Mortgage and taxes

Question: We will finish paying off our mortgage in four years. If all goes as planned, once we retire (shortly after), we will be mortgage-free.

Here’s the question: we could pre-pay and be finished in two years. If we do that, we will lose the mortgage interest deduction while we are making more money. Should we pre-pay, or should we pay at our current rate so that we can take advantage of the tax break on mortgage interest?

I must be missing something here. It seems to make sense to pay more quickly and lower the amount of interest that we will pay. However, I like that tax deduction too. Any advice would be welcome. Thanks–Kathy, Franklin, IN

Answer: I’d get rid of the mortgage. The mortgage interest deduction is probably the best-known break in the tax code–and the most overhyped.

You’ll come out ahead by paying off the mortgage because you won’t pay interest to the bank anymore. The value of the mortgage interest deduction declines in the later years of the mortgage when the interest portion of the monthly payment is much smaller than in the early years. You’ll still be able to take advantage of the standard deduction.