Over the past three years, I have mentioned the idea of paying off your mortgage early. It is an intelligent idea, but invariably someone will disagree with me. They will even out right say Dave Ramsey and John Cummuta wrong, when I quote them. However, maybe they will believe another man. One that is very wealthy in his own right. One who sends out regular educational emails to those (like me) subscribe to those emails. However, even I was surprised, because this multi-millionaire is known to borrow for his various ventures. His name is Donald Trump and the email subscription is Trump University.
The most common objection that I hear (and even according to Trump) is “If you pay off your mortgage sooner, you won’t be able to get a tax deduction.”
Technically this is true, but it’s a ridiculous statement. Let’s assume you’re in the 28 percent tax bracket. Each dollar of interest you pay the mortgage company is deductible. This will save you 28 cents you would have otherwise paid to the IRS on that dollar as income tax. But think about that. You’re giving up a dollar to save just 28 cents of federal income tax. On the other hand... if you pay off your mortgage, you will certainly have to pay 28 cents on each dollar not going to mortgage interest... but you’re getting to keep the other 72 cents!
So while this objection is technically correct, they are, in essence, saying, “Keep on paying a dollar of interest to the bank in order to save 28 cents in taxes.” Does that sound like good advice to you?
Oh, and don’t forget: You still get the full mortgage interest tax deduction while you’re paying off your loan... it only ends when your mortgage is paid off.
- Trump University -- Prepaying Your Mortgage
Listen, I am not going to criticize anyone for taking out a mortgage, but if you think you have to keep paying the bank, so you can have that deduction, think again. Why would you give away $1 to get 28 cents back?
Not to mention, if you go the full 30-years on a 30-year mortgage, you are paying for your house almost 3 times. For example, if you buy a $300,000 home, with $50,000 down. Borrowing the remain $250,000 at 7 percent, you’ll end up paying $598,769 over the life of the loan (not even including taxes and PMI). You see that? That's $348,769 in interest, on a $250,000 loan. Is that crazy or what? How can anyone continue arguing against paying off the mortgage early? With that kind of evidence, I was more convinced to pay off my mortgage as quickly as possible. That is why I am so glad mine is paid off, and hope everyone else will see this evidence to.
You know what else? The same thing can be said about a car loan. Due to that, I have been paying extra on the car, that Dave Ramsey would, encourage me to sell. I want to keep the car, which is the best (and newest used) car I have ever owned. This year, i will have it paid off. A full year and some odd months early.
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7 comments:
I think I would rather give that money to the bank than to the IRS. The bank will at least try to make money and lend, the federal goverment will only waste it and give it away (Chrysler for example).
HS
I would rather keep that money in my pocket. Paying off your mortgage guarentees you have a place to live and retire in, or sell and retire in something smaller.
Paying off your mortgage should be everyone's priority!!!
Not only that but saving to have a huge down payment should be your priority first. I am renting until I can put at least 20% down on a house I can afford!!!
The mortgage interest deduction alone is a silly objection. To determine whether to pay the mortgage off early you should estimate and compare two numbers:
A = the amount you save by paying it off early.
B = the amount you get by investing the extra payments instead. The answer will depend on individual circumstances, not on what multi-millionaires think.
There's a sequence that makes sense:
Deposit to 401(k) at least to get all company match.
Pay off all Credit Card debt.
Have emergency account properly funded.
Decide whether prepaying is right for you.
Most people are better off doing just that, because while, in theory, the market should return more than the mortgage rate, the reality is that most people can't stomach the market swings and buy high/sell low. So, the guaranteed 5% return is better than the chance to achieve a higher return. I do find it crazy when a client brags that's he's prepaying, but I see he has $10K in CC debt at 18%. The interest deduction is the most discussed aspect of this that just confuses the issue. I agree with Lev's remark. By the way, the only reason Trump is rich is due to his huge debt decades ago, he owed so much the banks negotiated with him. He's not an example of anything positive as far as I am concerned.
Thanks for the encouragement Becky.
Lev - Truump addressed your argument in his article to. Very interesting reading.
Joe Taxpayer - I agree. I even mentioned that in my post, in passing, that I was surprised he took that position, seeing the massive amount of debt he takes on.
I also am concerned, by one of his businesses, the only publicly traded one, having filed bankruptcy several times. What is it now? 3 times?
Still he has some pearls of wisdom, and I would love to meet him one day. Maybe even land an interview with him, for this blog. Try to get to know the man behind the persona.
HS, I would rather keep the money myself, like Becky said. In so doing, the Government might get a another 28 cents or whatever my tax bracket is, but I keep 72 cents. In the end I am ahead, then giving the bank that 28 cents.
Then again, by keeping it, I can then donate it to charity and still get the same deduction that I would have, from the mortgage. What a better use of my money. At least in my mind.
For me, I can't wait to stop paying my $1800.00 per month, principle and interest. The other portion that is taxes and insurance not included in the $1800 per month, will continue, at about $400 per month, probably forever.
What could I do with $1800 per month? Ahhh, I'll give 1/4 of it, or $5,400 to the government in taxes.
That leaves $16,200 per year, in my pocket! You'll never convince me not to pay off my mortgage early.
Oh, banks, yeah, they'll lend it all right, to WHOM? A bunch of folks who shouldn't have gotten a mortgage to begin with, and now, me the single who rakes in $111K per year GROSS, are having to bail OUT??? No, thanks!
Let's see, $16,200 per year is about $1,350 per month....save up that for a few months, and me and The Prince of Thrift are going on a cruise!!!...now that I am single again.
LOL
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