Step Six: The Final Payment

At this point you are debt free except for your home, you have three to six months of living expenses saved for emergencies and you are putting away 15 percent for your retirement. Congratulations! You are amount the top five to ten percent of Americans that have some wealth, have a plan, and are now master of your money. 

This is a dangerous point. It would be so easy to just say, 'I'm tired and this is good enough.' But remember that you are almost at the finish line, and think of what pride you will feel when you finish the race and declare yourself to be totally debt free. It is time to attach that home mortgage.

As a tax advisor, I've talked about mortgages with hundreds of people and the misconceptions people sometimes have are amazing. I always have to remember, though, that most people have never had any kind of economic education while growing up. And when you hear something repeated long enough and often enough, people start believing it as truth. So, it's time to look at some of the misconceptions people have about mortgages.

Misconception #1: You need a home mortgage to get the tax deduction.

A lot of people hand me their 1098 forms each year showing me the amount of interest they pay on their mortgages. And they are often amazed how I can find other deductions to add to that to reduce their tax liability. It makes things look like the home mortgage tax deduction is a great thing. If I even talk of the day when they can no longer use this deduction, some people panic about how much more in taxes they will have to pay. It is actually just a smoke screen that the lenders and government use to keep us priming the pump.

Let's do the math. If you have a house payment of around $900 a month, chances are that the interest portion of that is $830 a month. That is $9,960 a year going up in smoke to the mortgage company. So what is that going to save you in taxes? The simplistic answer is that if you are in the 30 percent tax bracket, it would save you $2,988 dollars on your taxes. That may sound great, but would you rather pay about $10,000 to the lender or about $3,000 to the IRS? I'll take the IRS.

In actuality, the tax savings are even less. Those of you using the home deduction know that you can either deduct the standard deduction or the itemized deductions (containing the home mortgage), whichever is more to minimize your tax liability. Follow me here. The standard deduction for Married Filing Jointly for 2009 is $11,400. Let's say when you add up your itemized deductions ($10,000 mortgage interest, $1,000 property tax, $3,000 state income tax, $1,000 charitable contributions), it comes to $15,000. Since you would get the standard deduction regardless, your extra tax savings would only be $1,080 ($15,000 - $11,400 x 30%). Would you rather pay $10,000 to the lender or an extra $1,808 to the IRS? I'll still gladly pay the IRS.

Misconception 2: Take out a thirty-year mortgage and promise yourself that you will pay it off like it was a fifteen-year mortgage, so that if something goes wrong you have breathing room.

As I've said before, emergencies happen. If you have the iron-clad will to do this, you would not be so far in debt to start with. There will always to an excuse to 'catch up next month.' Nonsense. The FDIC says that 97.3 percent of people don't systematically pay extra on their mortgages.

If you already have a thirty-year loan at a great rate, I'm not saying that you should refinance to a fifteen-year mortgage at a higher rate. But if you pay $250 extra towards principle, on average you will save almost $100,000 and fifteen years of payments. If you do want to refinance to a lower fifteen-year interest rate, never pay points or origination fees to get a lower rate. Studies have shown that most people never make their money back. Instead, ask for a 'par' quote, which has none of those fees.