Big Mortgages Are Better

I know that you don’t want a mortgage, you want a house, but to get a house most people must obtain a mortgage. You hate having a mortgage and you’d love to pay it off as soon as possible. You know that over 30 years, you’ll pay more interest than you paid for the house in the first place. You have been taught that the best thing possible is to own your home outright.

Despite all of this, a big long term mortgage is best. Although the advice you have been given to pay your mortgage off may have once made sense, today it is not the best decision. In today’s economic environment, a high loan-to-value long term mortgage is the best thing you can have. Don't pay off the mortgage rapidly, never make extra payments, and never use a bi-weekly mortgage payment plan.

You know that paying off the mortgage early will save you huge amounts in interest cost, but there is another side you may have overlooked. Consider the following reasons why you should carry a big, long term mortgage.

Your homes value has nothing to do with the mortgage; you’re going to build equity anyway.
No matter how you finance your home, it is going to go up or down in value without consideration of the loan balance, and luckily the odds are quite good that it will appreciate. Many homeowners try to build equity in their house by paying off the mortgage, but that produces minimal results when compared to the equity you’ll build through appreciation. Spend the extra money you were considering paying on the mortgage to improve and upgrade the home. In doing this, you'll enjoy your home more and create a more valuable asset that way.

A mortgage is cheap money.
There is no source to borrow money at a lower rate than a mortgage. A high quality mortgage to a creditworthy borrower, secured by a residential property is considered one of the safest investments for the lenders, so they offer their lowest rates to entice borrowing.

Mortgage interest is tax deductible.
In addition to the great rates, the government even subsidizes the borrower by making the interest tax-deductible. You can save as much as 33 percent on the interest cost, so for every $1000 of interest paid, you can save as much as $330 in taxes. That means a 6 percent mortgage loan really costs as little as 4 percent, making the cheapest money already available even cheaper.

Mortgage interest is tax-favorable.
Assume you have both a 6 percent mortgage and a 6 percent profit on your long term investments. The mortgage is deductible at your top tax bracket, but the long term investments are taxed at 15 percent. Let’s say you’re in the 33 percent tax bracket, this means that the mortgage will cost you 4 percent, while the investment nets 5.1 percent after taxes. In other words, tax law makes it beneficial for you to maintain your mortgage. Compounding increases the yield of the investment as well, creating a greater arbitrage, therefore further enhancing the tax-favorable situation.

Mortgage payments get easier over time.
A long term fixed rate mortgage guarantees the payment will never rise. On the other hand, inflation is eroding the value of the dollar and inflating income. Therefore, the payment over time becomes cheaper relative to your income, making it a smaller percentage of income and easier to make the payment.

Large mortgages are safer than smaller ones.
Assume you have $200,000 and you want to buy a $500,000 home. How much should you put down? Should you invest the entire $200,000 in the home or make a 20 percent down payment of just 100,000? Put down only the 20% and borrow the additional $100,000. This allows you to retain liquidity and diversity while controlling additional appreciable assets that can compound wealth.

What if you were suddenly without income for some reason? It would not matter what the payment was, with little to no reserve funds, you would be in immediate danger of default. With the additional $100,000 in a liquid investment, you would have the ability to sustain the payment and your other life expenses for an extended period of time until changes could be made.

What if the larger payment is just too much some months? Subsidize the payment by taking money from the liquid account. It probably made enough investment return to not have to draw against the principal anyway.

Mortgages let you create more wealth.
Wealth is created by owning as many appreciating assets as possible. Acquiring the assets can best be done by diverting as much cash flow to purchase and sustain them as possible. The best way to do that is to lower your monthly expenses. That’s why long-term loans that create lower payments are better than shorter-term loans which require larger payments. They allow more cash flow to be diverted to control more assets.

To sum up, the advantages and safety of liquidity, the controlling of additional assets and the current tax laws make borrowing more money a prudent investment decision. Furthermore, if you still have any hesitations, always be sure to discuss your options with an experienced mortgage consultant and your personal tax advisor before making any decisions.