It appears every neighborhood paper, monetary network, or informative media source is reporting the historically low interest rates, the anxiety of near zero or negative rates of interest, and also the discussion of economic growth because of these conditions. What does this really mean and more importantly, what does it mean to you personally?
Why We Believe We Must Pay off Our Mortgages
Current low interest rates have created an environment in which the older ideology about mortgages no longer applies. We’ve entered an age where we now advise you to refinance and keep up a mortgage for the remainder of your life, or at least to your 30-year mortgage period. I think we can agree that low mortgage rates benefit the homeowners, but before you start thinking we’ve lost our minds and there’s no way you may attempt to keep a long-term mortgage, let’s take a look at a few of the advantages of owning a mortgage.
First, we must understand where and why the ideology of paying back your mortgage comes in. This anxiety was ingrained in Americans and, subsequently, that the urge to buy and maintain a house was a defining purpose of financial success. We move forward to the late 70s and early 80s and we now see mortgage rates as large as 15%-20%. Due to these economic and emotional adventures, our parents and grandparents made it a point to educate their children and grandchildren that investing in your home is a requirement to guarantee homeownership.
So here’s a few reasons:
Reduce Monthly Payments
The answer, quite frankly, is a resounding no. The main reason people attempt to eliminate their mortgage is that pesky monthly payment. Let’s say you bought your home with a 30-year fixed mortgage and paid every month on time with no refinancing. The month after your last mortgage payment, you still need to make a payment on your property. This time you’re spending on your insurance and taxes. What was once a monthly savings for you from the bank or lending company is now your responsibility. So that demanding monthly payment you attempted to alleviate continues. It’s proven that an affordable mortgage payment helps individuals and families run and keep a private financial budget. It just helps everyone plan and maintain a fiscally healthy mindset.
Mortgage Tax Deductions
In addition to needing to pay this monthly payment, you lose out on the benefit of having that cash help you come tax time. This usually means that a percentage of the money that you pay each month decreases your taxable earnings. This is among the biggest upsides to maintaining a mortgage throughout your life.
Maintain Investable Liquidity
There is also a liquidity and investment advantage to owning a mortgage. The most advantageous is that a mortgage is one of the least expensive loans you will ever have. In comparison to most other forms of debt, mortgages hold the lowest interest rate for the best quantity of money. This cheap money provides some benefits when you refinance or buy a new home. The money you make from selling a home or refinancing a home that has increased in value can be used to put money into your retirement or a different account. This will enable you to grow your wealth quickly and at a really minimum cost to you. This will allow for diligent saving and each of the equity accumulated from the home can be used for another stage in life and improving liquidity requirements.
Let us look at an example. Let’s say you purchase your first home for $200,000, make the down payment of 20 percent ($40,000) and have a 30-year mortgage for $160,000 at 4 percent. Ten years into that mortgage, you get married and you and your spouse choose to sell your house and move into a bigger home to accommodate your expanding family members. You purchase a new house for $400,000. How much do you put down? We suggest that you put 20 percent down and invest the remaining $100,000. Saving this money can raise your emergency reserve savings, your retirement assets and enhance your overall financial safety. Should you stay diligent and utilize the monies for these purposes, you always have the capability to pay off your mortgage in the future if you so desire. You have created a cash flow of liquid and easily accessible currency (e.g. should you invest the $100,000, for 20 years at 8%, less than the historic 20-year average of the S&P 500 of 10%, your investment account balance could be $492,680.28 and your mortgage balance will be $132,958.72).
After you’ve got money invested in your house, the only means to get it back is by selling your home. This means, in the event that you’ve got a house with $400,000 in equity and value, the only way that you can get into the equity will be to sell your house. But, if you sell your residence, where are you going to reside? Typically, when homeowners alter housing situations through events like downsizing, they swap their present home’s equity to purchase the new residence, never utilizing the house’s equity in the very advantageous and tax valuable method.
The existence of buying a house and paying the mortgage off is now an antiquated way of thinking as a result of current low-interest-rate environment. The changes on your monthly mortgage payment increase your savings, liquidity and your retirement funds long-term, which lets you retire sooner and decreases the taxes you pay to Uncle Sam.