No, no, no. How the mortgage industry has gotten away with this form of propaganda for this long I’ll never know.
What I hear from people is that they “need” the mortgage for the tax deduction. A larger mortgage means a larger deduction. Keeping a mortgage, when you could be paying it off, is supposedly “good” for your tax return.
It’s all baloney. Borrowing more than you have to, or keeping a loan when you could be paying it down, is great for the lender and costly for you. Here’s the arithmetic:
Say that you borrow an extra $20,000 at 4 percent. You’ll owe $800 in interest. If you’re in the 25 percent tax bracket, your mortgage interest deduction saves you $200 in taxes. To get that $200 saving, you’ve paid an extra $600 to the bank.
If you don’t borrow the extra $20,000, you’ll have $800 more in your pocket every year, not to mention the pleasure of lower monthly payments.
So no, you don’t “need” a mortgage for the tax deduction. Borrow only for a sound, economic reason, without getting twisted up in taxes.