While most people must finance, in order to buy a home, there are some who have the funds to build a home. cash deal . It may be that the property is relatively cheap, they are downsizing, they recently sold another home, or they have many other liquid assets. While some may advise to reduce debt, and in most forms of debt I agree, there are many reasons why this advice does not apply to a home loan or mortgage. Let’s review 5 advantages of having a mortgage, while realizing that the main reason not to do so is to reduce maintenance expenses / monthly fixed expenses.
1. Opportunity cost of money: Many have heard this expression, but do not fully realize what it means or do not believe it applies to them. Ask yourself if it would make more sense to keep your own funds, invest them separately, and get a mortgage. Especially today, when mortgage interest rates are still near record lows, borrowing allows you to buy more homes than you could otherwise buy. Also, wouldn’t it make sense to diversify one’s portfolio and position yourself for a brighter financial future? Many factors can affect this decision, including: one’s comfort zone; future plans; age; personal situation; Expectations; and anticipated future needs. However, it is important to consider this essential opportunity cost of money.
2. Cash Flow: If you’re paying 4.5% as a mortgage rate, and you’re actually paying significantly less due to tax considerations, and you think you can generate more with your investments over time, doesn’t a mortgage make sense? If you’re unsure, you can always make a larger down payment or add additional principal repayments to your monthly payment and still enjoy some of the benefits.
3. Tax deductibles / tax advantages: Mortgage interest is tax deductible and therefore costs you considerably less than any other form of loan. Reduce your other higher-interest, non-deductible debt 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.
Four. Deposit: When you have a mortgage, most lenders also collect and maintain an escrow account to pay for property taxes, insurance, etc. You won’t have to worry about remembering to make a real estate tax payment and receive a late fee / penalty, because the lender will pay it out of your account. And, your escrow account will even receive dividends on the balance.
5. You can pay in advance: Many ask whether they should have a 30-year mortgage period or, say, 15 years. My suggestion for most is to take the longest term, so that you can pay the lower amount monthly, but make additional principal payments (for example, add $ 100 per payment), to reduce the payback period. There is no prepayment penalty for the vast majority of mortgages!
Understand mortgages and your mortgage options up front. Do what makes the most sense to you!
