The 4 reasons to have a mortgage are:
- You don’t have enough cash to pay for the house
- The tax deduction
- The potential spread between what your money can earn and the cost to borrow money.
- The most important reason is to have liquidity, use, and control of your money.
If you don’t have enough money to pay cash for a house it’s obvious you need to have a mortgage. Let’s talk about inflation for a minute. The most valuable dollars you have are the ones you have in your pocket today. A $2000 monthly mortgage payment with 3% inflation, in today’s dollars will feel like $823.97 30 years from now. Your money will never be worth more than it is today. Wouldn’t you rather hold on to your most valuable dollars?
What if we did have the money and wanted to pay cash for a house that costs $300,000? Rather than paying cash for the house if you kept your money and could earn 6% on your $300,000 for 30 years that would equal $1,806,773. If you pay cash for your house this is your opportunity cost because now the money is in your house and is earning 0%. I’ll come back to that in a minute. If you took out a 30 year mortgage at 4.5% your monthly payment would be $1,520. The total cost to own this home (principal, interest, and opportunity cost is $1,526,919). It makes sense to have a mortgage because your money can earn more than the mortgage is costing you. Now let’s factor in the tax deduction. If you are in the 30% tax bracket the net cost to borrow is 3.15% and the total cost to have the mortgage is $1,295,031. Not everyone can claim the mortgage deduction be sure to check with your tax adviser. A benefit to having a 30 year mortgage versus a 15 year mortgage is that you get more of a deduction in the first 15 years of a 30 year mortgage than you do with a 15 year mortgage. As you can see the potential spread and tax deduction make it a wise decision to have a mortgage.
Finally, let’s talk about control. Back to what I said earlier the money (equity) in your house earns 0%. Equity is determined by appreciation not by how much money you have in the house. Why would you want to tie up your money in something that earns 0%? They only way to get this money is to borrow or sell your house. What if you should lose your job, become disabled, or we have a natural disaster that destroys your home? If the money is in your house you will be unable to get at the equity. If you have your money in an account that you can readily access you can weather the storm until your circumstances change. At some point, your side fund is going to be enough to pay off your house if you choose to. Knowing what you know now, would you want to give up your most valuable dollars? I wouldn’t.
I am not licensed to give tax advice, please consultant with a tax accountant regarding your individual situation and how a mortgage would affect your circumstances.