A home mortgage is a loan issued by a mortgage company, a bank, or other financial institutions for the purpose of purchasing an investment or primary residence. The owner of the property or the borrower transfers the title to the bank or mortgage company but will be transferred back to the owner as soon as payments have been made and terms are consummated. Most people often misunderstand home mortgage and the benefits that they could get from it.
Benefits of Home Mortgage
1. Mortgage Does Not Affect the Value of Your Home
Most of us purchase our home because we are hoping that its value will rise over time. In reality, the value of your house will increase and decrease in the next three decades. The rise of your house’s value happens regardless of whether you have a mortgage or not. Owning a house outright is like burying your money under the rag. Because the value of the house will increase and decrease with or without a mortgage, your current equity is not earning any interest. Getting a long term home mortgage allows you to grow your equity as the value of your home grows.
2. Mortgage Will Not Affect Equity Building
One of the primary reasons for owning a house is to build equity. Most people believe that mortgages are bad because bigger mortgage means lower equity. However, this is a wrong notion. For instance, you purchase a house for $300,000 and you get a 30 years mortgage for the $250,000 at 4 percent. Your down payment, which is $50,000 is your beginning equity.
By paying every month, the balance of your loan after two decades will go down to only $117,886. This backs the notion that equity increases as you pay the mortgage off. In other words, the quicker you pay the mortgage off the quicker your equity will increase.
However, this does not consider the fact that there are other ways to build equity. Over the years, the value of your house will grow. If for instance, the value of your house increases at 3 percent annually, it will be around $541,833 in a couple of decades. You get around $250,000 in new equity.
3. Mortgages Are the Cheapest Money
While you can borrow from credit cards with zero interest for six months, you can never loan $200,000 and pay it off in 30 years with the same zero interest term. If you have the capacity to pay, the lender will grant you a loan. But the question is how much interest are you going to pay? The lender’s confidence in your capacity to pay translates to the interest rate of the loan.
By making your house a collateral, you come to terms that the lender gets the house in case you are not able to pay the loan back. This dramatically minimizes the risk on the part of the lender, thereby a low-interest rate.
4. Mortgage Interest Rate is Tax Favorable and Tax Deductible
These two are associated and offer significant benefits to get a mortgage. If you itemize your deductions, you will realize that the interest you are paying on loans to build, buy, or improve a residence is tax deductible. The deduction is obtained at the top tax bracket.
For instance, if you are in the 35 percent tax bracket, each dollar you pay in mortgage saves you 35 cents in federal and state income taxes. For instance, you are in the 32 percent tax bracket and you have a 5 percent mortgage. After taxes, the loan will only cost you 3.4 percent.
On the other hand, if you invest and earn 5 percent, for instance, the profits you earn will only be taxed at 15 percent. In other words, your profit after tax is 4.5 percent. Even if your investments are not earning more than what you are paying for the loan, you are still in a way making a profit.
5. Paying Mortgage Over Time Becomes Easier
Very few realize that carrying a mortgage is also fun. The monthly payment of your mortgage will be the same in the next couple of decades or in some cases will be decreasing over time. Over time, your monthly income will grow and soon you will realize that the value of your monthly amortization is significant compared to your income. Aside from that, the value of your house has also increased substantially over time. Payments to loans and mortgages seldom rise but income steadily does so.