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 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. Money owed on real property can, in fact, be an advantage to financial independence in a lot of ways. While there was recent financial trouble that occurs when a person’s lifestyle is financed using the value of a home, there’s no reason why mortgages shouldn’t be a reasonable and realistic financial tool to build wealth.
Here are some reasons why mortgages are different from other kinds of debt:
Having a mortgage can improve credit score.
Mortgages are viewed as “good debt” by creditors. Lenders see the ability to maintain mortgage payments as a sign of responsible credit use because it’s secured by the value of a home. Since 2009, credit scoring agencies have added points for consumers who are able to manage different kinds of debt. Having a mortgage that is paid each month makes a person look like a better, more responsible user of credit.
It’s one of the lowest interest rate loans.
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.
It’s the cheapest way to build wealth.
If a person has an investment opportunity that can make more than 4%, it can be financed with a mortgage and make money on a deal. While this kind of transaction is not without risk, it’s arguably less risky than cashing out a 401(k) or an IRA to use toward new investments.
It’s proof against volatility.
If a person has a fixed-rate mortgage, they can make plans around the amount paid each month. If inflation accelerates, a payment stays the same. If interest rates skyrocket, the person is protected from that, too. If interest rates drop, a person can usually refinance to save money. Whichever happens, a mortgage is locked in to protect a person from uncertain economic times.
It’s a safe emergency fund.
While it good to keep some money in a savings account to protect against minor emergencies, the equity of a home can protect a person from financial setbacks. If a person receives more than 4% in returns on an investment, then they can make money by keeping a home equity line of credit as an emergency fund and pursuing returns with a savings account.
If you’re interested in purchasing a new home or refinancing an existing one, DoverPhila Federal Credit Union can help. Our knowledgeable service personnel can answer any questions you might have about how to get the most financial power out of your dream home. Call today or visit our online Mortgage Center.