While most people must finance in order to buy a home, there are some who have the funds to make a cash deal . It may be that the property is relatively inexpensive, they are downsizing, they have recently sold another home, or they have many other liquid assets. While some may advise reducing debt, and in most forms of debt, I agree, there are many reasons why this advice does not apply to a mortgage or home loan. Let’s review 5 advantages of keeping a mortgage, while realizing that the main reason not to 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 believe 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 are still near all-time lows, loans make it possible to buy more home than would otherwise be possible. Also, might it not 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 take into account this essential opportunity cost of money.
2. Cash flow: If you’re paying a 4.5% mortgage rate, and are actually paying a little less due to 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 debts 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.
4. 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 getting 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 prepay: Many ask if they should carry a 30-year mortgage or, for example, a 15-year one. My suggestion to most is to take out the longer term, so you have the ability to pay the lower amount each month, 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!