You don’t have to be a veteran internet surfer to know that there are hundreds of financial experts floating about on the web. Because of this, you’re likely to run across really bad advice and unfortunately, it’s keeping a lot of people in the hole.
One of the pieces of, eh, advice that I see and as a matter of fact it’s something I just read in a USA Today article, says that it’s the wise move to not pay off your mortgage. Rather, you should keep it as a “tax shelter”.
Friends, this is bad advice and those telling you to do it are bad at math.
Let’s leave names, companies, and plans out of this for a moment and look at math. If you have a mortgage of $100,000 at 3% interest that means you are paying $3,000 in interest per year which you can write off. Please note, you can only write this off if you itemize and do not take a standard deduction.
Let’s say you make $100,000 per year and fall into the 25% tax bracket. Instead of paying taxes on $100,000 (which would be $25K) you’d be paying taxes on $97,000 (which would be $24,250). That means you save $750 on your taxes but you’re paying $3,000 in interest to the mortgage company.
Again, tell me how keeping your mortgage makes sense?
There are several benefits to paying off your home early but I want to give you one number: $94,952.38
That is how much money you would have in 10 years if you invested $500/month (reasonable mortgage payment sans taxes and insurance) at an 8% interest rate. You would put in $60,000 and would have gained over $34,000 in interest. Compare that to the near $23,000 you’d pay in interest to the mortgage company over those 10 years on the aforementioned mortgage.
What sounds better to you?
Look guys, the fact is keeping your mortgage hanging about is going to keep you tied to those monthly payments while limiting your buying options. Dragging a mortgage into retirement isn’t a wise idea. You can do a lot better things with that money rather than paying interest. Ever notice how those who advocate this message are usually beholden to mortgage companies?
Dump your mortgage. It’s Move #8 of my 9 Moves plan and it is the best thing you can do as you head into retirement.
Disagree? Let me know in the comments! Also, tell me what you would recommend for people to do prior to heading into retirement. Look forward to your thoughts!