Tax Credit of Paying Off a Mortgage

Paying off a mortgage is the payment of all remaining interest and the full principal amount, allowing the lender to close the account. While borrowers can incur penalties for paying off a mortgage early, they can also save a large amount of money on interest. However, even when paying off a mortgage over its full period, homeowners may lose tax benefits.

Tax Credits and Deductions

There is no particular, permanent tax credit for paying off a mortgage. This is one problem that homeowners have, because there is a very notable tax benefit to making mortgage payments. Homeowners can deduct all interest payments from their mortgage on their taxes, but this deduction ends when the final payment is made. However, paying off a mortgage offers other benefits. For example, you might put funds than would have gone to further payments in a retirement account instead, which can shield the funds from taxes.

Tax Reliance

Another benefit of paying off the mortgage is that the tax reliance on the interest deduction is removed. Taxes are fluid, and the IRS-allowed deduction has the potential to change over time, lowering the benefits of the deduction. Tax credits can also change. Both states and the federal government create credits in particular situations, so future tax credits for paying off mortgages are possible, although this again relies on tax laws for savings, which can be risky.

Deduction vs. Savings

Homeowners able to pay off their mortgages must then face an important decision. Is it better to continue making payments and saving money through the tax benefits provided, or to pay off the mortgage and have extra cash available? In general, because paying off the mortgage opens room for more financing and frees up more financing than receiving only a portion of payments back through taxes, it is better to pay off the mortgage and focus on investments, savings and other purchases which may provide ideal tax credits.

Refinancing

Refinancing is a special case when it comes to the deductions of mortgage interest. A refinance does pay off the total primary mortgage, but it replaces that mortgage with a new one. The new monthly payments typically have a higher interest component than the payments of later years in an older mortgage, qualify for higher interest deductions and allow homeowners to save while also paying off the primary mortgage.

References

About the Author

Tyler Lacoma has worked as a writer and editor for several years after graduating from George Fox University with a degree in business management and writing/literature. He works on business and technology topics for clients such as Obsessable, EBSCO, Drop.io, The TAC Group, Anaxos, Dynamic Page Solutions and others, specializing in ecology, marketing and modern trends.