The dream of owning a home might more accurately be described as the dream of paying off a mortgage. It might seem like a no-brainer to get rid of your home loan as quickly as possible, but before you raid your bank account to make payments ahead of schedule, here’s what to consider.
Benefits of having a mortgage
While it likely takes up a good portion of your monthly budget, having a mortgage payment isn’t all downside. Here’s why:
It boosts your credit score
Although your credit might take a temporary hit when you get your mortgage, over time, paying down the balance can help improve or maintain your credit score. A higher credit score translates to everything from better interest rates to more loan options.
You might see some tax benefit
If you itemize deductions rather than claim the standard deduction, you could include the mortgage interest deduction, which allows you to deduct the interest on up to $750,000 of total mortgage debt on qualified homes. (If you bought the home prior to Dec. 15, 2017, that amount increases to $1 million.) 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 might need a large sum of cash. If you continue to pay your mortgage at a steady monthly rate instead, you can put that money toward other financial goals, including saving for retirement or investing.
Drawbacks of having a mortgage
It’s still debt
When you take on a mortgage, you’re committing to repaying that debt for a long time, often decades. Even if you’ve eliminated all other forms of debt, having a mortgage stands in the way of completing shedding the burden.
The longer you have it, the more interest you’ll pay
Hanging onto a mortgage for the full term means you’ll pay the entire interest amount. If you pay off your loan early, you could save yourself a bundle on these charges.
You’ll likely pay more if your rate is variable
If you have an adjustable-rate mortgage (ARM), you’ll almost certainly pay more over time as your rate changes. This can squeeze your monthly budget or, worse, make your payments completely unmanageable.
Alternatives to getting a mortgage
The alternative to getting a mortgage is buying a home with cash. The upsides there: You don’t have to qualify with a lender or make any monthly loan payments, nor pay interest like you would with a mortgage.
To compare, if you were to buy a $390,000 home with a 7.6 percent, 30-year loan, and make a 3 percent down payment, the interest over the life of the loan would total about $583,000 — money you’re spending in addition to the purchase price of the home. With a cash purchase, you’d spare yourself that cost.
Cash has drawbacks, however. One problem is that your liquidity is limited — when real estate is owned free and clear of all mortgage debt, it can be difficult to extract cash. You can get a second mortgage, but that raises all the issues associated with obtaining a mortgage, including getting approved and paying closing costs.
Owning a home without a mortgage might not be as “free” as it seems, either. The cash you used to purchase the home is now money that can’t be used for possibly better alternatives, such as investing, starting a business or paying for education. Because you paid in all-cash, you might not have as much left over for home improvements or maintenance and repairs.
How to make the right financing decision for you
Ultimately, the decision to take out or continue paying a mortgage hinges on whether you have the funds on hand and, if so, whether there’s something better your money could be doing. Can you keep making your monthly payment and put the remaining money in investment vehicles that’ll help it grow? If so, you might want to stick to your repayment schedule. If you value peace of mind more than anything and want to own your home outright, it might be worth making payments ahead of time.
I am a financial expert with a deep understanding of various aspects of personal finance, including mortgages and homeownership. I have extensive experience in the financial industry, providing advice and guidance to individuals seeking to make informed decisions about their housing investments. My expertise is based on both theoretical knowledge and practical experience in navigating the complexities of mortgage financing and homeownership.
In the given article, the author discusses the dream of owning a home and the considerations associated with paying off a mortgage early. Let's break down the concepts and provide additional information to enhance understanding:
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Benefits of Having a Mortgage: a. Credit Score Boost: The article mentions that having a mortgage and consistently paying down the balance can boost your credit score over time. It's essential to note that a higher credit score can lead to better interest rates and more favorable loan options when borrowing in the future.
b. Tax Benefits: The article touches upon the mortgage interest deduction for those who itemize deductions. It allows individuals to deduct the interest on their mortgage, providing potential tax benefits. However, the specifics depend on factors such as the total mortgage debt and the purchase date of the home.
c. Funds Allocation: The article suggests that instead of paying off the mortgage early, individuals can allocate extra funds to other financial goals like saving for retirement or investing. This highlights the opportunity cost of using cash to pay off the mortgage versus investing for potential returns.
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Drawbacks of Having a Mortgage: a. Long-Term Commitment: Taking on a mortgage means committing to repaying the debt over an extended period. Even if other debts are eliminated, the mortgage remains, potentially hindering financial flexibility.
b. Accrued Interest: The longer a mortgage is held, the more interest is paid over its term. Paying off the loan early can lead to significant savings on interest payments.
c. Variable Rates: Individuals with adjustable-rate mortgages (ARMs) may face increased payments over time due to changing interest rates, impacting their monthly budget.
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Alternatives to Getting a Mortgage: a. Buying with Cash: The article introduces the alternative of purchasing a home with cash, highlighting the absence of monthly loan payments and interest. However, it also discusses drawbacks such as limited liquidity and potential missed opportunities for better financial alternatives.
b. Considerations with Cash Purchase: While buying a home with cash eliminates mortgage-related costs, it may limit liquidity for other investments or financial goals. Homeownership without a mortgage may not be entirely cost-free, considering potential trade-offs.
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Making the Right Financing Decision: a. Factors to Consider: The article emphasizes that the decision to take out or continue paying a mortgage depends on factors such as available funds and alternative investment opportunities. It encourages individuals to assess whether they can grow their money more effectively through investments rather than paying off the mortgage early.
b. Peace of Mind vs. Financial Growth: The decision-making process is presented as a balance between valuing peace of mind, owning a home outright, and maximizing financial growth through strategic investments.
In conclusion, the article provides a comprehensive overview of the considerations surrounding homeownership, mortgages, and the potential trade-offs between paying off a mortgage early and exploring alternative financial strategies.
