Mortgage lenders are messing with your mind
- January 31, 2010
- 7 comments
- Posted in Latest Posts, Real Estate
“I need a mortgage for the tax deduction.” Every time someone says that to me I go nuts. It’s the mortgage lenders’ longest-running, most successful scam. People keep their mortgages when they don’t have to, and even take larger ones, because they think the tax deduction helps them out. When you write off mortgage interest on your tax return, you pay less tax. So it follows that paying mortgage interest is good for you, right?
WRONG. It never, ever helps you out financially to keep a mortgage you don’t need. The loan costs you more—far more—in out-of-pocket cash than the amount you save in tax. By helping you think otherwise, the lenders are playing you for a sucker. I’ve even heard accountants tell their clients they ”need” this tax deduction, but that’s because accountants care only about what’s on your tax return. Getting an interest deduction lowers your tax. Unfortunately, it also lowers the amount you have left to spend on other things.
A simple example tells the tale. Say that you paid $10,000 in mortgage interest last year and you’re in the 25 percent tax bracket. You wrote off $2,500 on your tax return and paid the remaining $7,500 to the bank. Now say that you’ve paid off your mortgage and aren’t spending $10,000 on interest. With no write-off, you pay $2,500 more in tax. But the other $7,500 is yours to keep. Instead of enriching the bank, you are enriching yourself.
Clearly, you’re going to need a mortgage when you buy a house. Being able to deduct the interest takes the edge off the expense. But never take a larger loan, or hang on to a loan you don’t need, just to keep the tax write-off. If anyone feeds you the line about “needing” mortgage deductions, just laugh and say “no way.”
Tags: mortgage, mortgage interest deductions
Thanks, Ms. Quinn – people think I’m nuts that I put extra every month towards my principal so I can pay my 30-year mortgage off in under 20. I don’t plan to refinance as I do use the lower 30-year payment as a hedge. I’m self-employed and worry about the great “what if” I run into a dry spell and couldn’t pony up the extra money for a shorter-term mortgage.
BTW, out of all the books I’ve bought and gotten rid of since the 1990s, Making the Most of Your Money has remained firmly on my bookcase, and I just bought the updated version last month. Money well spent!
Thanks for sharing your story! And I’m so glad that my book has helped.
Our accountant advised my husband exactly as you describe, “you need the interest write-offs.” I disagreed. With $375,000 in two mortgages for our home and a beach house, we paid well over $20,000/year in interest for over 15 years. Now after 23 years of marriage, we’re getting divorced. I wish I had asserted myself more so I’d be in a better position now. We didn’t need such large loans. I’d sure like to have some of the $300,000 spent on interest back now!
Jane;
Thank you for all you’ve done and all you do to educate us on matters of personal finance. I caught your interview on Marketplace Money over the weekend and enjoyed it.
As a mortgage professional and educator (I volunteer time at the local high school to educate seniors on the basics of money management) I tend to agree with many of your tenants.
However, when it comes to paying off a mortgage early I don’t think it’s a matter of “one size fits all”. When I am working with clients I first want to know that they have a sufficient cash cushion and have plans to work on other accumulation goals such as retirement and college savings BEFORE they begin to pay down their mortgage.
How do you weigh in on this?
As you’ll see in my book, I do indeed put reducing debt, building a cash cushion and contributing to a retirement account at the top of my priorities list.
However, you can see what is happening to people who are entering retirement with a large mortgage and, often, consumer debt. They can’t cover their payments and their living expenses, too, when their paychecks stop. I support the old-fashioned idea that you should enter retirement with no consumer debt and a paid-up home. To achieve that, you have to start early. Once you are already in retirement, those debts can become a millstone around your neck. Rising bankruptcies among people in their 70s and 80s are a direct result of too little saving and too much debt, including mortgage debt.
If they are already in retirement, with debt, it is probably impossible to pay off the mortgage all at once. They will need their cash to pay expenses. Without a paycheck, they will probably have to reduce their living expenses in order to keep covering mortgage payments.
Ric Edelman suggests otherwise and I am trying to figure what is the right strategy for me!
Quote from Ric Edelman’s website:
10 Great Reasons to Carry a Big, Long Mortgage
Never own your home outright. Instead, get a big 30-year mortgage, and never pay it off (assuming you can afford to make the payments on the mortgage).
Now, I know that you don’t want a mortgage. What you want is a house, but to get it, you must obtain a mortgage. If you’re like most folks, you hate your mortgage, and you’d love to get rid of it as soon as possible. You grimace at every monthly payment, and you know that, over 30 years, you’ll pay more in interest than you paid to buy the house in the first place.
That’s why you put down as much money as possible — to keep the mortgage as small as you could. You might have taken out a 15-year loan to get the loan paid off in half the time, and might even be making extra payments, or perhaps signed up for one of those biweekly loan programs, all to enable you to get rid of the mortgage just as quickly as possible.
You do all of these things, of course, for a very basic and deep-rooted reason: because your parents taught you that you should never have a mortgage, and the key to the American Dream is to own your home outright.
Yet, a Big 30-Year Mortgage May Be Best
Although your parents’ advice once made sense, today it is completely wrong. In today’s economic environment, a big, 30-year mortgage may be the best thing you can have. (Now, don’t confuse the idea of a big mortgage with that of a big house;
So: Never pay off the mortgage. Reject 15-year loans, never make extra payments, and forget about those biweekly mortgage payment plans.
Before you dismiss all this, read on — because I’m about to show you how your mortgage can help you build wealth over the long term.
First, understand that everything you know about mortgages — and particularly what you fear about them — is wrong. The myths you believe were told to you, bless their hearts, by your well-meaning parents and grandparents. They told you that mortgages are dangerous, that having one means you can lose your home. They told you this because they remember the Depression era, a time when millions of Americans lost their homes. Although mortgages were indeed dangerous in the 1930s and 1940s, the rules of money have changed and, unfortunately, your elders don’t realize this. So, by learning why your elders were correct in their desire to pay off their mortgages, you’ll come to understand why you should keep yours. SNIP
So who is right?
This reader submitted loooong quotes from Edelman, too much for this site, so I cut them sharply. Obviously I disagree with Ric. His are boom-time arguments. The housing collapse, and retirees with mortgages they can’t afford, show the wisdom of owning your home free and clear by the time you retire.