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  • Does the mortgage interest deduction make carrying a mortgage worthwhile?

    Since announcing our intention to pay off our mortgage in six years, I’ve been asked if that’s wise, given that the interest on a mortgage is tax deductible. The short answer is, it doesn’t really matter to me. Paying off the mortgage will free up a lot of cash flow, which in turn will open up lots of options for us – options that I most definitely want to have in six years, because they may include things like the very expensive private school that we can’t afford right now.

    The long answer is – no surprise here – it depends – on whether you can earn more money with the extra principal payment than you would save by paying off that amount of principal. The math gets kind of complicated (at least for me), and I’m not a CPA or tax lawyer, so let me know if I haven’t got this right.

    Let’s say that you’ll pay $10,000 in mortgage interest this year and are in the 25% tax bracket, meaning that you’ll pay $2500 less in taxes thanks to your mortgage. Let’s also assume that if you pay an extra $250 per month in principal, you’ll reduce your mortgage interest to $9,000, and therefore reduce your tax deduction to $2250. In other words, you’ll end up paying $250 more in taxes this year because you paid off $3000 extra in principal ($250 x 12) . But you also paid $1,000 less in mortgage interest, for a net gain of $750.

    Now, suppose you could take that $250 per month and invest it somewhere and earn more than $750 over the course of the year (plus more, to cover the taxes you’ll owe on the extra income). Then theoretically, you’re better off not paying extra on the mortgage but going with the investment instead. However, it also occurs to me that the math ought to be even more complicated because the mortgage interest savings are probably compounded over the life of the loan – that sort of calculation is way beyond my abilities, so I’m not even going to attempt to go there.

    In my case, I haven’t run the actual numbers to see if we could earn more via investment than we’ll save by paying off the mortgage early. I don’t even want to attempt those calculations, and in any event, it doesn’t matter because I would predict the gain wouldn’t outweigh the options that I’m looking forward to having in six years. And for us, that’s what really matters.

    We are debt-free! (Except for the mortgage – here’s how we did it)

    I sort of slipped the big announcement into a previous post, but we are now debt-free!

    Except for the mortgage.

    The funny thing is, I’ve been looking forward to writing about being debt-free for a long time. When I made the final payment on our last non-mortgage debt (a student loan), I had big plans to write about how we accomplished it, and how good it feels to not have any debt. (I was just waiting for the official “congratulations, you’ve paid off your loan!” letter.)

    But after paying off that last loan, I turned my attention to our mortgage. And that’s sort of taken away from the accomplishment of paying off all of our other debt – because the simple fact is, we’re still in debt.

    A big part of why my sense of elation at paying off the last of our non-mortgage debt has been diminished is that I can see how much more freedom we will have when we no longer have the mortgage. So while I’m still excited that we’ve paid off our other debts, paying off the last non-mortgage debt doesn’t feel that different from paying off the debts that we finished off before that.

    I’ll be really excited when we have paid off the mortgage. Because if all goes according to plan, we’ll never need to borrow money again. (Unless we decide to move, in which case we may need another mortgage, or make a big investment, like buying rental property – neither of which is likely to happen, however.)

    Here are the steps we’ve taken to ensure we can pay off our mortgage quickly and hopefully never need another loan again:

    We don’t just live within our means – we live well beneath them. We are lucky that we can do this, of course, while still maintaining a comfortable lifestyle. But we worked hard in school and after graduation, and made wise choices, to get to this point in our lives.

    We pay off our credit cards each month. This goes along with the first point, of course, in that we don’t spend more than we can pay off. Some of my favorite bloggers, like No Credit Needed, don’t believe in using credit cards at all. Personally, I’m okay with credit cards as long as I’m not spending frivolously and can pay off the balance each month. The convenience and rewards are worth it. (And remember that failed all-cash experiment last year?)

    We save money each month. One of the first things we did as a married couple was build a nice emergency fund. It’s grown over the years, as our family and obligations have expanded. We continue to add to the fund each month, and this helps to ensure that we won’t need to borrow money in the event of a major financial need.

    We set aside some money each month for the next car payment. After we paid off our last car loan, I started making monthly deposits for the sole purpose of buying a new car with cash in four to five years. We may need to draw some money out of our savings account to complete the purchase, but we definitely won’t need to take out a loan to buy the car.

    We use the debt snowball method. I love the debt snowball. Ours has grown a lot over the years, and will now be used to pay off the mortgage. A portion of every regular increase in income (i.e., salary raises) and decrease in expenses (e.g., lower insurance premiums) has gone toward the debt snowball. Our nearly decade-old snowball is now big enough that we will be able to pay off our mortgage in about six years. I can’t wait for that day!

    Previously: How I’m paying off my student loans

    My week in review

    I don’t know if I’ll make this a regular feature, but there are some random things that I thought were worth sharing but not really worthy of their own post.

    The highlight of the week was definitely initiating the payoff for my student loan. Once that goes through, we’ll be debt-free except for our mortgage!

    I don’t know what my problem is, but I’ve screwed up what’s supposed to be an incredibly easy bread recipe twice now. It’s the focaccia recipe I mentioned a couple of weeks ago. Camille from Growing Up Gabel made it and said it was great so I was really looking forward to it, but I obviously lack her breadmaking skills. The problem is probably that I’m not using all white flour – it’s just so hard for me to not substitute half white whole wheat flour, but of course it’s much denser. I’m guessing that if I want to do this, I need to add some gluten, even though the dough seems to rise beautifully in the bowl and pan. I’m going to try it soon with just white flour and that will at least help me determine if it’s me or just the ingredients.

    Just because I’ve done something well in the past doesn’t mean I can do it well again – at least, not on the first try. I made calamari for dinner this week for the first time in at least six months. It had been so long that I kind of forgot how to deep fry the things. It took a few batches before I was able to keep the oil at a consistent temperature, and I even overcrowded the pot once. But the pieces that came out well were amazingly delicious, as always. I don’t really have a recipe, but here’s my technique: Marinate the squid in buttermilk for a few hours. When ready to cook, heat the oil and dredge the squid in cornmeal. Fry until golden brown. Drain on paper towels and sprinkle lightly with salt.

    Our federal tax refund seemed to come especially fast this year. I think it was within two weeks of our accountant e-filing our returns. We had to pay the state, so I don’t know how quickly state refunds are being issued, though apparently they are being issued now (for a while during the budget crisis, refunds had been withheld). This year was the closest we have ever come to getting our federal and state taxes exactly right (i.e., not owing any money nor getting a refund). Of course, I try to get as close as I can every year so I think it was just luck.

    Thanks to all of your suggestions, I think I put together a pretty good non-food Easter basket. Of course, I’ll know for sure after their reaction tomorrow. But thank you again for your help!

    The keys to paying off debt: persistence, consistency & growing your debt snowball

    Kelly at The ¢entsible Life explained how she’s paying off her debt, and asked her readers how they’ve paid or are paying their debts off. It occurred to me that the single most important thing we’ve done to get so close to being debt-free is being persistent and consistent. We’ve made every payment on time. We’ve always paid extra, even if it wasn’t much, especially at the beginning.

    And the other thing we’ve done that’s been key is grow our debt snowball. The “debt snowball” is simply the payment you make each month toward your debt – it’s a “snowball” because when you pay off one debt, you apply the payment you’d been making toward the next debt, and you keep doing it until all of your debts are paid off. (No Credit Needed has a more detailed explanation about debt snowballs.)

    We’ve consistently added to our debt snowball over the years. Salary increases in particular have helped grow our debt snowball. Also, any long term decreases in our expenses – such as a reduction in our insurance premiums – have been applied to our debt snowball.

    I’m a believer in “snowflaking” too – a term coined by PaidTwice for random savings that can be applied to pay off debt. It’s been my experience, though, that snowflaking is most effective when you can’t grow your debt snowball. Growing the debt snowball is more effective than snowflaking because it’s a regular thing – there’s that much more money going toward the debt each month. But of course, adding snowflaking to your growing debt snowball will pay off your loans fastest of all.

    Warning for new mortgage holders: Ignore that biweekly payment invitation

    We refinanced our mortgage in January, and that meant we got a new lender. In today’s mail was an invitation to enroll in the lender’s biweekly payment plan which “does the work” to help me pay off my loan faster by automatically deducting half of my regular monthly payment every 14 days. The way the math works out, I would end up making 13 “full” mortgage payments each year, theoretically without feeling any pain. According to my lender’s calculations, I would pay off my loan 4 1/2 years earlier and save over $34,000 in interest.

    Um, no thanks. I can manage that “work” on my own perfectly fine. I’ve planned all along to pay extra principal each month, and now I plan on rolling my debt snowball into the mortgage once my student loan is paid off. That’ll result in the mortgage being paid off 23 1/2 years early and over $100,000 saved in interest.

    What really staggered me was the cost of the biweekly mortgage plan. The lender must make a fortune off of anyone who signs up. There’s a $375 enrollment fee, plus a $1.50 transaction fee with each payment. With 26 payments, that’s an extra $39 each year!

    I hope no one pays these fees, because they’re outrageous. In these economic times, you’d think lenders would actually just be grateful to have a customer who pays on time!