On a recent trip to Boston, I had a chance to go see Paul Revere’s house, the oldest standing house in Boston. During the tour, I was told that Mr. Revere put a down payment on the home in 1770, and then took out a mortgage of five years for the balance of 160 pounds. Boring to some (OK, probably most), but I found this fact fascinating. Not only were mortgages in existence 240+ years ago, but even someone who was apparently quite well-off had one!
Should You Maintain Your Mortgage?
For many people of means, a common question is whether to maintain a mortgage or pay it off. Many people take out mortgages because they do not have the money to pay outright, but just as many take out mortgages for the potential benefits that they offer. This seems counterintuitive at first blush, but sometimes having a little bit of “good” debt can be a positive thing, even if you have the cash to pay it off.
Reasons You May Want to Carry a Mortgage
- It’s cheap money. Right now, the odds are in your favor of earning more money on your investments than you would pay in mortgage interest. For example, if you borrow $100,000 at a 3% interest rate, and invest it at an 8% interest rate, over the next 10 years you’ll likely be $50,000 richer!
- You may get a tax deduction. If you have taxable income, you may be eligible to deduct the mortgage interest against your income. So your mortgage interest rate, on an after-tax basis, might be lower than the rate you locked in.
- It can help your credit score. Lenders look for a record of on-time payments, so if you can automate your mortgage payment so that you never miss one, it can help raise your credit score over time. (Note that missing payments or being delayed can have the opposite effect.)
- It offers flexibility. Homes can be very illiquid investments, so having money that would have been tied up in a home in a more liquid form can prove very useful in a myriad of circumstances.
- It’s an inflation hedge. If history is any guide, inflation will reappear at some point in the future, which is when having a mortgage at a fixed rate is great. As costs around you go up, it makes each of your mortgage payments cheaper and cheaper relative to the prices of other rising goods.
There are many types of mortgages, with varying term lengths and principal/interest components (for example, ARM, fixed-rate, interest-only and balloon mortgages). Not all of these are the same, and no solution is right for everyone. Taking out a mortgage to buy an expensive sports car is missing the point. You do not want debt to pay for luxuries. Rather, taking money that would have gone towards paying off a loan and investing it for a better return, can enhance long-term savings.
Carrying a Mortgage Isn’t Right for Everyone
Of course, carrying a mortgage is not right for everyone. There is a psychological component to being debt-free that may be more important than any potential savings. In that case, paying down the mortgage can feel much better than not. Your situation and investment goals all need to be considered when making the mortgage decision, so please speak with your Abacus advisor to evaluate which decision is right for you.
