I think you should take out a mortgage to buy a house. It’s much better to be paying off a loan for a house you will eventually own than it is to be paying rent. However, mortgages are not a "good deal." Paying off your house is the smarter financial move! Even if you can deduct the interest from your taxes, you still have to pay the interest first, and deducting it doesn’t mean you get it all back, it just means you don’t pay taxes on that amount of income. (And for people who says they like to borrow money that way and then invest it in something that returns more … well, that’s a risky strategy. I prefer to invest money I have instead of money I don’t have and would have to pay back if I lost it.) This guy agrees with me: How Much of Your Car Should You Finance? Zero percent. – iTulip.com Forums.
"But there are tax advantages to holding a mortgage," you say. The government raises a tax on your current income via an income tax, then offers to partially reduce it if you accept a tax on your future income via interest on a government sponsored loan to buy a house that bearly keeps up with the rate of inflationâ€“except during a housing bubble, such as we just experienced. This is what passes for good household finance? How long have North Americans been falling for this nonsense?
When you get to deduct the interest on your mortgage, you are not getting the interest money back! (Say the top part of your income falls into a 30% tax bracket. If you deduct $10,000 in interest, you would pay $3300 less in taxes. But you still paid $10,000 in interest, so you still have $6700 less than you would have had without the mortgage!)
4 Replies to “Mortgages are not good financial investments”
A mortgage in and of itself may not be a great investment, but a home is, and for most people the mortgage is the only vehicle for purchasing a home.
Agreed, which is why I started by saying that I think taking out a mortgage to buy a house is a good idea. But lots of people argue that you shouldn’t try to pay off your house early because the mortgage itself is a good financial vehicle and I don’t agree with that.
To be fair and follow the example all the way through, you would have to consider what else you could do with the money that you decide not to put down on your house.
$10,000/year in interest payments could reasonably be 5.5(ish)% on a $180,000 loan. You could very easily make that $6,700 (or a quite a bit more) in a no-risk, FDIC insured investment. You could make eaisly twice as much on still very low risk investments. On top of that, by retaining that money you retain options and reduce your personal risk. If you lose your job you can use that money to live and (in the case where you have money to pay off a large part, but not all of the loan balance) to pay the house note. If you lose your job, you’d find it difficult to get that money back (i.e. borrow it against your equity) with as favorable of terms. Also, if you drop it on your mortgage to reduce the balance of an existing loan, you’re still obligated to make the same payments until the loan is gone. Just a thought…
That’s a good point. Saving the money so that you can make the mortgage payments if your income goes down can be a good strategy. It’s one I used recently – as soon as I knew I was going to be on unpaid maternity leave I quit paying ahead on my rental. (Paying off the mortgage on a rental is probably not a good financial investment but I’m anti-debt.)
Now I’m saving until I can just pay it off in one lump sum. Although by then it might just be paid off as the mortgage might have run it’s course!
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