Leveraging Your Mortgage: Why it Pays
Maintaining mortgage debt is sometimes a faster path to wealth than paying off your house entirely and being totally debt free. With a mortgage, you can leverage a huge amount of money with a relatively small monthly payment, and enjoy substantial perks along the way.
Borrowing money with a mortgage offers a rare chance to cheaply leverage your money for potentially dramatic gains. As a result, it's often smarter to keep mortgage debt than it is to pay it off. Conventional mortgages charge significantly lower interest than other types of consumer loans, at terms that are relatively easy to meet and involve an exceptionally long payback period.
- Buy a house for $250,000 today, for example, with a down payment of $50,000 or less, and you can pay it back at a competitive fixed rate during the next 30 years.
- If the increase in value of your property is nominal and barely keeps up with inflation, rising a mere 3,5 percent per year, you'll still make back your down payment in less than six years.
- If it rises 5 percent per year, which is considered rather mediocre for other types of investments, such as stocks, you'll make your 50 grand back in less than 4 years.
Additional bottom line savings
These calculations don't factor in the additional savings that you'll gain through tax exemptions. That's because most mortgage interest is tax deductible. During the first years of your mortgage, you pay mostly interest, so the tax perks are considerable at the time you probably need them most-namely, during the introductory phase of your mortgage when you hope to reimburse yourself for the money you used as a down payment.
If you buy during a downturn in the real estate market, like the one that's spreading throughout the U.S. right now, you can amplify your potential for profits considerably. You have a chance to acquire a house at a deep discount, and then rack up the equity when the bull market cycle resumes.
The median price of a typical single family home now hovers near $220,000; but two years ago, it was closer to $255,000. If such properties climb back to those previous levels, the market will wind up tacking on more than 15 percent in value. That means that a house bought today for $250,000 may likely be worth around $288,000 when the market returns to the year-ago levels. Add on tax perks, and you'll likely compensate for your entire down payment.
Paying down your mortgage principal will not change the amount of your monthly payment, so it may have no positive impact on your current household budget. Rather than trying to pay off your mortgage loan, you could invest extra money in a retirement fund, such as your employer's 401(k), for tax deductions and tax-deferred savings and growth. Even normal gains could easily generate returns that are greater than the interest rate of your mortgage, making it a smarter financial strategy than paying off your house.