IKE,
One thing I frequently tell people is that you should never ever forget that a tax deduction is never returned in full to you.
By that I mean, even if you get a deduction for your mortgage interest paid, the tax break is only around 30% to 40% (maybe a touch higher) on the dollar, depending on your bracket and your state's treatment of the mortgage interest. So for every dollar you send the bank in deductible interest expense you are saving 30 to 40 cents. You are still out of pocket 60 to 70 cents per dollar paid.
If instead you don't pay the bank that dollar and put it in your pocket, sure you are sending the government another 30 to 40 cents in taxes because you don't have the write off, but you are retaining 60 to 70 cents in your pocket....which could be invested.
The 60 to 70 cents paid represents "rent" in the old, and I would argue nonsensical statement, "Why are you renting and throwing your money out the window?"
Further, if your mortgage rate is, say, 8%, even though it is deductible the money that could pay off the mortgage is sitting earning a taxable return. So forgetting the tax impact or taking it into account...either way you need at least a "guaranteed" 8% return to be at even up. The interest expense is deductible and the earnings are taxable.
Bottom line in my book is the individual's makeup and desires in life. If I have a client that I know will sleep better at night by not having a mortgage to pay, you know what I think the best plan for that client is? To pay the mortgage. As long as they know they are giving up a possible higher return elsewhere, and they choose to pay it off I don't think anyone can fault them and in fact, in my opinion,the best financial plan for them is to pay off their mortgage. You only get one go around in this life and maximizing returns on every dollar does not necessarily make it the best life.
So....all subissues aside, I don't believe there is a solid one answer fits all for this issue.
A tax deduction is not necessarily a good thing.....you are still out of pocket 60% to 70% of the dollar spent. One needs to really examine how much better off they are putting those monies to risk elsewhere. Perhaps, like your sister, it is better to send the 30% to 40% to the government and keep the remainder for yourself.
Not disagreeing with you, but just offering some food for thought.
-Scott |
