I recently had a client ask me if they should take out a mortgage on their home to create a tax deduction.   Their house is paid off, they are in the 25% tax bracket.

Most people think it is a good idea to have a mortgage, especially if your income in retirement is primarily taxable as ordinary income (Pension, 401K, 403B Traditional IRA, Thrift Savings Plan etc.).   While I am not opposed to a tax deduction, it is important to note that the deduction is based on the interest that you are paying, not the total mortgage payment.   That means you are paying someone interest to create this deduction and you are only deducting a portion of your payment.

The conventional wisdom is that you can earn more money investing than the cost of the mortgage interest.  While this is probably true, depending on your risk tolerance and your investment performance it may not be worth it.

Following are some numbers assuming a mortgage of $110,000, at an interest rate of 4%.    The $110,000 is then invested earning 4-7%.    The calculation is based on earning the same rate of return each and every year with no volatility.  This is not very realistic, the higher rate of return you target, the greater the volatility.

 

Snip of Mortgag Chart

Stating the obvious, the greater the rate of return, the greater the impact.   I will be reviewing this with my client and they will determine if having a mortgage and creating a tax deduction is worthwhile.

If it was me, I would not take out the mortgage.   An uncertain $1,279 – $3,754 per year does not seem worth it.