The Benefits of a Monthly Mortgage Payment
There are many reasons why having a mortgage can benefit you. Often, mortgages are the least expensive money you can borrow, so you don’t have to worry about high interest rates. But before you decide to pay off a home mortgage there are questions you must ask yourself. Do you have any other debt? What is the interest rate on your mortgage? How much have you saved?
If you have any other loans besides a mortgage it’s a good idea to consider paying those off first. Things such as car loans, credit card debt, and student loans tend to have a much higher interest rate than a home mortgage. Your home mortgage could also help establish good credit and can appreciate in value, while a car loan will always depreciate in value and should be paid off first. And once you have a mortgage payment, it’s very important to reduce your consumer debt to zero before even considering paying off a mortgage.
Lenders see mortgages as responsible debts because mortgages are considered “good debts” and are tied to a physical asset. Lenders see this debt as responsible because it means that you are willing to commit to make long term payments. If you have a good payment history it will improve your credit rating, which can make life easier for you in many different areas. It also helps to have different types of credit to improve your credit score, so having a mortgage along with a few other types of loans can be of great benefit.
Many are unaware that the fixed interest rate on your loan is not always the true interest rate on a mortgage. As a homeowner, you can deduct the interest rate on your mortgage off of your tax return each year. This will in turn lower the interest rate you are paying on your loan. When you determine your true interest rate, chances are you’ll make more than that percentage on your other investments. For example, if you have a 4% mortgage interest rate and you are in the average American tax bracket, after taxes the interest you are paying is really only around 3%. So why take out money that is making a profit by paying off your mortgage loan when you could just continue to pay your mortgage from month to month? In a situation like this it would not make financial sense to pay off your mortgage. You should always consult with your tax advisor to determine the tax implications of paying off your mortgage. (This calculator can help provide some insight into your unique situation.)
It’s not smart to pay off your mortgage loan unless you are financially stable enough to get through retirement, which can be quite a task these days. A retirement plan should include allowances for medical expense and other unforeseen expenses in retirement. It’s a common misconception to use the money in a 401k account; this account should be left untouched. Ideally you should not pay off a mortgage unless you can continuously max out your 401k contributions. (See the above sentence about consulting with your accountant.J)
If you were to lose your job or have another kind of financial tragedy, would you still have enough money saved up after paying off your mortgage loan? It’s wise to always keep somewhere between three and twelve months of expenses saved up in a savings account. If all of your assets are in your house it will limit your ability to address unexpected expenses or other opportunities, exemplifying the old fashioned saying “don’t put all your eggs in one basket.” This is true of almost anything, but especially your financial investments.
The main financial reason for owning a house is to build equity. Equity, for the homeowner novice, is the amount of ownership that has been built up in a property. The ownership building process happens through payments and appreciation. Without a mortgage loan, any equity you have in the house will not earn interest. This equity cannot be sold, but banks will lend money against it. Home equity loans offer significant tax savings because interest paid on a home equity loan is tax deductible.
Mortgage payments are also beneficial if you plan on moving. If you plan on selling your home at some point, saving as much money as possible would be the smart move. This will help you make a down payment on your future home. Additionally, the mortgage industry is always changing and it’s hard to predict housing market trends, so it’s best to be conservative when investing money in a home.
As time goes on your mortgage payment will begin to seem less and less of a burden. As the economy changes, inflation grows, and you grow in your career, your mortgage payment will remain the same. What may seem like a big undertaking at first will eventually become expected and easy to budget for, so save your pennies and make smart investing choices with your hard earned dollars.
If you’d like advice on budgeting for a mortgage payment, or are a current homeowner and want tips on building equity, contact one of our qualified mortgage bankers.