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Mortgage and taxes

Question: I always enjoy listening to your comments and hope that you have a moment to settle a discussion a friend and I are having. Is the "benefit" of the itemized tax deduction on one's income tax worth retaining a mortgage if one is able to satisfy that debt? In this case, we are discussion someone who has about fifty thousand dollars on the mortgage and is of retirement age, no children and few other itemized deductions. There is no other debt. Thank you for your thoughts on this matter. Judith, Reading, OH

Answer: Sure, I'd love to weigh in on your discussion. The short answer is that any financial benefit you get from the mortgage deduction is swamped by the cost of paying interest on the loan. My guess is that the value of your mortgage interest deduction is not only minimal, but it's below what you can get by simply taking the standard deduction. (It's worth finding out.)

The main reason not to pay off the mortgage has to do with your personal financial safety net. You don't want to put all your savings into one asset, like a home. But if you have a well-diversified portfolio and adequate savings why not get rid of the mortgage. And that sounds like you or your friend.

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Chris Farrell is the economics editor of Marketplace Money.
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The income tax deduction on mortgage interest lowers your effective your interest rate, because it gives a fraction of your interest payment back to you in the form of lower taxes. So, as an example, you might pay $5000 in interest over the course of the year and pay $1000 less in taxes. Your effective annual interest payment would then be $4000.

$4000 is less than $5000, but is still a lot more than $0. The tax deduction makes mortgages more affordable, but is not as good as paying no interest whatsoever.

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