I've written recent posts on my long-term goal of eliminating my mortgage. In the comments on that post, it was pointed out that by paying off my mortgage early, I would be missing out on the tax savings of the mortgage interest deduction. So I thought I would take a look at the big picture on how paying off my mortgage would affect my cash flow. Using my 2005 figures for income, IRA contribution, mortgage interest paid and property taxes paid, I ran the TurboTax tax estimator for the following two scenarios:
Scenario 1 (Today's Reality)
Pay monthly mortgage with no additional principle payments.
Annual amount of principle & interest payments = $11,890.
Annual taxes owed: $14,503.
Total out-of-pocket expenses: $26,393
Scenario 2 (A Perfect World: my goal in 10 years)
Condo is paid off - pay no mortgage interest.
Income, IRA contribution and property taxes paid are the same as in scenario 1.
Annual amount of principle & interest payments = $0
Annual taxes owed: $16,291.
The tax estimator predictably calculated higher taxes owed for scenario 2. However, when you take into account the fact that if my mortgage were paid off, I would not have an annual expense of $11,890 on principle and interest payments, scenario 2 is the clear winner. I realize that this is a simplistic analysis of whether I should pay off my mortgages, but it is powerful.
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