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An increasing number of homeowners are considering paying off their mortgage early. While paying off debt generally is a sound strategy, homeowners also are aware that mortgage interest is tax-deductible, so paying off a mortgage early may not be in the best interest for all homeowners.
MAKING SENSE OF THE STORY
• Homeowners with credit card debt, and those who aren’t contributing the maximum amount to a 401(k), are advised to make those the first priority. It is also important that homeowners have at least six months’ worth of living expenses in cash.
• Retirees, and those close to retirement, who are contemplating a lump-sum payoff, need to ensure they have enough liquid savings to handle emergencies and unexpected medical expenses.
• Homeowners planning to move to a larger home or downsize to a smaller one within five years are not advised to put extra money toward a mortgage.
• Those who itemize deductions on a tax return can figure out the amount of money saved on mortgage interest by multiplying the mortgage interest paid last year by their tax rate (federal plus state). For example, a couple in the 28 percent tax bracket, with a $200,000 loan at 5 percent, will save $2,781 in taxes the first year of a loan. It’s important to remember that tax savings decline further into the life of the loan, as more money is applied toward the principal.
• For many retirees, and those nearing retirement, who are close to the end of the mortgage, the interest deduction may not be considerable enough to avoid paying off the loan, especially since retirees often end up in a lower tax bracket.
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