Home Buying in 90505>Question Details

Brian Oliva, Home Buyer in Harbor City, CA

Is it better to have a small amount of a mortgage payment or to pay off your home in full? Is it true that the taxes rise when your house is paid off?

Asked by Brian Oliva, Harbor City, CA Wed Dec 29, 2010

Help the community by answering this question:


If you pay off your home, you no longer have a interest deduction at the end of the year. Speak with you CPA and weigh the situation regarding the best step to take.

In California, property taxes go up every year no matter if you own your home free and clear or not. Prroperty taxes are one of the largest revenues for this state so don't count on any reduction.

If you have any questions, please call me at (661) 255-3335.

Cheryl Garner, Mortgage Expert
Fairview Mortgage Capital, Inc.
Email: cheryl@cherylgarner.com
Web Reference: http://www.cherylgarner.com
0 votes Thank Flag Link Sun Jan 2, 2011
Taxes remain exactly the same when your home is paid off unless the city or county raises them. You are better off to have a paid off home then a small mortgage. You will save a fortune in interest. Plus your living expenses for the home will be minimal. You will be able to save a lot of money which is the best thing you can have - cash.
0 votes Thank Flag Link Fri Dec 31, 2010
Hi Brian,
Your taxes won't actually rise,but you will no longer be able to deduct the morgage interest. In my opinion it is always better to get out from under a loan, if you can pay it off do so.
0 votes Thank Flag Link Fri Dec 31, 2010

There is no real reason to have a mortgage if you don't have to have one (this is not the conventional answer you will get from financial advisors, bankers, or most real estate professionals). Use a mortgage only when it is the only way to acquire home ownership. Below is a simple explanation of how no mortgage would affect your taxes and your disposable income. For more detailed analysis, I recommend that you check with your tax professional.

Property taxes - no effect. You will pay the same property taxes, with or without a morgage payment. Property taxes are based on the value of the home or the purchase price, whichever is less.

Income taxes - Currently you are allowed to deduct your mortage interest from your taxes. Here is how that might affect the following home owner (HO). Say HO pays $10,000 in mortgage interest every year. HO can deduct this amount from his income at the end of the year. Assume HO is in the 30% tax bracket. HO will reduce their income by $10,000 and thus save $3,000 in taxes. The problem here is, HO is still out of pocket $10,000 in mortgage interest.

The effect of this on HO's disposable income - HO has now paid $10,000 to the bank in order to save paying $3,000 to the government. Net effect on disposable income is MINUS $7,000. Wouldn't it make more sense to just pay the $3,000? Net effect on disposable income is MINUS $3,000. That is a $4,000 savings. And if you took the $10,000 you would be paying the bank and invested it at a 5% yield you have an additional $500 in you pocket.

CONCLUSION: Spending $10,000 to get $3,000 is not a sound business decision. At least not the last time I checked. You should just hang on to your $10,000, invest it wisely and find other ways to minimize your tax liability (like charitable contributions perhaps).

Dare to Dream.

Shel-lee Davis, QSC®
Certified Distressed Property Expert – CDPE®
Short Sale & Foreclosure Resource – SFR®
Certified HAFA Specialist – CHS®
SSG Pro®
Your Real Estate Consultant for Life
RE/MAX Palos Verdes Realty
424-2HELP12 (424-243-5712)
0 votes Thank Flag Link Fri Dec 31, 2010
The benefit of having a mortgage is the mortgage interest deduction (MID). Paying interest on your mortgage gives you something to deduct on your taxes (for now, anyway. Eliminating the MID is being eyed by politicians as a way to reduce federal debt). If you have no mortgage, you have fewer deductions, thus paying more taxes.

Cynthia I. Nakaya
Realtor, Tarbell, Realtors
Eastvale Office
12648 Limonite Avenue, Suite 2G
Corona, CA 92880
951.743.3321 Cell/ Text
951.270.1020 Fax
License # 01818243
Short Sale Certified
Turning House Calls into Homes
0 votes Thank Flag Link Thu Dec 30, 2010
Hi Brian, from your questions I'm guessing you already own your home.

"Is it true that the taxes rise when your house is paid off?"

From the answers below you now know property taxes do not rise when one pays off a mortgage. Valued-based (ad valorem) property taxes are controlled by Prop 13 in CA, which is one of three taxes that may make up the total tax paid on your property. For a detailed explanation of these three taxes see: http://www.trulia.com/blog/steve_ornellas_mba_re_mastersgri/…
(Also informs how to lower your property tax via Prop 8)

"Is it better to have a small amount of a mortgage payment or to pay off your home in full?"

You are the only person who can answer this question. Every detail of your current financial situation (personal savings, retirement savings, health, status, college plans, timeframe in your current home, target retirement date, etc...) needs to be reviewed by a financial/tax advisor before making such a decision. Do not trivialize the importance of obtaining guidance in this respect.

Now, I'm going to ask you to think outside the box for a moment on this question you posed by reviewing the two following questions:

Question 1:
What is the return on each dollar of principal you pay on your loan each month?
Answer: 0%. You MAY increase your equity position by paying principal; however, equity is NOT return. Understand the value of your home when sold is dictated by housing prices, and thus, the POTENTIAL of a return on your paid-in equity. Will there be a return that can be calculated at that time? Sure. However, there is not a static return rate like a CD or passbook account.

Question 2:
Do you make yourself more secure when you pay in extra principal, or is it the bank that becomes more secure?
Answer: The dollars paid in principal really only make the Lender more secure and the only way you can get to your equity is to cash-out using a new loan (or selling of course). As so many have found out, paid-in principal is subject to market-based risk.

My main point:
Recognize a Mortgage is much more than just a loan -- it is a financial planning instrument/tool that must be integrated into your short and long-term personal financial plan in order to satisfy your goals and needs.

Again, PLEASE consult a financial/tax advisor to form a long-term strategy based on your personal financial picture.

Best, Steve
0 votes Thank Flag Link Thu Dec 30, 2010
Taxes do not rise when you pay your home off. There are many tax implications to having a mortgage (you can potentially offset income taxes), you need to consult a tax advisor who is familiar with your finances.
0 votes Thank Flag Link Thu Dec 30, 2010
Hello Brian,

I would prefer to pay off the mortgage. Reducing debt can be just as valuable as increasing your income. You will not increase your taxes by paying off your mortgage. However, you will lose the mortgage interest deduction on your federal income tax.

Harold Avent, CRS, CDPE, e=PRO
Broker Associate
REMMAX Execs South Bay
Email: harold@haroldavent.com
0 votes Thank Flag Link Thu Dec 30, 2010
Hi Brian:

There is no reason your taxes should rise because of mortgage payoff. Just as my fellow Realtors indicated, mortgage interest deduction and the return on your investment may the some of the factors you should use in deciding whether you should pay off your mortgage. If the balance remaining is very small, it may not make much difference. Let's say your remaining balance is $100,000 and the interest rate of your loan is 5% before tax deduction considerations, you should calculate to see if you can beat the 5% by investing the $100,000 somewhere else, rather than using it to pay off the loan.

There is another angle you should be aware of. If you have large equity in your home, you are opening up your liability in case of lawsuits against you. Your property might be sought after to collect a judgment against you by means of an abstract of judgment or a lien. You might consider protecting against this loss by obtaining adequate liability insurance. If you have multiple properties, you might consider LLC for each property.

Salim Patel

Ca DRE License # 01241927
The Real Estate Group
3480 Torrance Blvd., Suite 100
Torrance, Ca 90503
(310) 528-4271 Cell

email: salim@InvestinSouthBay.com

0 votes Thank Flag Link Wed Dec 29, 2010
1st time I have ever heard tax increase if you pay off your home. Taxes may increase yearly to begin with HOWEVER not due to paying a home off.

You need to confer CPA for tax benefit pay a home off in full The interest you do write off annually

Lynn911 Dallas Realtor & Consultant, Loan Officer, Credit Repair Advisor
The Michael Group - Dallas Business Journal Top Ranked Realtors
0 votes Thank Flag Link Wed Dec 29, 2010
Since home mortgage interest is currently a deductible expense on your income, I would look at the interest rate you are paying on your loan & compare it to the rate you earn on the money you would use to pay it off with. Paying off your loan will have no consequence on your property taxes, but losing the interest deduction may increase your income taxes. It would be wise to consult your tax accountant first.
0 votes Thank Flag Link Wed Dec 29, 2010
Hi Brian,

Property taxes do not rise when you have paid off your home, but without the mortgage deduction, your personal income tax liability may go up.
0 votes Thank Flag Link Wed Dec 29, 2010
I have never heard of taxes going up after paying off a home
0 votes Thank Flag Link Wed Dec 29, 2010
I agree with what others have said, except for regarding your property taxes. Taxes are based on the sale price and/or the appraised value of the home, but they may increase over time and not stay at the same level as when you purchased the home. The county recorder has a review cycle for evaluating the amount of property taxes to be collected on the property and there are increase percentages they can increase the tax amount within those cycles. So, to answer your question, yes taxes do increase, but not simply because you pay off the mortgage.
You should always consult with your tax expert regarding all matters as they relate to tax exposure for yourself.
Web Reference: http://www.cleehomes.com
0 votes Thank Flag Link Wed Dec 29, 2010

You need to speak with your accountant about the ramifications of paying off. Property taxes are based upon purchase price and there should be no increase without a transfer of interest.

Best Regards,

Lance King/Owner-Managing Broker
DRE# 01384425
0 votes Thank Flag Link Wed Dec 29, 2010
A mortgage on a house doesn't effect the taxes. The taxes are based off the assessed value of the home set by the county assessors office. Paying off the mortgage is just a matter of preference.
0 votes Thank Flag Link Wed Dec 29, 2010
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