Money Talks, So Should You

Ask Jane: Should I get a larger mortgage for the tax deduction?

Jane Bryant Quinn
by Jane Bryant Quinn, Dimespring Contributor  (@janebryantquinn)

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.

READ: Should I overpay my mortgage?

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.

Jane Bryant Quinn is a nationally known commentator on personal finance, with books and columns read and trusted by millions. In her long career, she has established herself as America’s most reliable voice for people trying to manage their money well. Read more of Jane's articles here