Interrupter CheckmarkInterrupter IconFacebookGoogle PlusInstagramGroupRamsey SolutionsTwitterYouTubeExpand MenuStoreCloseSearchExpand MenuBackStoreSign in

Ask Dave

Is It a Good Idea to Keep a Mortgage for the Tax Benefit?

Tonya asks why Dave tells people to pay off their houses instead of using it as a tax write-off. Dave explains.

QUESTION: Tonya on Facebook asks why Dave tells people to pay off their houses instead of using it as a tax write-off. Dave explains.

ANSWER: Let’s do some quick math. Let’s pretend you had a $200,000 mortgage at 5% interest. Five percent of $200,000 is $10,000, which means if you have a 5% mortgage on $200,000, you pay $10,000 in interest to the bank. If you make $75,000 a year, you’re in a 25% tax bracket. You’re able to deduct that interest—the tax write-off. The reason everyone keeps their mortgage is because they’re sophisticated and want to keep the tax write-off. “You don’t want to pay off your mortgage. You’ll lose the tax write-off!” How many times have you heard that bunch of crap?

Let’s play with this for just a second. If you make $75,000 a year and you have a $10,000 tax write-off, that means you pay taxes not on $75,000 but on $65,000. If you paid off your home mortgage, you would have to pay taxes on not $65,000 but $75,000 because you wouldn’t be paying any interest anymore. You’re going to have to pay taxes on $10,000 worth of income. You’re in a 25% tax bracket. Twenty-five percent of $10,000 is $2,500. Your tax bill just went up by $2,500 because you paid off your mortgage. Did I mention that you’re no longer sending $10,000 to the mortgage company? Your tax bill went up by $2,500, but your interest bill went down by $10,000. Did you get this?

What these idiots are saying all over America is that you need to keep your tax deduction—and you’re an idiot if you believe that. You’re sending $10,000 to the mortgage company to keep from sending the federal government $2,500. Calling that sophisticated would make you an idiot. I’ve been that idiot. I used to tell people to do that all the time, and then I got called out on it. Then I went, “I was completely an idiot.” That’s wrong. You don’t send Countrywide $10,000 to keep from sending the IRS $2,500 and call that sophisticated. It’s not sophisticated; it’s stupid.

That’s why I say pay off the house versus the tax deduction. If you want to trade $10,000 for $2,500, you can do that without being in debt. Just increase your giving to a 501(c)3—your church or the Red Cross or whatever. Pay off your mortgage, give $10,000 extra in charitable giving, and your tax bill will not go up one penny. You’ll save the $2,500 in taxes by giving away the $10,000. Your charitable giving is tax-deductible.

We do not stay in debt because of the tax deduction. If you’re in debt, take the tax deduction, but don’t stay in debt because you’re somehow sophisticated.

Thank you! Your checklist is on its way! 

Taxes Made Easy! 

Taxes Made Easy

Take the stress out of tax prep with our free checklist.

Taxes Made Easy! 

Take the stress out of tax prep with our free checklist.