Do you need mortgage interest for tax deductions?
March 25, 2009 | Mortgage Acceleration | 
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The simple answer is NO. Mortgage interest costs you more than the deductions are saving. If you have the opportunity to pay off your mortgage early you should do so. Lets look at the numbers.
Lets assume that you earn $90,000 per year which would put you in a 25% tax bracket without any mortgage interest deductions. Federal taxes would be $22,500 in this tax bracket which leaves $67,500 post tax income.
Now lets look at what a person with a take home income of $90,000 ($7500 per month) would pay in mortgage interest. First we need to establish what he qualifies for. A home loan of $488,990 at 5% interest over 30 years would require a payment of $2625 (principle and interest). This is 35% of his net income before property taxes and insurance. A person with this income should use this as his ceiling. With taxes and insurance the total payment would be $3100+ (depending on the tax rate in your area). This puts the total monthly housing payment at over 41% of their income. Again, we are establishing the ceiling so that we know what is the max tax deductions a person with $90,000 yearly would see.
Interest paid in the first year would be $24,285 which when deducted from the gross income leaves $65,715 taxable income. Because of this tax deduction you are now in a 15% tax bracket instead of 25%. Most people stop here because they see this as a benefit. However, if we follow this through we will see the smoking mirrors.
The Federal taxes on $65,715 would be $9,857 which would leave $55,858 left in your pocket. Remember, the money left without the mortgage interest deduction was $67,500.
In conclusion, the mortgage interest caused a loss of $11,642 even with the change in the tax bracket. At the end of the day it is not about what you save as a deduction, its about what you keep when that is all tabulated. Every dollar you pay in mortgage interest loses $.20 - $.30. So if you are spending $5000 in mortgage interest each year you are losing $1000 - $1500 in hard earned cash. This is the same at any level of income. There is no time that paying mortgage interest outweighs the benefits of paying off the mortgage early. You would be better served to have that money to invest elsewhere.
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