I heard something on the Dave Ramsey show the other day and would like to share. It is a one of his "financial myths": Why would I ever want to pay off my home mortgage when I get such a great tax return from the government?
For the scenario, to keep all the math simple (besides, this was his scenario), let's make these assumptions:
Mortgage Amount: $200,000
Interest Rate: 5%
Annual Salary: $70,000
At 5%, the amount of interest that you would pay to the bank is $10,000. Since this interest is tax deductible, you do not pay taxes on 70k, but $60,000.
Now consider that you do not have a mortgage. Since you did not pay $10,000 to the bank, your taxable income remains at $70,000. How much would you pay in taxes to Uncle Sam on that $10,000? At 70k, you are in the 25% tax bracket. 25% of $10,000 is $2,500.
So, some might have you believe that it is better to send $10,000 to the bank in interest to avoid sending $2,500 in taxes to the government.