Mortgage 101: The Financial Benefits Of A Mortgage
Mortgage Payments Aren’t as Bad as They May Seem
When it comes to paying off mortgages, conventional wisdom holds that you should do it as quickly as possible, but conventional wisdom isn’t always correct. In fact, there are specific advantages to carrying a mortgage on your home for as long as possible. In this article, we’ll examine the many benefits of having a mortgage, and discuss why it doesn’t always make sense to pay off the remaining balance in a hurry.
Mortgage Debt Is Low Interest
A mortgage is one of the most affordable means of borrowing money that you will ever encounter, unless you receive a zero-interest loan from a wealthy uncle. Think about it: credit card companies may offer teaser rates, but those are only good for the first year or so. As it stands right now, mortgage interest rates are historically low, and if you’re locked in at 4.2%, you can put money towards other debt rather than paying off your house in a hurry. For example, you might instead pay off your credit cards. Once you’ve vanquished your high-interest revolving debt, you might turn your attention to paying off your auto loans, which, as low-interest as they might be, are undoubtedly higher than your mortgage.
Mortgage Interest Is Tax-Deductible
If you file 1040 and itemize your deductions, you can deduct the interest paid on your mortgage. The higher your tax bracket, the more lucrative this deduction has the potential to become. For example, if you’re in the 35% tax bracket, then every thousand dollars you spend on mortgage interest nets a tax savings of $350. Plus, you’ll also get a tidy deduction from your state tax obligation. Not too shabby!
You Might Be Better Off Investing Your Extra Money
If you’re currently locked into a new mortgage, or have recently refinanced at today’s ultra-low mortgage rates, then you’re already taking advantage of some of the cheapest money you’ll ever borrow. Instead of rushing to pay off low-interest debt, why not invest extra money instead? If you weren’t already maxing out your employer’s 401k matching program, for example, you’d be foolish not to devote your spare cash to doing so. Also, assuming you’re paying interest in the low four percentage points, you shouldn’t have too difficult a time reimbursing yourself for that interest by investing in carefully vetted stocks and index funds. Historically, the stock market has averaged gains of 12% per year. Now that is not the same thing as returning 12% every year, but over the course of three decades or so, it may still a safer bet than sinking all of your extra cash into paying off your home.
Maintain Your Financial Liquidity
As you get older, financial liquidity may become more important. You or your partner could develop a medical condition that requires expensive treatments. Maybe you’ll want to help one of your adult children purchase their own home. Perhaps you’ll decide to take up an expensive hobby like aviation, or maybe you’ll decide to buy a winery on the coast and live out your remaining years as an amateur winemaker. Whatever the case may be, you’ll need a high degree of financial liquidity. And while it is possible to tap into your home equity, it can be quite an ordeal. If you invest your money instead of paying off you home early, then you should be able to tap into your investments on relatively short notice. Sure, you might not have your house paid off in full, but at least you’ll still be headed in the right direction. It’s worth asking which scenario is more desirable: having the cash flow to do what you want during retirement while still paying your monthly mortgage payment, or having your home paid off and then having to taking out a reverse mortgage…
Mortgage Payments Seem to Get Smaller and Smaller
When you first take out your mortgage, the monthly payment might seem pretty pricey, compared to what you might have been paying in rent. But assuming you’re on a fixed-rate mortgage, you’ll probably find that it seems smaller and smaller as the years go by. If you live in a desirable place, rents will go up along with property values, and at a certain point, your monthly payment will seem like a downright bargain.
Your Mortgage May Vary
If you’re the type who can’t stand to be in debt, then you might want to go the “15-year, pay a little extra each month” route. But just because paying off your mortgage early is an immensely satisfying feeling, it doesn’t mean it’s always the most prudent financial decision. We are all for paying off debt, but make sure to play the long-game and consider all the places your money could go before you decide to knock out your mortgage first.
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