10/26/2010

Should You Pay All Cash or Should You Carry a Mortgage?

Should you be in a hurry to pay off a mortgage? Or should you never pay it off? What reasons would you have for carrying a mortgage instead of having total equity in your property? Why do we want to make a bigger down payment, get 15-year loans, pay more money every month? If you are trying to decide what to do, save a bigger down payment or pay all cash, or make a lesser down payment, take a look at this.

When the stock market crashed in 1929, the banks called (demanded immediate payment on ) home loans in the 1920's due to the run on banks, which led to homeowners losing their homes. This is when people starting believing it was bad to have a mortgage and that it was bad to be in debt. Then, mortgage loans could be called on a moment's notice, but today, due to a change in the rule,  the bank is prohibited from paying in full without prior notice, and can only demand this month's payment. People have been trained to think of debt elimination and being debt-free due to this history.
  • Mortgages don't affect home values--mortgage is not a debt, it is an asset class.
  • Equity is built whether or not there is a mortgage, it is built due to market growth in value.
  • A mortgage is the cheapest money you can borrow because it is secured by the property (unlike most debt which is unsecured and is given at much higher interest).
  • Mortgage interest is tax-deductible.
  • Mortgage interest is tax-favorable.
  • Mortgage payments get easier over time, the payment never grows, but your income does.
  • Mortgages allow you to sell without selling; owners have the opportunity to use the equity.
  • Mortgages enable you to create more wealth than you otherwise would.
  • Mortgages allow you to invest more money more quickly.
  • Mortgages give you greater liquidity and greater flexibility. The 30-year loan may actually give a better return than a 15-year loan--if you save and invest the difference.
 Many people carry a mortgage even though they have the money to pay it off because they have learned to use their mortgage to create wealth. A big mortgage is not an excuse to buy a big house--Buy the cheapest house you can buy, and get the biggest mortgage. See Ric Edelman, 10 Great reasons to Carry a Big Long Mortgage

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