One of the most frequent questions we receive at White Oaks is whether or not to pay off the mortgage on their home. In the past we had a pretty standard answer. If your investments earn more than the interest rate on your mortgage, the financial answer was to keep the mortgage. This answer assumed the mortgage interest being paid was tax deductible. This answer also assumed the earnings on investments being taxable. The simple comparison of the cost of the mortgage as compared to investment returns was simple and straightforward.

New Tax Reality

That was then and it is important to recognize the changes in the tax law effective this year have changed the dynamic considerably. Under the new rules, the standard deduction is now $12,000 for an individual and $24,000 for a married couple filing jointly. In other words, an individual needs over $12,000 of itemized deductions to receive any tax benefit at all. State and Local Taxes (SALT) are now limited to $10,000. This makes it more difficult to climb over the standard deduction levels. To generate $24,000 of interest would take a $533,000 mortgage at current mortgage rates and absent any other deductions not one penny of that would be deductible!

On one hand, it makes no sense to generate expenses just to get a tax deduction. A tax deduction at the highest Federal Rate of 37% still has a net cost of 63%. So how should serious people who are looking to maximize their financial well being think about this going forward? The White Oaks answer is to assess based on the “new” actual costs. For example, many people will not have enough deductions to fill the standard deduction going forward, and since for the most part investment income is taxable, the new thinking needs to include the current fact pattern in their thinking.

Illustrating the Practical Implications

Let’s start with a taxpayer in various tax brackets and calculate the return necessary to earn to justify keeping the mortgage in place without having enough to exceed the Standard Deduction. Of course, this assumes the resources are available to pay the loan off. The math in each case works this way. Let’s assume a 35% Tax Bracket. Subtract the tax bracket from 100. 100%-35%= 65%. Since it is a percentage the decimal equivalent is .65. 5% divided by .65 is 7.69%.

The Rate of Return Necessary to Earn More Net Return on Investments

24% tax bracket 32% tax bracket 35% tax bracket 37% tax bracket
3.5% mortgage 4.61% 5.40% 5.38% 5.50%
4% mortgage 5.26% 5.88% 6.15% 6.35%
4.5% mortgage 5.92% 6.61% 6.92% 7.14%
5% mortgage 6.57% 7.35% 7.69% 7.93%


Note the change in dynamic from the previous tax law. Before, the higher the tax bracket the lower the amount of return necessary to lean towards the investment side versus paying off the mortgage. Now, unless one fills up the “zero bracket” (12,000 individual – $24,000 Joint) amount” to allow the interest to be deductible, the amount one must earn to justify “NOT” paying off the mortgage quickly is higher. Of course, charitable contributions can increase the amount of deductions that can be itemized. However, buying a home is no longer the slam dunk for lowering taxes.*Federal Taxes only. Assumes not enough deductions to meet Standard Deduction amount. Partial deductions have not been considered.

This is not to say buying a home is no longer a good thing to do. There are many advantages including the pride of ownership and stability owning a home can bring. That said, the dynamic of how to pay the mortgage has changed. Also, even the higher comparative costs shown in the table above should not be viewed as impossible hurdles to overcome in a solid investment strategy. The process to evaluate is more complex under the new rules. If we can be of help, please let us know.

The foregoing content reflects the opinions of Wealth Oaks Wealth Advisors, Inc. and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.

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