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Why You Don't 'Need' a Mortgage Interest Tax Deduction

"I need a mortgage for the tax deduction." Every time someone says that to me I go nuts. It's the mortgage lenders' longest-running, most successful scam.

People keep mortgages when they don't have to, and even take larger ones than they need, because they think the tax deduction helps them out. When you write off mortgage interest on your tax return, you pay less tax. So it follows that paying mortgage interest is good for you, right?

Wrong. It never, ever helps you out financially to keep a mortgage you don't need. The loan costs you more -- far more -- in out-of-pocket cash than the amount you save in tax. By helping you think otherwise, the lenders are playing you for a sucker.

I've even heard accountants tell clients that they "need" this tax deduction. That's because accountants care only about what they see on your tax return and the interest deduction lowers your tax.

Unfortunately, it also lowers the amount you have left to spend on other things. You're left with less money after-tax.

A simple example tells the tale. Say that you paid $10,000 in mortgage interest last year and you're in the 25 percent federal tax bracket. You wrote off $2,500 on your tax return -- that's your gain from the deduction. You paid the remaining $7,500 to the bank.

Now say that that you've paid off your mortgage, which means that you don't have to spend $10,000 on interest. You have no deduction so you pay $2,500 more in tax. But the other $7,500 stays in your bank account. Instead of enriching the bank, you are enriching yourself.

Almost everyone needs a mortgage when he or she buys a house. Being able to deduct the interest takes the edge off the expense.

But never take a larger loan, or hang on to a loan you don't need, just to keep the tax write-off. If anyone feeds you the line about "needing" mortgage deductions, just laugh and suggest that they re-enroll in third grade math.

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