While most people must finance in order to purchase a home, there are some who have the funds to make one. cash deal . It may be that the property is relatively cheap, they are downsizing, they recently sold another house, or they have many other liquid assets. While some may advise reducing debt — and on most forms of debt, I agree — there are many reasons this advice doesn’t apply to a home or mortgage loan. Let’s review 5 advantages of maintaining a mortgage, while realizing that the main reason not to do so is to reduce monthly maintenance charges / fixed expenses.
1. opportunity cost of money: Many have heard this expression, but don’t fully realize what it means, or don’t think it applies to them. Ask yourself, would it make more sense to keep your own funds, invest them separately, and get a mortgage? Especially today, when mortgage interest rates remain near record lows, loans make it possible to buy more homes than would otherwise be possible. Also, wouldn’t it make sense to diversify your 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 keep in mind this essential opportunity cost of money.
two. Cash Flow: If you’re paying a 4.5% mortgage rate, and you’re actually paying a little less because of tax considerations, and you think you can earn more from your investments over time, a mortgage doesn’t make sense. If you’re not sure, 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 deductible / 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 maintaining a mortgage. If you’re 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 will 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 receiving a late fee because the lender will pay it out of your account. And, your escrow account will even receive dividends on the balance.
5. You can prepay: Many ask if they should carry a 30-year mortgage or, for example, 15 years. My suggestion for most is to take out the longest term, so that you have the ability to 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 early on. Do what makes the most sense to you!
