home, etc.
Homeowners who itemize their tax returns can deduct property taxes they pay on their main residence and any other real estate they own. This includes property taxes you pay starting from the date you purchase the property.
Is PMI deductible? The legislation, signed into law Dec. 20, 2019, not only makes the deduction available again for eligible homeowners for the 2020 and future tax years, but also enables taxpayers to take it retroactively for the 2018 and 2019 tax years by filing amended returns.