Is a Mortgage Always Better?

Note from Prince of Thrift: The opinions of Guest Posters are their own
and the owner of this blog may or may not agree with them.

By Tom Kerr - MortgageLoan.com

Many consumers find debt distasteful. If given the choice, they’d use a windfall from a generous inheritance or hitting the lottery to pay off their mortgages completely. But carrying a reasonable amount of debt can be a wise financial strategy. If you’re fortunate enough to be in this circumstance, it’s important to consider all your options.


In the world of financial management, mortgage debt is considered “good debt” because it's secured by property. Even so, it’s still somewhat unpleasant because having a mortgage means paying interest. Over the life of a loan, you can wind up paying tens of thousands of dollars in interest, not counting the costs involved if you refinance along the way. But as the saying goes, there are two sides to every coin. Many financial experts are quick to add that there are two sides to debt, as well.


To pay or not to pay?


There are some distinct advantages to having a mortgage:


Putting all your investment money into your home to pay off your mortgage can expose you to the risk of having all your eggs in one basket. A fire, flood, or other natural disaster could wipe out your equity, and insurance might not cover the loss.


Similarly, you could lose your home’s equity through a lawsuit against your property if someone were injured there. An unexpected divorce, contractor’s lien, environmental hazard, or land dispute could also put it at risk through litigation.


By paying off your mortgage, you lose one of the only substantial tax deductions allowed by the IRS. Deductions also apply to most refinances and home equity loans.


Lack of liquidity


One of the biggest reasons not to pay off all your mortgage debt is that cash tied up in property lacks liquidity. In other words, it’s hard to get to in a hurry, as many homeowners learned during the current housing slowdown. Unless you don’t need that money, it’s a good idea to keep a portion of it invested in something other than real estate, like stocks, bonds, certificates of deposit, or other assets that can be easily turned into liquid cash. That way, you can take advantage of profitable investment opportunities to make your money work harder than it does in real estate. If an emergency requires that you get to your money fast, you’ll have easy access.


There are also distinct advantages to paying off your debts. That’s why many economists advocate against being leveraged to the hilt. Instead, they suggest balancing your asset portfolio by maintaining a small, strategic level of mortgage debt based on the points mentioned above. Then pay off the rest of your red ink, put most of your cash into dependable investments that will ensure that your net worth steadily grows, and pat yourself on the back for being essentially debt-free.