Every corner of the personal finance world stresses the same point: Debt is the wealth killer.
Debt is the single greatest threat to your retirement planning, college savings, and financial independence.
Except, as it turns out, there is one kind of debt that defies all of these rules: MORTGAGES.
The money you owe on a home can, in fact, be a bonus to your financial independence in a lot of ways. While we’ve seen the recent financial trouble that occurs when people finance their lifestyles using the value of their home, there’s no reason why you shouldn’t see mortgages as a reasonable and realistic financial tool to build your wealth.
Here are a few reasons why mortgages are different from other kinds of debt:
1. Having a mortgage can improve your credit score.
Mortgages are seen as “good debt” by creditors. Since the mortgage debt is secured by the value of your house, lenders see your ability to maintain mortgage payments as a sign of responsible credit use. They also see home ownership, even partial ownership, as a sign of financial stability.
Since 2009, credit scoring agencies have added points for consumers who are able to manage different kinds of debt. Even if you’ve bought your first home with a first time home buyer mortgage, having a mortgage that you pay each month makes you look like a responsible user of credit.
2. It’s one of the lowest interest rate loans you’ll ever get.
Mortgage loans are among the safest types of loans that lending institutions can issue because the property is a guarantee that the loaned money can be recovered if there is ever a problem. As a result, mortgage rates are offered at rates lower than many other types of debt. Mortgage rates generally track the “prime” rate – the interest rate the Federal Reserve charges institutions to borrow money from them.
3. Mortgages get preferential tax treatment.
The interest you pay on your mortgage is generally tax-deductible, which puts it in a class of debt by itself. The government wants to encourage home ownership, and is therefore willing to offer you a tax break for the financing costs of your mortgage. This tax treatment makes mortgages potentially even less expensive.
4. It’s protected from interest rate volatility.
If you’ve got a fixed-rate mortgage, you can make plans around the amount you pay each month. If inflation accelerates, your payment stays the same. If interest rates skyrocket, you’re protected from that, too. If interest rates drop, you can usually refinance to save money. Whatever happens, your mortgage is locked in to protect you from uncertain economic times.
5. It’s a safe emergency fund.
While you want to keep some money in a savings account to protect you from minor emergencies, you can use the equity in your home to protect you from major events. If the unexpected happens a home equity loan or home equity line of credit can get help you pay for what’s needed without causing a financial crisis.
So get comfortable knowing some types of debt are actually good. When you’re ready to look at purchasing a new home or refinancing an existing one, Genisys Credit Union can answer any questions you might have about how to get the most financial power out of your dream home. Contact us to learn more about our home loans!
© Genisys Credit Union and www.genisyscu.org, 2018. Unauthorized use and/or duplication of this material without express and written permission from this site’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Genisys Credit Union and www.genisyscu.org with appropriate and specific direction to the original content.
SOURCES:
http://online.wsj.com/articles/nine-reasons-to-love-your-mortgage-1406420252?mod=Your_Money_newsreel_2
http://www.nytimes.com/2012/10/15/business/reverse-mortgages-costing-some-seniors-their-homes.html?pagewanted=all&_r=0
http://blog.readyforzero.com/how-does-a-mortgage-affect-your-credit-score/
FAQs
Having a mortgage can improve your credit score.
How can mortgage debt be beneficial? ›
Loans like mortgages are usually considered good debt because they provide value to the borrower by helping them build wealth.
How can being in debt be a good thing? ›
Examples of good debt are taking out a mortgage, buying things that save you time and money, buying essential items, investing in yourself by borrowing for more education or to consolidate debt. Each may put you in a hole initially, but you'll be better off in the long run for having borrowed the money.
How much mortgage debt is ok? ›
Debt-to-income ratio targets
Meanwhile, any ratio above 43% is considered too high. The biggest piece of your DTI ratio pie is bound to be your monthly mortgage payment. The National Foundation for Credit Counseling recommends that the debt-to-income ratio of your mortgage payment be no more than 28%.
Can I use my mortgage to pay off debt? ›
A cash-out refinance — where you take out a new mortgage equal to the amount you owe on your old home loan plus some or all of your home equity — is a common way to consolidate credit card debt. Mortgages typically have far lower interest rates than credit cards do.
What is the average age people pay off their mortgage? ›
That makes sense, of course, as older Americans have had a longer time to make payments. But with nearly two-thirds of retirement-age Americans having paid off their mortgages, it means that the average age they have gotten rid of that debt is likely in their early 60s.
Is mortgage debt better than credit card debt? ›
Mortgage interest rates are typically lower than credit card interest rates, so consolidating this debt into your home loan could save you money. While there are downsides, such as losing some equity in your home, eliminating credit card debt can be your first step to more financial freedom.
What are the top 3 careers reported among millionaires? ›
Third Foundation - Pay cash for your car Accounting, Engineers, and Teachers - The top three careers reported among millionaires. Outpacing inflation - In order to outpace inflation when investing, your investments need to have a ----higher rate---- of return than the rate of inflation.
How do rich people use debt to get richer? ›
Wealthy individuals create passive income through arbitrage by finding assets that generate income (such as businesses, real estate, or bonds) and then borrowing money against those assets to get leverage to purchase even more assets.
What is the 50 30 20 rule? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
Credello: Studies show that Millennials often have debt. The average amount is almost $30K. Some have more, while others have less, but it's a sobering number. There are actions you can take if you're a Millennial and you're carrying this much debt.
Is it better to pay off mortgage or keep money? ›
It's typically smarter to pay down your mortgage as much as possible at the very beginning of the loan to avoid ultimately paying more in interest. If you're in or near the later years of your mortgage, it may be more valuable to put your money into retirement accounts or other investments.
How to turn mortgage debt into cash? ›
A cash-out refinance allows you to convert your home equity into cash by borrowing more than you currently owe, paying off the old loan balance and pocketing the difference. You can use the money however you'd like, from paying off credit cards to remodeling an outdated kitchen.
Is it better to keep a mortgage or pay it off? ›
If it's expensive debt (that is, with a high interest rate) and you already have some liquid assets like an emergency fund, then pay it off. If it's cheap debt (a low interest rate) and you have a good history of staying within a budget, then maintaining the mortgage and investing might be an option.
What are the advantages of bank debt? ›
Advantages of Bank Loans
The rates you pay will be cheaper than other types of high interest loans, such as venture capital. As Bizfluent says, bank loans offer significantly lower interest rates than you will find with credit cards or overdraft.
What are the advantages of debt to equity? ›
The major benefit of high debt-to-equity ratio is: A high-debt to equity ratio signifies that a firm can fulfil debt obligations through its cash flow and leverage it to increase equity returns and strategic growth.
What are the benefits of a mortgage company? ›
A mortgage broker is offered loans on a wholesale basis from lenders, and therefore can offer the best rates available in the market, typically making the total loan cost lower for the client. A reputable mortgage broker will disclose how they are paid for their services, as well as detail the total costs for the loan.
Every corner of the personal finance world stresses the same point: Debt is the wealth killer.