16 Aug

5 Key Benefits of a Long-Term Mortgage

5 Key Benefits of a Long-Term Mortgage

There are many untold truths about a mortgage, and getting to know them can be highly beneficial for all. Conventionally, people have misconceptions about housing loans, which puts them in doubt when opting for it. However, when the positives are carefully analyzed, all the doubts can be put to rest. Discussed below are some of the main benefits of carrying a long-term mortgage loan.

  1. Building Equity

Apart from the satisfaction of residing in a house that they proudly own, many people buy a house in order build equity. This equity can be liquidated for various reasons like wedding or education expenses whenever required. So, people think that a bigger mortgage can lower the equity they are trying to build. However, a huge mortgage loan can have minimal effect on the overall equity of a house.  For example, consider a scenario where a person buying a house for $400,000 makes a down payment of $50,000. The remaining $350,000 is the loan amount that has to be paid off in 30 years time at 4%. The ‘down payment’ itself is the initial equity, and if the value of the house grows at 3% per a year, it would be worth $722,444 after 20 years. This is a substantial amount even if the person is only able to pay just $200,000 of the initial amount of $350,000.  The difference amount of $572,444 is the overall equity built on the house. This is achieved by deducting the remaining loan amount ($150,000) from the total worth of the home. Now as one can see, the size of the mortgage doesn’t affect it.

This simply means that one can build equity irrespective of the size of the mortgage on the house.

  1. Low-Interest Rate

Mortgages are one of the most inexpensive loans one can get. However, people might argue that credit cards offer 0% interest for a period of 6 months. But the fact is, that interest rate shoots up to more than 18% after the initial six months, and if someone wants to borrow hundred thousand dollars at such a high rate, the repayment would simply become impossible when had to be paid over a period of 30 years.

An individual is eligible for a loan only if he is able to demonstrate to the bank (or mortgage company), that he has the ability to repay the loan in the stipulated time. The higher the confidence a bank has on the person’s ability to repay the loan, the lesser is the interest rate. In that case, a mortgage is a kind of loan where a risk on the part of the bank is minimal. That’s because the bank can claim the house that has been mortgaged if the borrower doesn’t pay back the loan. This is the reason for such a low-interest rate, and it makes perfect sense for people to make use of it.

  1. Tax-Savings

The mortgage interest comes quite handy during tax submissions as the mortgage interest rate is tax-deductible. For instance, the interest paid to buy a house is tax-deductible up to $1 million. If the borrower is in the 33% tax bracket and acquires a mortgage at 5%, then the cost of the loan would actually be 3.35% after taxes. On the other hand, if he goes on to invest an amount at 5%, the profits would be taxed at 20%, which keeps the after-tax profit to just 4%. Thus, investments can earn lesser than what is paid out on the loan, which makes the loan more profitable.

  1. Easier EMIs in long-run

Payment of the mortgage installments in the initial stages, when the loan is new, can be difficult for most borrowers. However, if it is a fixed-rate loan, then over a period of time the amount becomes insignificant in comparison to the monthly income. It is because, the amount being paid every month never rises on such loans, but the income would steadily rise. On the other hand, the value of the house can also grow substantially over the time. Any borrower who has purchased the house in single down payment may be missing out on this huge benefit.

  1. Allows Better Investments

Consider a scenario of an individual buying a second house from the amount he has received from the sale of his first house. For instance, if he has received an amount of $300,000, should he consider spending the whole amount on buying a new house that costs $500,000 or would it be smarter in just making a down payment of $50,000 and using the rest as an investment? Most would argue that spending the whole amount will be helpful. That’s because in that case they will have just $200,000 to repay and can do it easily. However, the second option is the one that should be considered if the individual wants to create wealth in the long-term. By investing the remaining amount at a much higher interest rate, he would not only be able to have sufficient income from the returns but will also be eligible for higher tax deductions. The amount thus saved in tax can be used to pay off the huge loan even it has been borrowed at a slightly higher rate.  Carrying a huge loan and using the investment proceeds to pay the EMIs is always a better option than having a small mortgage with no proceeds to invest.

These are some of the clever reasons on how a huge mortgage can be beneficial to borrowers. As mortgages are defined in terms of PITI (Principal, Interest, Taxes, Insurance), people usually ‘pity’ a person who is carrying a huge loan. However, these benefits could serve them as an eye-opener.

Key Takeaways

  • Though many people have misconceptions about a mortgage, there are several benefits attached to it.
  • Mortgages are available at inexpensive rates and utilizing them can be a smart financial decision.