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Ask Dave

Why wouldn't you pay cash?

Brian and his wife have reached a point where they can pay cash for a house. Still, Brian wonders if getting a mortgage for the tax deduction is a good idea. Dave explains why paying cash is the way to go.

QUESTION: Brian and his wife are at a point where they can pay cash for a new home, and still have plenty of money in the bank. Brian asks if they should do this, or if it’s a better idea to get a mortgage for the tax deduction. Dave explains why cash is the way to go.

ANSWER: I think the real question is this: Why wouldn’t you pay cash if you can? I would never advise someone to get a mortgage just for the tax deduction, because these tax deductions are never 100 percent.

Let’s pretend you had a $200,000 mortgage at five percent interest. That would be $10,000 a year in interest. If you take a $10,000 tax deduction and you’re in a 25 percent tax bracket, that would save you 25 percent of $10,000 on your tax bill — or $2,500. So, you would never send $10,000 to your mortgage company just to avoid sending $2,500 to the government.

You don’t keep a mortgage just for the tax deduction. That’s trading a dollar for a quarter, and you don’t want to do that. Everybody thinks losing the tax deduction is an awful thing, but you could give $10,000 extra to your church — something you don’t have to be in debt to do — and get the same tax write-off.

There are numerous positive aspects to staying out of debt. One big thing it does is change your risk level. It gives you a level of peace and security you’ll never have when debt is hanging over your head. All that money that was going out the door to the bank can be used to build wealth and give like never before.