While most people must finance, in order to be able to purchase a home, there are some who have the funds, to make a cash deal. It might be that the property is relatively inexpensive, they are down-sizing, have recently sold another house, or have lots of other liquid assets. While some may counsel to reduce debt, and in most forms of debt, I would agree, there are many reasons this advice does not apply to a home loan or mortgage. Let’s review 5 advantages of carrying a mortgage while realizing the major reason not to, is reducing one’s monthly carrying charges/ fixed expenses.
1. Opportunity cost of money: Many have heard this expression, but fail to fully realize what it means, or don’t believe it applies to them. Ask yourself, might it make more sense, to maintain one’s funds, invest them separately, and take out a mortgage. Especially today, when mortgage interest rates still remain close to historic lows, borrowing permits one to purchase more houses than he might otherwise be able to. In addition, might it not make sense, to diversify one’s portfolio, and position himself for a brighter financial future? Many factors might impact this decision, including one’s comfort zone; future plans; age; personal situation; expectations; and anticipated future needs. However, it is important to keep in mind this essential, opportunity cost of money!
2. Cash flow: If you are paying 4.5% as your mortgage rate, and effectively paying quite a bit less because of tax considerations, and you believe you can, over time, generate more from your investments, doesn’t a mortgage make sense. If you aren’t sure, you can always make a larger downpayment, or add additional principal paybacks to your monthly payment, and still enjoy some of the benefits.
3. Tax deductible/ tax advantages: Mortgage interest is tax-deductible, and thus costs you considerably less than any other form of a loan. Reduce your other debts with higher, non – deductible interest, while carrying a mortgage. If you are in the 30% tax bracket, for example, your effective interest rate on a 4.5% mortgage is only 3.15%, etc.
4. Escrow: When you have a mortgage, most lending institutions will also charge and keep an escrow account, in order to pay the real estate taxes, insurance, etc. You won’t have to worry about remembering to make a real estate tax payment, and getting a late charge/ penalty because the loaner will pay this out of your account. And. your escrow account will even receive dividends on the balance.
5. You can pre-pay: Many ask if they should carry a 30 – year or, for example, a 15 – year mortgage period. My suggestion for most, is to take out the longer – term, so you have the ability to pay the lower amount monthly, but make additional principal payments (e.g. add $100 per payment), to reduce the payback period. There is no pre-payment penalty for the vast majority of mortgages!
Understand mortgages, and your mortgage options, from the onset. Do what makes the most sense for you!