For decades, the most common and well-accepted belief is that paying down your mortgage is a good idea. After all, the quicker you pay it off, the less money you throw away in interest payments. So it stands to reason that getting it paid off faster just makes sense. But is that still the case?
Or, have the changes to the tax law turned things upside down?
Tax Cut and Job Act Changes
First off, with the Tax Cut and Jobs Act (TCJA) there are some big changes coming to mortgages and taxes. For starters, the law will now limit the property tax deduction, and lower the mortgage limit from $1 million to $750,000and only on your primary residence. These made a lot of headlines when the TCJA was first proposed and later passed. However, there are some other changes that could have an even bigger impact.
Mortgage Deduction on Rental Property
For example, say you wanted to purchase a rental property and use equity from your primary residence to make a down payment. In the past, you would have expected this mortgage interest to be deductible. However, because of the recent changes to the nation’s tax law, only the mortgage debt use do purchase the original property is tax-deductible. Cashing out equity would be deductible but only if you were using it to refinance an improvement on your current home.
Consider Your Tax Situation
The idea that paying off your mortgage as quickly a possible is always a good idea may never die. However, under the new tax plan the numbers will change so it’s something you should at least consider. As with any tax change, everyone is different so there is no one set right answer. Forsome, it might make sense to pay off their mortgage sooner. For others it could make sense to hold onto it longer.
Standard Deduction or Itemizing?
Let’s look at one example.If you no longer plan to itemize your deductions because the new standard deduction will now be higher, then paying off your mortgage faster definitely make sense. Holding onto this extra interest without the benefit of a tax deduction is a waste of money. On the other hand, if you are planning to still itemize your deduction, then holding onto your mortgage longer might make more sense. That’s becauseas soon as you’ve paid off that debt you lose the ability to deduct it from your taxes. Additionally, if you’re in a higher tax bracket you will likely pay more taxes if you pay your mortgage off faster.
Saving vs. Paying
Meantime, anyone who is already saving enough for their all their financial goals –whether it’s for retirement, your kid’s college funds, etc. –should consider using any extra money they have to pay down their mortgage. This is especially true for anyone who is not itemizing and instead using the standard deduction.In the end, if you aren’t sure how the new taxes will affect your mortgage interest and deduction, it’s a good idea to meet with a tax professional to review your situation. This will help you plan accordingly for the best results.