There is often a feeling of freedom for homeowners, even when they feel saddled by their mortgages, because of the many overall benefits of a mortgage. Although some of these benefits are inherently personal, many other benefits offer financial advantages that are sorely lacking from rental properties. Whether you look at your mortgage as a symbol of homeownership or an investment for your future – or both – the pros and cons of a mortgage may tip toward the pro column when you weigh both sides.
Pride of Homeownership
Financial benefits aside, the most important benefit of a mortgage to many homeowners is what it represents – a place they can truly call their own. Even though your home probably collateralizes the mortgage that financed it, it’s still your home as long as you make timely payments. One of the tenets of the “American dream,” homeownership brings personal as well as social fulfillment to more than 63 percent of
Ability to Customize Your Home
Unlike renting a home, which doesn’t give you too much latitude for customizing your living environment, owning a home gives you the freedom to make changes that suit your preferences and needs. If you live in a neighborhood with restrictive covenants, you may not have a no-holds-barred pass to change the appearance of your home and yard, but you’ll still have more control than you'd have if you were renting. And when you make improvements that increase your home’s value, you’ll also be increasing your investment.
Increasing Investment Value Through Improvements
Your mortgage amount is based, in part, on the appraised value of your home. When you make certain home improvements, your mortgage amount stays the same while your home’s value increases. Consumer Reports notes that an upgraded kitchen may bump up your home’s sale price to 7 percent, but even a fresh coat of paint could increase your home’s value up to 2 percent. As a comparison, you may be able to paint your home if you're renting, but even if your landlord pays for the cost of paint and supplies, you won't see a return on your investment.
Mortgage Rates and Costs
Having a fixed-rate mortgage ensures that your housing costs will remain the same for the term of your mortgage, which typically is 30 years. Even if you have an adjustable rate mortgage, you’ll know the maximum amount you may have to pay during the life of the loan. If you’re renting, your lease payments will likely continue to increase when each lease term ends, and you have no guarantee of the amount of each increase.
Mortgaging Vs. Saving for Home
If homeowners had to pay cash for their homes, many may save for a lifetime and never reach the goal of homeownership. A mortgage allows you to purchase a home by making monthly payments without having the entire purchase price in your bank account, which often totals hundreds of thousands of dollars. And since mortgage payments stay the same (on a fixed-rate mortgage), while your income may continue to increase, you may see more disposable income the longer you pay on your mortgage.
Investing Your Money
Even if you’re not a big-time trader in the stock market, you can still be an investor if you own your home. As you pay down your mortgage, you build up equity in your home. In a nutshell, home equity is your financial interest in your home, which represents the home’s market value less your outstanding mortgage balance and other liens on the property.
Your equity likely will increase in another way – simply as the market value of your home increases over time. Many investment professionals refer to a mortgage as a “forced savings” account.
Mortgage Interest Tax Deduction
If you itemize your tax deductions, you can include the mortgage interest you pay in a tax year as a deduction. IRS Publication 936 (Home Mortgage Interest Deduction) outlines all the requirements for taking this deduction. Generally, you can claim up to $750,000 in mortgage interest ($375,000 if you file your tax return as married filing separately) as of tax year 2019. But if you secured your mortgage before December 16, 2017, you may be able to deduct up to $1 million of mortgage interest.
Eligible mortgages include those that are for your primary home or a second home, and they may be purchase mortgages or second mortgages. Qualifying homes include houses, condominiums, mobile homes, house trailers, boats and similar properties that have sleeping, cooking and toilet facilities.
As a comparison, if you pay for purchases with a credit card, that interest rate is typically much higher than a mortgage. But you cannot claim credit card interest as a tax deduction.
Building Your Credit
Making timely mortgage payments is a positive contributor to your credit score. With a typical mortgage term lasting from 15 to 30 years, you’ll have a longstanding account because of your mortgage. Having a mortgage also diversifies your credit accounts, and credit diversity – the types of credit accounts you have, including credit cards, personal loans and a mortgage – also helps boost your credit score.
When you apply for a new mortgage, your credit score may dip at first. Lenders check your credit as one component of mortgage qualifying, and this credit check initiates a “hard credit inquiry” on your account. Each occurrence of a hard credit inquiry lowers your credit score by a few points, but you’ll recoup these points when you make timely payments on your new mortgage.
Importance of Financial Liquidity
Particularly as you grow older, financial liquidity may be one of your goals. When “life happens” and a medical condition presents itself, or when your children or grandchildren need financial help, having access to cash can help relieve the financial stress. Instead of financial needs, you may simply have financial “wants,” such as a new business start-up or a desire to travel the world. Regardless of the reason, financial liquidity can help you achieve your goals.
Even if your mortgage is not paid in full, you may have significant equity built up after years of making mortgage payments. Your forced savings plan may pay off at some point by giving you a little more financial freedom than you had when you were younger.
On the flip side, you may want to manage your liquidity risk when you’re younger by resisting the urge to pay down your mortgage too fast. Making additional principal payments at the expense of not using that extra money to build an emergency fund may not be the wisest financial decision. Financial experts typically recommend having cash reserves of at least three to six months’ worth of living expenses in case of an emergency or an unforeseen financial burden, such as a sizable home repair. Other experts, including Suze Orman, recommend having an emergency fund of eight to 12 months’ worth of living expenses.
- National Association of Realtors: Social Benefits of Homeownership and Stable Housing
- Consumer Reports: 8 Ways to Boost Your Home Value
- Investopedia: Home Equity
- Moving.com: 5 Big Financial Benefits of Home Ownership
- IRS: Publication 936
- NerdWallet: How Does a Mortgage Affect Your Credit Score?
- Homes.com: Mortgage 101 - The Financial Benefits of a Mortgage
- CNBC: Here's How Much Money You Should Have in Your Emergency Fund, According to Financial Expert Suze Orman
Victoria Lee Blackstone was formerly with Freddie Mac’s mortgage acquisition department, where she funded multi-million-dollar loan pools for primary lending institutions, worked on a mortgage fraud task force and wrote the convertible ARM section of the company’s policies and procedures manual. Currently, Blackstone is a professional writer with expertise in the fields of mortgage, finance, budgeting and tax. She is the author of more than 2,000 published works for newspapers, magazines, online publications and individual clients.