What are The Advantages and Disadvantages of Having a Mortgage?
The dream of homeownership often boils down to the goal of paying off a mortgage. For most people, a mortgage is the largest debt they will ever have, significantly impacting their monthly budget. Naturally, it can seem appealing to pay off that home loan as quickly as possible.
However, before you dip into your savings to make extra payments, consider the potential benefits of having a mortgage. Here are some advantages, along with the drawbacks, and tips on how to make the best decision for your financial situation.
Benefits of having a mortgage
Although you might grumble about the expense, having a mortgage and making those monthly payments comes with its benefits. Here’s why it can be advantageous.
It put a your own roof over your head
Let’s be honest: Most people in the U.S. can’t afford to buy a home outright, especially with today’s soaring prices. For many, financing is the only viable path to homeownership, and a mortgage is the best borrowing option available, offering significantly lower interest rates compared to credit cards or personal loans for a $400,000 purchase. Despite the challenges, homeownership has numerous advantages. It frees you from the uncertainties of landlords and rising rents, which can often exceed monthly mortgage payments. Additionally, owning property is an asset that:
- increases your net worth as it appreciates
- can provide a source of cash
- can be passed down, creating wealth for future generations
It’s a forced savings account
If you view your home as a wealth-building asset, paying your mortgage can be seen as an investment in that asset. As National Association of Realtors Chief Economist Lawrence Yun puts it, “A monthly mortgage payment is often regarded as a forced savings account that helps homeowners build net worth.” Each mortgage payment increases your ownership stake, known as home equity. Over time, as you accumulate equity, you can borrow against it through a home equity loan or line of credit (HELOC). Essentially, maintaining a good standing on your mortgage allows you to access cash from your home without needing to sell it.
It boosts your credit score
While getting a mortgage may initially lower your credit score, consistently paying down the balance can help maintain and even improve it over time. Lenders prefer to see a mix of credit types on your report, and a mortgage is considered “good debt” because it contributes to acquiring an asset. Managing your mortgage responsibly through timely payments enhances your credit profile. A higher credit score can lead to better terms on loans and more borrowing options in the future.
You might see some tax benefit
If you choose to itemize deductions instead of taking the standard deduction, you can include the mortgage interest deduction, which lets you deduct interest on up to $750,000 of home-related debt. If you purchased your home before December 15, 2017, that limit increases to $1 million. Additionally, if you itemize, you can also deduct property taxes.
You could put the extra funds to work elsewhere
To pay off your mortgage early, you may need a significant amount of cash. By sticking to your regular monthly payments instead, you can allocate that extra money toward other financial goals, such as saving for retirement or investing.
Drawbacks of having a mortgage
Certainly, there are drawbacks to keeping a mortgage. Here are the main concerns.
It’s still debt
Taking on a mortgage means committing to repaying a debt for many years, often decades. Even if you’ve paid off other obligations, a mortgage is still a significant expense that can tie up your income and impact your cash flow.
Risk of foreclosure
A mortgage allows you to acquire an asset, but it also puts that asset at risk if you fail to repay it. As a secured debt, your home serves as collateral for the loan, which is why mortgage interest rates are lower than those for credit cards or personal loans. If you miss payments for several months, your lender has the legal right to foreclose on your home and take possession of it.
The longer you have it, the more interest you’ll pay
Keeping a mortgage for the full term means you’ll end up paying the entire interest amount. By paying off your loan early, you can save significantly on these charges. Most homebuyers choose fixed-rate mortgages, but if you have an adjustable-rate mortgage (ARM), you’re likely to pay more over time as your rate fluctuates. This can strain your monthly budget or even make your payments unmanageable.
Less flexibility in selling
A mortgage is a lien on your home, which must be settled before you can sell the property. Most mortgages include an alienation clause, requiring the loan to be paid off when the home changes hands. This can impact the market price you set for your home, especially if you need the sale proceeds to cover the mortgage balance, affecting how easily it sells and your potential profit.
Selling can also become challenging if your home or neighborhood loses value or if the housing market declines. If your home is worth less than the remaining mortgage balance, you’re considered underwater, which complicates selling unless your lender agrees to a short sale.
Alternatives to getting a mortgage
Buying a home with cash eliminates the need for a mortgage, avoiding lender qualifications, monthly payments, and interest costs associated with loans.
For instance, consider a scenario where you take out a $390,000 mortgage with a 30-year term and a fixed 7.6 percent rate. Over the loan’s life, you would pay $601,329 in interest alone, totaling $991,329. Compared to paying cash, which saves nearly two-thirds of this cost.
However, paying cash has drawbacks. Your liquidity is restricted since real estate, even when owned outright, can be challenging to convert into cash. While you can use a home equity loan or HELOC, this mirrors the mortgage process, including approval and closing costs.
Furthermore, owning a home outright may not be as financially freeing as it seems. The cash invested in the home is tied up and cannot be allocated to other critical goals like retirement savings, business ventures, or education costs. Diversifying investments is crucial, as putting all assets into real estate may limit financial flexibility.
How to make the right financing decision for you
Ultimately, the choice to take out or continue paying a mortgage depends on whether you have the available funds and if those funds could be used more effectively elsewhere.
Can you manage your monthly payments while investing the extra money in options that will help it grow? If so, sticking to your mortgage repayment schedule might be the best route. However, if having peace of mind and owning your home outright is a priority for you, paying off your mortgage early could be a worthwhile decision.