Should I pay off my mortgage, or pay mortgage interest and have the tax deduction?

Many times I'm asked if it is better to have a 30 year mortgage and have the tax advantages of mortgage interest or pay off your mortgage.  Unfortunately, this question doesn't cross a lot of people's minds because they are having a hard time making ends meet and need the smallest monthly house payment possible.  But for those who have the option, here is my advice:

For tax purposes, interest you pay on a mortgage, 2nd mortgage, or home equity loan is fully deductible if you can itemize deductions.  What does this mean?  It means that for every dollar you deduct on your tax return against your income, you will save the percentage of tax in your particular bracket.  It may not save you the total amount, because your itemized deductions have to be over the standard deduction amount to save you any additional tax.  The first $11,600 in itemized deductions for a married couple or $5,800 for a single person are given to you as a standard deduction whether or not you pay mortgage interest.

Say you paid $15,000 in mortgage interest during 2011.  If you're in the 25% tax bracket and have other deductions that equal or are more than the standard deduction, you will receive an adjustment on your federal taxes in the amount of $3,750 (25% of $15k).  If you're in the 15% bracket, your federal tax savings would be $2,250.

If you didn't have a mortgage, you would pay the $3,750 or $2,250 extra in taxes, but you would also be keeping the $15,000 you would have spent on your mortgage interest.  Would you rather keep the $11,250 or $12,750 in your pocket instead of realizing the small adjustment on your taxes?

If you must pay mortgage interest, try to refinance your loan at a lower interest rate and cut the number of years of your mortgage down below the number of years you have left on your current mortgage.  If you continue refinancing at 30 years, you will never pay off your home!