Why mortgage tax breaks are bullshit.

I suppose I'm being too harsh. It's not the tax breaks that are bullshit, it's that people will hang on to their mortgage, paying only the minimum, because they think they're smart to "keep the tax break".

Say there's a person who has a good job paying $130,000 (28% tax bracket).

They get a house, put 20% down ($40,000) to avoid PMI, and puts the other $200,000 on a 30-year note at 6.5%.

The mortgage tax break comes in the form of interest deductions. For the amount of interest you pay to the bank in a given fiscal year, you'll get to deduct, or not pay taxes on that amount. In other words, the amount of interest is deducted from your overall earnings.

The interest they'll pay for the first year with this mortgage is $11,861.92. That means that they'll get to deduct $11,861.92 from their overall earnings for that year. With me so far?

Well, normally they'd pay $30,382 in taxes, ending up with $99,618 after federal income taxes.

But they get that tax break, right? So they get to deduct $11,861 from that original $130,000, which, in the 28% tax bracket, will end up saving them $3,321 in federal taxes.

So, because it's so smart to keep your mortgage for as long as you can for the tax break, this person will pay a bank $11,861 in order to avoid paying the government $3,321. Keep in mind that this figure doesn't include home owners insurance, home owners association dues, unexpected repairs, and local and state property taxes.

Does that sounds smart to you?

I mean, the tax break is a nice perk, but it's hardly worth not paying off your mortgage early if you have the means.