Every corner of the personal finance world stresses the same point: Debt is the wealth killer.
Debt is the single greatest threat to your retirement planning, college savings, and financial independence.
Except, as it turns out, there is one kind of debt that defies all of these rules: MORTGAGES.
The money you owe on a home can, in fact, be a bonus to your financial independence in a lot of ways. While we’ve seen the recent financial trouble that occurs when people finance their lifestyles using the value of their home, there’s no reason why you shouldn’t see mortgages as a reasonable and realistic financial tool to build your wealth.
Here are a few reasons why mortgages are different from other kinds of debt:
1. Having a mortgage can improve your credit score.
Mortgages are seen as “good debt” by creditors. Since the mortgage debt is secured by the value of your house, lenders see your ability to maintain mortgage payments as a sign of responsible credit use. They also see home ownership, even partial ownership, as a sign of financial stability.
Since 2009, credit scoring agencies have added points for consumers who are able to manage different kinds of debt. Even if you’ve bought your first home with a first time home buyer mortgage, having a mortgage that you pay each month makes you look like a responsible user of credit.
2. It’s one of the lowest interest rate loans you’ll ever get.
Mortgage loans are among the safest types of loans that lending institutions can issue because the property is a guarantee that the loaned money can be recovered if there is ever a problem. As a result, mortgage rates are offered at rates lower than many other types of debt. Mortgage rates generally track the “prime” rate – the interest rate the Federal Reserve charges institutions to borrow money from them.
3. Mortgages get preferential tax treatment.
The interest you pay on your mortgage is generally tax-deductible, which puts it in a class of debt by itself. The government wants to encourage home ownership, and is therefore willing to offer you a tax break for the financing costs of your mortgage. This tax treatment makes mortgages potentially even less expensive.
4. It’s protected from interest rate volatility.
If you’ve got a fixed-rate mortgage, you can make plans around the amount you pay each month. If inflation accelerates, your payment stays the same. If interest rates skyrocket, you’re protected from that, too. If interest rates drop, you can usually refinance to save money. Whatever happens, your mortgage is locked in to protect you from uncertain economic times.
5. It’s a safe emergency fund.
While you want to keep some money in a savings account to protect you from minor emergencies, you can use the equity in your home to protect you from major events. If the unexpected happens a home equity loan or home equity line of credit can get help you pay for what’s needed without causing a financial crisis.
So get comfortable knowing some types of debt are actually good. When you’re ready to look at purchasing a new home or refinancing an existing one, Genisys Credit Union can answer any questions you might have about how to get the most financial power out of your dream home. Contact us to learn more about our home loans!
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