Question

What if: You have a real estate property of value $400000, and you have a principal amount left of $200000. You have a surplus of $50000 on your expenses every year, what would you do - pay off $30000 of the principal and invest the rest(bank CD, mutual fund etc) or keep it all in an investment (same CD, mutual fund etc.?). [Paying off the principal will lower your mortgage interest, leading to tax implications with respect to itemized deductions, but you pay off your house faster.]

Answer 1

It is always wise not to pay off immediately if you get tax benefits based on payment of interest on loan.The interest you are paying on your home loan will help in reducing your tax bill to a great extent

The Balance can anyhow be invested in Bank CD Mutual Fund etc.If you had settled the home loan to reduce the mortgage interest, you will end up paying more tax on return from investments along with your regular income in the long run.You will not get any tax shields.

You need to compute your mortgage interest rate after adjusting tax benefit which will give you actual effective interest rate and Compare it with your tax slab rate and decide accordingly.

Until mortgage loan of $750000 you can deduct the whole of interest you paid for the year to reduce the tax bill .So in this case its better to continue paying mortgage interest when you can claim whole of your interest paid as deduction in your tax bill