Prepaying a Florida Mortgage: Tax Implications

Those with a Florida mortgage often wish to be done with it as soon as possible. They want to be full-fledged homeowners.

Below, financial analyst Don Taylor responds to the implications of just such a scenario:

Q: How would prepaying my mortgage affect my taxes? I’ve read several articles in reference to “prepaying mortgage” not being a good idea. My dream is to be mortgage free and own my home outright. Is this a nightmare instead of a dream?

A: If you use the mortgage interest deduction on your income taxes, then prepaying your mortgage reduces your interest expense, and by doing so, that interest deduction. IRS Publication 936, Home Mortgage Interest Deduction, has everything you need to know about that deduction.

Not everyone who owns a home can use the Florida mortgage loan interest deduction, and where the mortgage interest expense doesn’t do much more than replace the standard deduction, prepaying the mortgage only has a marginal impact on their taxes - the margin being the difference between itemized deductions and the standard deduction.

Read more about what the tax benefits of home ownership are today.

Your goal to be mortgage-free isn’t a nightmare. Keep the dream. I think that it’s a great goal for homeowners to have the house paid off before they retire. What I counsel is to not abandon other financial goals, such as retirement savings, to focus solely on paying off the house.

My rule of thumb is, if you expect to earn more on your other investments, on an after-tax basis, than the effective (after-tax) rate on your mortgage, then don’t prepay your mortgage.

For example, if you’re skipping out on contributing to a 401(k) plan and missing the company match, you should be contributing to the 401(k) up to the limit of the company match before making any additional principal payments on your mortgage.