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Benefits to Mortgage Debt

June 5th, 2019 | Debt, Credit, Mortgage

In order to buy a house, most Americans take on a mortgage loan. While debt is usually to be avoided if possible, when it comes to a mortgage there may actually be some financial benefits for borrowers.

Liquidity

If you dump all your extra funds into paying off your mortgage, you may be in a tight spot if you face a financial emergency. Family deaths, divorce and health traumas are just a few things that can quickly rack up enormous debts. If you do not have a sizable emergency save up and you have been sinking all disposable cash into your home, you may end up selling your home to pay for those bills. It is much harder to tap your home’s equity than it is to pull money out of your bank account. Before going full steam on paying off your home, make sure you set aside three to six months’ worth of expenses in your savings. 

Beyond preparing for financial crises, you may also be able to get better returns on your extra money by investing it. This can be especially true if your mortgage loan has a very low interest rate.

Credit Score

If you consistently make your mortgage payments on time, your credit score will improve. While it may not seem like credit score matters much after obtaining a mortgage, it does still affect things like auto loans, business loans, and in some cases employment opportunities. If you have extra cash but also have other debts, your credit score (and wallet) would benefit most by paying down those high-interest credit card bills, student loans or car loans first.

Payments Get Easier

Over time your income will probably increase and as will inflation in the greater economy, but if you have a fixed-rate loan your payment will never increase. Over time, it will fell easier to make that payment as it shrinks as a percentage of your income.

Tax Breaks

While tax laws have changed in recent years, there are still potential tax breaks for some mortgage borrowers. If you make enough to itemize your taxes, you can deduct any mortgage interest you paid on up to $750,000 in mortgage debt.

Of course, there are downsides to holding on to your mortgage until the very end. You will end up paying the maximum amount of interest and your home will cost you more than if you paid off the loan early. Also, if you have an adjustable rate mortgage, until you refinance or pay off the loan you may live in fear of your changing interest rate. And if your mortgage lasts into your retirement years, you may feel a financial pinch once you are living on a fixed income.

The answer to whether mortgage debt is helpful is not universal. It will depend on factors like the type of loan, the mortgage interest rate, and the borrower’s income potential. In some cases, those keeping a mortgage loan can be more beneficial than paying it off quickly.