What are the benefits of carrying a mortgage?

[draggar]

So we're looking to buy a new home and we may be able to buy a house outright (no mortgage) but my wife is insisting that we need to carry a mortgage for"benefits" I'm wondering - what are these benefits?

Credit rating - Sure, paying off a mortgage on time etc.. helps your credit but do does a car loan, paying off a credit card in a few months, etc..

Tax break - honestly, I don't see how spending $12,000 in mortgage payments for a couple hundred dollar tax break is a benefit.

Equity - Um, what? If it's paid off you have 100% equity!

[42_42_42]

Note: I am not an accountant, the following is based solely on me listening to Clark Howard on the radio:

There are no benefits to borrowing money when one can afford to pay for said item without borrowing money.

Yes, interest on a mortgage can be tax-deductable, but the amount you're saving isn't = to the amount you pay in the long run.

[Luna Baby]

If you can pay cash for a house and not mortgage it, do it! 42_42_42 hit the nail on the head when she said, "Yes, interest on a mortgage can be tax-deductable, but the amount you're saving isn't = to the amount you pay in the long run." You don't need the deduction if you are saving that amount.

Check out Dave Ramsey's site and see what he has to say about it, too.

[csquared]

Long term debt is better than short term debt. The reason being that you will be paying your mortgage off with cheaper dollars due to inflation.

Lets say you take out a 30 year mortgage with a $1,000.00/month payment. How many hours do you have to work to make that payment?

Now think about 5 years from now, 10 years from now, 20 years from now... How many hours will you have to work to make that same payments? Hopefully, you will be making more money. You will be making the payments with cheaper dollars.

Second thing to look at, how much interest can you earn with that money vs the interest that you will pay on the mortgage? I am currently making 10% interest on an investment (real interest, not "paper earnings") and paying 3.65% on my mortgage. If I had the money to pay off my mortgage, I would put it in the investment and use the interest to pay the mortgage.

Third, stay liquid. After you pay for the house, how much cash will you have left? You can get the mortgage now (with a great interest rate). What about the future? You lose your job. You need cash. Can you get a loan? Even with the equity in the house or will you have to sell the house? What will be the interest rate?

As you have the money, I do recommend a nice down payment. At least 20%. I probably would not go over 40%.

Whether you get a mortgage or not, buy smart. Don't buy more than you can afford. Make sure it is structurally sound (that was my mistake, I could shoot my home inspector).

Good luck, and welcome to the joys of home ownership.

[Andara Bledin]

If you have enough money to buy a house outright, then you should seriously consider going to a professional adviser who will be up on all of the pros and cons regarding buying versus a mortgage.

However, as csquared mentioned, the major factors will be liquidity and return for the dollar.

^-.-^

[csquared]

If you have enough money to buy a house outright, then you should seriously consider going to a professional adviser

Quoted for truth.

Above and beyond the mortgage decision, you should look into how to make your money work for you. If you have enough money to pay for a house outright, that is a substantial chunk of change.

[pitmonkey]

The only thing that might be to your advantage is if you need to make improvements. A mortgage will have lower interest rates that a improvement lone. Also taxes play into that.

[taxguykarl]

Yes, interest on a mortgage can be tax-deductable, but the amount you're saving isn't = to the amount you pay in the long run.

42_42_42 is right. If you are in the 25% bracket, you are spending $8000 to avoid sending $2000 to the IRS.

The tax break is damage control at best.

[sms001]

And I heard a 'quickie fact' type thing on the radio today, that if you plan to EVER move, you should carry a mortgage. Didn't hear the context or reasoning, but apparently there are reasons besides the future value of money ones already mentioned. Guess a third 'see a professional' is in order?

[draggar]

Long term debt is better than short term debt. The reason being that you will be paying your mortgage off with cheaper dollars due to inflation.

Lets say you take out a 30 year mortgage with a $1,000.00/month payment. How many hours do you have to work to make that payment?

Now think about 5 years from now, 10 years from now, 20 years from now... How many hours will you have to work to make that same payments? Hopefully, you will be making more money. You will be making the payments with cheaper dollars.

This makes a lot of sense - long term stability >> short term debt payoffs.

Second thing to look at, how much interest can you earn with that money vs the interest that you will pay on the mortgage? I am currently making 10% interest on an investment (real interest, not "paper earnings") and paying 3.65% on my mortgage. If I had the money to pay off my mortgage, I would put it in the investment and use the interest to pay the mortgage.

This is something else we're looking into - investing some of the money but it's hard to find out where to invest it and what will give good and consistent results. 10% is a pretty good return, IMO.

Third, stay liquid. After you pay for the house, how much cash will you have left? You can get the mortgage now (with a great interest rate). What about the future? You lose your job. You need cash. Can you get a loan? Even with the equity in the house or will you have to sell the house? What will be the interest rate?

We're looking into this, too. Saving extra $$$ for the future.

As you have the money, I do recommend a nice down payment. At least 20%. I probably would not go over 40%.

Why 40% would anything more just be futile (payments wouldn't be much less, etc.).

Whether you get a mortgage or not, buy smart. Don't buy more than you can afford. Make sure it is structurally sound (that was my mistake, I could shoot my home inspector).

Good luck, and welcome to the joys of home ownership.

My wife has a client who is a home inspector and has offered to help us for free or very low cost (take him and his wife out to dinner, a free dog training lesson or two, etc.).

As for home ownership - we currently own now. We're looking to get the heck out of here.

If you have enough money to buy a house outright, then you should seriously consider going to a professional adviser who will be up on all of the pros and cons regarding buying versus a mortgage.

We have an accountant who has been playing the real estate game for decades successfully (yes, even in this crappy market) and is willing to help us, has even mentioned a "rent-to-own type of thing.

The only thing that might be to your advantage is if you need to make improvements. A mortgage will have lower interest rates that a improvement lone. Also taxes play into that.

We're expecting to spend a bit on improvements but still. One of my store managers knows someone who bought a very nice house (5 bedrooms, 3500 square feet, pool, on a canal, 1/3 acre lot, in a VERY nice neighborhood)) for $75K and put $25K into it (yes, he's a GC so we can double that to $50K for us normal people) - that's $125K for a very nice house.

[Seshat]

Consider mortgaging a small percentage of the house, keeping the cash available (liquid or semi-liquid) for two to five years while you see if you need to - say - get the place totally rewired. Or restumped. Or anything else expensive.

If it turns out that you don't, you can then pay out the mortgage.

HOWEVER: see my sig. I don't even play a financial advisor on TV! Get professional advice.

[Merriweather]

Long term debt is better than short term debt. The reason being that you will be paying your mortgage off with cheaper dollars due to inflation.

Lets say you take out a 30 year mortgage with a $1,000.00/month payment. How many hours do you have to work to make that payment?

Now think about 5 years from now, 10 years from now, 20 years from now... How many hours will you have to work to make that same payments? Hopefully, you will be making more money. You will be making the payments with cheaper dollars.

Second thing to look at, how much interest can you earn with that money vs the interest that you will pay on the mortgage? I am currently making 10% interest on an investment (real interest, not "paper earnings") and paying 3.65% on my mortgage. If I had the money to pay off my mortgage, I would put it in the investment and use the interest to pay the mortgage.

Third, stay liquid. After you pay for the house, how much cash will you have left? You can get the mortgage now (with a great interest rate). What about the future? You lose your job. You need cash. Can you get a loan? Even with the equity in the house or will you have to sell the house? What will be the interest rate?

As you have the money, I do recommend a nice down payment. At least 20%. I probably would not go over 40%.

Whether you get a mortgage or not, buy smart. Don't buy more than you can afford. Make sure it is structurally sound (that was my mistake, I could shoot my home inspector).

Good luck, and welcome to the joys of home ownership.

These are all very valid arguements. Gut feeling is always paying cash instead of financing has to be better, but on a house, it may not be.

If you normally have (or think you will have) other debt, it may very well be best to owe on a mortgage rather than owe on credit cards, car payments, or other debts - usually a mortgage is lower interest than other types of debt, and it's tax deductible.

Also, you could consider a shorter term mortgage, or putting down a large down payment and only partly financing. And there's always the option of making larger than minimum mortgage payments to gain extra equity.

Personally, I'd take all the ideas & suggestions everyone has written here, and go get the opinion of a professional financal advisor.

[Aethian]

I wouldn't get a mortgage, if I can pay for the house outright then I believe that to be better. I won't have to worry about PMI, the mortgage being sold without knowing, won't have to be worrying if the mortgage is paying the correct insurance or not. Just too many things out there that can throw a "big bank" or even a "small bank" into a bad light.

Also if the house is paid for that means I can make "house payments" to myself. Throw those puppies into a well managed portfolio and I'll be building money for retirement. Household repairs should already be on a budgeted line item so when something needs to be repaired the money is already there and having been built upon.

Also...a mortgage can be foreclosed on. What happens if you or your wife get hurt and can't work OR if your companies go bust?

[Lachrymose]

Okay, some fairly good sounding advice in here..but..I'll use me as an example.

I just bought a house in November. Total mortgage amount is $148,000.
I got a 4% interest rate. Really good at the time, even though I think they keep dropping. Not sure.

Looking on Bankrate.com's mortgage calculator (http://www.bankrate.com/calculators/...alculator.aspx )

If I keep the loan for the full 30 year term without paying it off early, I will pay $106,366.87...IN INTEREST ALONE!
That puts that "great interest rate" in perspective.

Personally, if I could buy a house paid in full up front, I would do it. In a heartbeat.

ETA: I didn't take into account the so-called "tax benefit"..but it really doesn't matter. It's no where near that amount.