The Mortgage Myth

Pool Boy and I have about 11 years left on our mortgage. (yeah!!!!) I’ve had more than one person tell me that we are crazy to pay off our mortgage. “Why would you do something so stupid? You’ll lose your tax deduction! Plus, you could use that money to invest instead and come out ahead.”

They apparently don’t have basic math skills.

Let’s run this example (borrowed from Dave Ramsey, of course):

Your mortgage interest rate is 8%.
You can invest and get 12%.

You may think you’re losing out on 4%, but this is where you are wrong, in my humble opinion. First of all, would you really invest that money or would you just spend it like the rest of your money, without a plan? If that’s the case, then it REALLY doesn’t make sense. But let’s say that you do have a financial plan and you wouldn’t just blow the extra money.

The interest part of the mortgage payment is is $830/ month, which equals almost $10,000 per year you are paying in interest. If you’re in the 30% tax bracket, this would give you a tax deduction of $3000. So if you didn’t have this mortgage payment, I would have to pay an additional $3000 in income taxes. So to those people who say I’m stupid, let me say this. You want me to send $10,000 to the bank just so I don’t have to send $3,000 to the IRS?

Now for the investing portion. If you don’t pay extra on your mortgage and spend the extra money on investing, it would appear that you are gaining 4% each year. Keep in mind that the interest you would earn is taxable, so take the taxes out of that extra 4%. Not all that much left now, right? Add risk to that equation. What if you/your spouse were to get called into the manager’s office this afternoon and be fired? What if you/your spouse got sick and could no longer work? Would you still be able to pay your mortgage? If you got fired or sick, where would you rather have your $10,000 be sitting? In the bank’s pocket or in your mutual fund?

Learn how to keep your money, friends. There are very, very few good arguments for having debt.