To Pay Off Your Mortgage Or Not

I have to vent some frustration even though this doesn’t have to do directly with the markets.  I was listening to a well-known talk show host that tells you to pay off all debt no matter what.  I respect him for providing something many Americans need, a swift kick in the butt and to tell them stop buying so much and save. 

But, I heard this lady call in and say should I pay off my $164,000 mortgage?  She had inherited $175,000 recently and had an income of $110,000 per year.  Without asking what she was currently doing with the money, he asked how much mortgage interest per year she was paying each year.  She said it was about $7,000.  He told her he would pay off the mortgage in a heartbeat.  She said what about my deduction?  He figured her deduction was about $2,500 per year.  He told her you’re going to pay the bank $7,000 per year in order to avoid paying the IRS $2,500 per year. 

Sounds logical right?  But, that assumes she is doing nothing with the money.  What if she was earning even $10,000 on her money (about 5.7%)?  Then she’d be getting $12,500 ($2,500 deduction + $10,000 earnings on $175,000) and only paying $7,000 to do it.  So, by having the mortgage, she would be making $5,500 per year.  Now should she pay it off?

I’m not saying she necessarily shouldn’t (although I wouldn’t) pay off the mortgage.  It might be the move she ends up doing.  The point is to at least ask her the question what is she doing with the money.  To not even address it is misleading.  The average person needs to have ALL the information in front of them, not just the convenient numbers to make the point.


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August 2008
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