A Suze Orman exclusive

The Most Popular Stupid Tax Strategy

I know this may sound like heresy, but the mortgage interest deduction is the most overrated tax strategy in existence. I constantly hear happy homeowners boasting about how much money they “saved” with their mortgage interest deduction. Folks, you are really not saving a dime.

If you are in the 28 percent tax bracket each dollar you pay in interest is only going to "save" you 28 cents. So let's do the math together: that means you are still spending 72 cents to save 28 cents. Please explain to me what is so great about that.

And you're so happy with this so-called tax break you aren't thinking clearly about what is really happening. In the first years of a mortgage the majority of your payment goes toward paying your interest on the loan, not the principal. And homeowners think that's fine and dandy; it means a bigger tax deduction. But if you can bring some logic to this you would realize you're not building up any equity because of your payments. You may be building up equity yes, but that is because real estate prices are going up. The question has to be asked, what happens if they ever start to go down or just tread water for a while? But let's just look at why the mortgage companies really have you pay the majority of the interest up front. First, the stats show that homeowners tend to move every six or seven years. So that means when you go to sell you've only paid interest on your mortgage; you haven't really paid down any of your principal. The upshot is that the lender has been getting paid a ton of interest while you haven't been paying off much of the principal. So that makes money for the lender, but at your expense.

Now while I know most people need a mortgage in order to purchase a home, there will come a time in your life when it will make sense to get rid of your mortgage. So I don’t want you to just keep paying a mortgage under the guise that it is your only tax write-off. A long time ago, I learned to do what the rich people do; very few seriously rich people have a mortgage. They simply write a check. And an interesting tax fact is that did you know that if you buy a primary residence and you have to mortgage it, that any interest on a mortgage above $1.1 million cannot be written off. You read that right, mortgage interest is only deductible up to a $1.1 million dollar mortgage.

My advice: Once you live in a house that you intend to stay in for the rest of your life, do everything you can to pay off the mortgage ahead of time. Yes, you will lose your tax write-off, but now you understand it’s really just a phantom value. And in return for paying off the mortgage ahead of schedule you will save tens of thousands of real dollars in interest you never have to pay. That sure sounds like a good deal to me.

And don’t worry about having to find oodles of money to make those extra payments. Make just one extra payment a year and you will slice 5.3 years off of your 30-year 6 percent mortgage.

Payoff Tip: Lately the buzz has been simply to set up a bi-weekly mortgage payment plan with your current lender and you will shave years off your mortgage. Bi-weekly means that you pay your mortgage every two weeks rather than once a month. To set up that bi-weekly payment plan, many lenders will charge you up to $500, plus a $5 fee charged with each payment. That’s a waste of money, since you can easily do this on your own. Simply divide your current mortgage payment by 12 and send that extra amount with your current mortgage payment every month and you will accomplish the same thing. And by the way if you think those fees don’t add up. If you invested that $500 along with the $10 every two weeks over 25 years and earned 8 percent you’re talking about $13,680. That is a lot to pay a lender to do something that you can do on your own.