No, You Shouldn't Take Out the Largest Mortgage Possible

For Women & Co. By Jonathan Clements, Director of Financial Education, Citi Personal Wealth Management

Have you ever been told "you should take out the largest mortgage possible"? As with so much conventional wisdom, there's an element of truth: For many Americans, a mortgage is indeed the most attractive way to borrow because interest rates are not only low, but also the interest is often tax-deductible.

But a mortgage isn't some sort of financial freebie -- and too much mortgage debt can create severe financial headaches. How so? Consider three issues.

First, even if your mortgage interest is tax-deductible, it's still costing you a lot more than it is costing Uncle Sam. Let's say you are in the 25 percent federal income-tax bracket. If you incur $1 of mortgage interest, you might save 25 cents in federal taxes, which means the other 75 cents is coming out of your pocket. Moreover, your mortgage interest is only reducing your tax bill if you itemize your deductions on your federal tax return, rather than taking the standard deduction. For further information, consider consulting a tax professional.

Second, while mortgage rates are often low, they are typically higher than the yield you could earn by stashing your extra cash in a savings account or a certificate of deposit. The implication: Instead of putting money in these savings vehicles, you may be better off paying down your mortgage.

Third, a large monthly mortgage payment could leave you in a financial bind, especially if you lose your job. And even if the monthly payments are manageable, you likely have other goals you need to save for, such as retirement and your children's college costs. The larger your mortgage payment, the harder it'll be to meet these other goals. Indeed, for many folks, retirement only becomes possible when the mortgage is paid off -- and that big monthly expense goes away.

Women & Co., a service of Citi, is the go-to personal finance source for women. By providing financial content, commentary and community, Women & Co.'s mission is to get women thinking and talking about personal finance. Founded in 2000, Women & Co. is one of the longest running personal finance websites dedicated to helping women strengthen their financial futures.