Every corner of the personal finance world seems to hammer home 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 real property can, in fact, be a boon to your financial independence in a lot of ways. Let’s talk about a few reasons why mortgages are different from other kinds of debt:
Having a mortgage can improve your credit score. Mortgages are seen as “good debt” by creditors. Because it’s secured by the value of your house, lenders see your ability to maintain mortgage payments as a sign of responsible credit use and 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. Having a mortgage that is comfortably within your budget and one that you pay on time each month makes you look like a better, more responsible user of credit.
It is possibly the lowest type of interest rate loan you’ll ever get. Mortgage loans are among the safest types of loans that lending institutions can issue. If there’s a problem during the life of the loan, the real property is a guarantee that the loaned money can be recovered. As a result, mortgage rates generally track the “prime” rate – the interest rate the Federal Reserve charges institutions to borrow money from them.
It gets 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 homeownership, 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. Consult a tax advisor regarding deductibility of interest.
It’s proof against 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 (principal and interest) 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.
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 you can get more than a 4% return on your investment, you’ll make money by keeping a home equity line of credit as an emergency fund and pursuing returns with your savings.
If you’re interested in purchasing a new home or refinancing an existing one, CSE Federal Credit Union can help. Call today to speak to one of our representatives and see if you qualify for a home loan with a great low rate. Our knowledgeable service personnel can answer any questions you might have about how to get the most financial power out of your dream home. Call CSE at 337.477.2000 or visit csefcu.org and get details about our home loan options!
This article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax or financial advice.
Sources: http://online.wsj.com/articles/nine-reasons-to-love-your-mortgage-1406420252?mod=Your_Money_newsreel_2 http://blog.readyforzero.com/how-does-a-mortgage-affect-your-credit-score/