Why Mortgages Are Different From Other Kinds of Debt
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. Money you owe on real property can, in fact, be a boon to your financial independence in a lot of ways. While we’ve seen the recent financial trouble that occurs when people finance their lifestyles using the value of their home, there’s no reason why you shouldn’t see mortgages as a reasonable and realistic financial tool to build your wealth. Let’s talk about seven reasons why mortgages are different from other kinds of debt:
1.) 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. They also see home ownership, even partial ownership, 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 you pay each month makes you look like a better, more responsible user of credit.
2.) It’s the lowest 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.
3.) It’s the cheapest way to build wealth. If you have an investment opportunity that you think will make more than 4%, you can finance it with a mortgage and make money on the deal. While this kind of transaction is not without risk, it’s arguably less risky than cashing out a 401(k) or an IRA to use toward new investments.
4.) 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.
5.) 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 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.
6.) 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.
7.) It can serve as a source of retirement income. So-called “reverse mortgages” are increasingly popular among retirees whose portfolios are struggling. Functionally, you take out a mortgage on your home, and the lending institution pays you a set amount every month. Usually, the loan doesn’t come due until you pass on or vacate the home. That way, the proceeds from the sale of the home, along with life insurance and other death benefits, can be used to pay off the debt. Mortgages can help finance your retirement.
If you’re interested in purchasing a new home or refinancing an existing one, UCCU can help. Call 801-223-7640 today to speak to one of our Home Loan Experts and ask about our home loan options! Our knowledgeable service personnel can answer any questions you might have about how to get the most financial power out of your dream home.