Except, as it turns out, there is one kind of debt that defies all of these rules: mortgages. The money you owe on real property can, in fact, be a boon 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. Let’s talk about seven 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. Because it’s 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. Having a mortgage that you pay each month makes you look like a better, more responsible user of credit.
2.) It’s the lowest interest rate loan you’ll ever get. Mortgage loans are among the safest types of loans that lending institutions can issue. If there’s a problem during the life of the loan, the real property is a guarantee that the loaned money can be recovered. As a result, mortgage rates generally track the “prime” rate – the interest rate the Federal Reserve charges institutions to borrow money from them.
3.) It gets 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 homeownership 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 protection against 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.
If you’re interested in purchasing a new home or refinancing an existing one, Sikorsky Credit Union can help. Give us a call today, 203-377-2252 ext. 6115 and ask about our home loan options!
Every corner of the personal finance world seems to hammer home the same point: Debt is the wealth killer. Debt is the single greatest threat to your retirement planning, college savings, and financial independence.