Throughout history, mortgages have gotten a bad rap. It could be because the name "mortgage" is literally translated from Latin to "dead pledge". Perhaps it is because currently the media is filled with unfavorable stories about mortgage default and glitches within the industry at large. Regardless of the reasons, there are perks associated with mortgages, aside from using the home loan to finance one's pursuit of the American Dream.
Tax Breaks
Ben Franklin wrote, "In this world nothing can be said to be certain, except death and taxes", and while dodging the Grim Reaper is impossible, there are ways to make taxes more manageable. The tax break on income taxes provided by mortgage interest is certainly one of them.
Taxpayers who have opted to buy a home financed with a home mortgage can legally reduce their taxable income courtesy of the interest paid on that loan. Presently, the deduction applies to principal residences financed with a home mortgage and in some instances that break can also apply on second homes. The legal deduction limit applies to interest paid on mortgages (including fixed rate mortgages, adjustable rate mortgages and jumbo loans) up to $1 million on either a primary residence or second home.
Build Wealth
Mortgage Marvel, the industry's premiere mortgage rate origination tool, defines equity as "An owner's financial position in a property. Equity is the difference between the property's value and the amount that is owed on mortgages." It is this balance that allows home buyers to build wealth, especially when compared to the net worth of a renter.
According to Federal Reserve Board statistics, once equity is built, a home owner’s net worth is 46 times that of a renter’s. The process takes years of paying off mortgage debt in a timely fashion courtesy of amortization ("A loan repayment plan which enables the borrower to reduce his debt gradually through monthly payments of principal and interest," Mortgage Marvel). Individuals interested in buying a home now should consider equity, not potential home value, the most important wealth-building device of the property.
Build Credit
The process of securing a home loan and paying the debt off in a timely manner can help individuals build a healthy credit score. Additionally, the process can provide consumers with access to credit, courtesy of a home equity line of credit or HELOC. A HELOC is a type of loan secured by property and will provide those in need with a loan amount not exceeding the amount of equity built.
Once borrowed, the money can be used for any type of expense from kitchen renovations, to financing trips to the Caribbean or even paying for a child's college education. However, according to Bankrate.com, the money can also be used to turn a profit (Forbes.com). For those with decent credit and a significant amount of equity, it is possible to get a HELOC featuring interest rates of approximately 5 percent. The interest rate on those loans is also tax deductible up to $100,000. According to Forbes.com that will bring after-tax cost of capital down to about 3.5 percent, well below the average interest rate charged by lenders.
Ultimately, the best thing about mortgages is that the loan can allow qualified individuals to own, not rent the roof overhead. The fact is, buying a home represents the largest expense a person will make during their lifetime and most consumers do not have the spare cash floating around to buy properties outright. If you are a consumer ready to take the official leap to home ownership, Mortgage Marvel will provide you with accurate and competitive rates from a range of lenders, in an easy to read comparison table.
