To mortgage or not to mortgage?
The Census Bureau estimates that in 2019, 62 percent of owner-occupied properties had a mortgage. For the remaining share who have the cash to buy real estate without one — or for those able to pay theirs off — there’s a choice to be made: take on or continue paying a mortgage, or skip it and own your property outright.
Here’s what to consider.
Is it bad to have a mortgage?
Imagine you go to a restaurant. Someone at the table has oysters. You hate oysters. But are oysters bad? Good? Who’s to say? We all have our preferences.
The same is true with mortgages. Some people see debt as something to be avoided at all costs. Others see it as a way to live better or as a tool to (hopefully) increase wealth.
Objectively, what’s bad about debt is the irresponsible use of credit — spending money you don’t have on things you don’t need, spending too much money or having too much debt given your ability to repay.
The fact is, we all need a place to live, but buying a home with cash is simply not possible for many of us. Home prices have risen so much so that it’s taking would-be homeowners years to accumulate enough savings to buy. When you consider this reality and the basic need for shelter, a mortgage can be “good” debt to take on — if you’re able to reasonably afford the payments, and have enough money for a minimum down payment and closing costs.
Mortgage vs. no mortgage
Aside from being an option for those unable to buy a home outright, one major benefit to financing has been the ability to write off mortgage interest.
When you deduct your mortgage interest, your payments don’t decrease month to month, but your income taxes for the year do, lowering your costs overall. (In many cases, your state income taxes would be lower, as well.)
This deduction historically made having a mortgage more attractive for many homeowners. However, with the Tax Cuts and Jobs Act of 2017, the standard deduction increased to the point where it no longer made sense for many taxpayers to itemize their deductions, effectively eliminating the mortgage interest write-off. According to the Urban Institute/Brookings Institution Tax Policy Center, only 4 percent of taxpayers were likely to write off mortgage interest under the new law, down from 21 percent previously.
In addition, you don’t have to pay interest like you would with a mortgage. To compare, if you buy a $275,000 home with a 3 percent, 30-year loan, and make a 3.5 percent down payment, the interest over the life of the loan will add up to $137,589 — money you’re spending in addition to the purchase price of the home. With a cash purchase, you’d spare yourself that cost.
Cash has drawbacks, however. One problem is that your liquidity is limited — when real estate is owned free and clear of all mortgage debt, it can be difficult to extract cash. You can get financing, of course, but that raises all the issues associated with obtaining a mortgage: approval, cost, possibly mortgage insurance, etc.
Owning a home without a mortgage may not be as “free” as it seems, either. The cash you used to purchase the home is now money that can’t be used for possibly better alternatives, such as investing, starting a business or paying for education.
Should I pay off or prepay my mortgage?
If you already have a mortgage, you may find yourself with the means to make extra payments or pay it off entirely. Paying your loan off sooner can be especially appealing if you’re close to retirement and want to lower your monthly expenses.
Most loans today allow prepayments, in whole or in part, without penalty. In other words, if you want to throw an extra $50 or $100 a month toward your mortgage, you can likely do it.
Realistically, though, not many borrowers keep a mortgage for 30 years or anywhere close to that. So, if you make extra payments, the result will be that when sell your home or refinance, you’ll owe less to your lender.
Just like with a cash purchase, if you’re considering paying off your mortgage completely, keep in mind that there may be other, better uses for those funds. Remember that a mortgage can be considered “good” debt if it’s used responsibly, and your life plans may change, so it’s best to consider your goals and priorities carefully before making this decision.