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There comes a time when we need some additional money in all our lives, but our hands are tied, and we are on a shoestring budget. At times like that, we tend to use our credit cards, borrow money, or having a mortgage. While this could come in handy and save face, it is important to make sure borrowing doesn’t become a habit.
Over the generations, people have been told that it is not wise to take a loan or mortgage. However, financial advisors and wealth management experts believe that having a mortgage could benefit you in more than one way. But that does not mean that you should get a mortgage unnecessarily.
If you are buying a home it could be a big leap in terms of your financial health. It could benefit you in more than one way and elevate your financial standing. Having a mortgage could be a wise decision when you are buying your first home and looking for sources to fund your dream. However, it has more benefits than just that. So, make sure you evaluate your needs before applying for one to reap the benefits of having a mortgage.
Here Are Some Benefits of Having a Mortgage
Buying a home could cost you a fortune, and it could be impossible to fund from just your savings. This is all the more true if you are young and wish to take the big leap of becoming a homeowner. The reasons for it could be numerous, and irrespective of the reason, the decision could be the right step towards your future.
However, if you do not have the money to afford the home you have set your eyes on, you need not deter. When you apply for having a mortgage, you can buy your dream home without drying out your bank account or pooling in all your years of effort and savings. And this means that you could buy a home that you cannot afford at this point but would eventually be able to do through mortgage payment. As you buy a home by having a mortgage, you could still retain the emergency funds and savings you have.
Remember that it is a great decision to buy a home, but it is not wise to go broke while becoming a homeowner. So, make sure you always have enough money to fall back on in case of an emergency. However, make sure you understand the amount you need to repay every month. You could do this by having a mortgage calculator, which would provide you the EMI based on the loan amount, interest, and repayment time. When you do so, you can be confident that you have taken an informed decision and not a hasty one, which could land you in trouble. Lets take mortgage on 120000 as a sample which will give you more Idea on how mortgage calculator works.
A home loan makes the process of homeownership an affordable affair. You can buy a property outside your budget, even if you have just a little money on hand. As the monthly repayment is usually a small fraction of the amount you borrowed, you could still have a majority of your earnings and savings handy. This would save you from bankruptcy and a cycle of debts. Ensuring that the person continues to have savings and can afford a decent living is one of the reasons banks and lenders have an upper cap on the loan amount.
This ensures that the person borrowing the money is capable of repaying the loan without going bankrupt or getting into numerous debts while trying to repay they’re having a mortgage. As you get accustomed to a life of paying mortgages, you take more calculated steps on your earnings and spendings.
This means you would suddenly start noticing all the unnecessary expenses you are making and avoid them, which would add up to your savings. As all your eggs are not in the same basket (some as savings, emergency funds, and the home), you can be sure that your financial future is secure.
When you having a mortgage, you sure run into debt and make a long-term commitment to repay it. It might impact your credit score and could land you in trouble if you do not repay it on time. However, if you are regular and do not miss a repayment cycle, you could reap numerous benefits.
One of those is the tax benefits that you could claim. Yes, the state offers tax benefits to people with a mortgage. However, the deductions are not applicable on the entire loan amount, instead, it takes into account only the interest that you pay.
This is because your EMI includes the interest that you need to repay besides just the principal amount. The interest falls under the category of deductibles when you are filing your taxes. As you save money on taxes, you will find it easy to repay having a mortgage on time.
And did you know that you could reap these tax benefits for the entire duration of having a mortgage and thus, in the long run, save enough to pay for a month’s mortgage? Isn’t that amazing! So, why should you pay for a home upfront and dry out your savings when you could take a loan and reduce the tax burdens? You could also apply for a standard deduction instead of having a mortgage interest deduction.
However, these deductions are applicable only for a home loan, late payment fees, insurance premiums, and discount points. It does not cover home equity loans, and cash-out refinances for home improvements. Similarly, you cannot claim the benefits of tax deductions on a second mortgage to repay a high-interest loan, buy a car, or take a vacation.
When you talk to your financial advisor, you can better understand how you could increase your investments. A professional would help you understand what you can consider a deductible and what does not qualify for deductions while filing your taxes.
Better Credit Score
If you are looking for ways to improve your credit score, having a mortgage could help you. Yes, you read that right. A mortgage is seen as a good loan, and having it on your credit report could benefit you in many ways. As you repay the mortgage regularly, it improves your credit score, which could help you secure a loan at a better rate in the future. Besides that, most of your transactions, even the good ones, disappear from your credit report after seven years.
And after a point, you might have to make a conscious effort to have some good transactions there. However, having a mortgage would stay on your account for around twenty years, you do not have to worry about anything. Your future lenders would be more than willing to lend you money on seeing these long-standing transactions of on-time repayment of the loan.
Ensures The Safety Of The Investment
The property market is a potential source of investment and ensures that your earnings go into the right asset. However, there are a lot of legal issues that come with buying a property. It is always possible that the realtor is taking you for a ride or the property you are trying to buy is not worth the money. This could leave you bankrupt and in the middle of a legal battle.
However, when you avail a mortgage, the lender would pool in all the resources at hand to ensure that this is a credible investment. The lender would find out if the construction is legal, the credibility of the seller, and the authenticity of the paperwork. All this will assure you of the guarantee of the property in which you are investing. While the process is tedious, it will help you understand that your investment is safe and your asset would be secure.
Home loans are generally for a longer duration than a regular loan. As the sum you borrow is huge, it is only natural for you to need more time to repay it. That is why most people go for a minimum of five years to a maximum of 30 years based on their income, ability to repay, and age.
As you religiously repay your loans during this period, it boosts your credit score, and there is no doubt about that. But a few people would argue against taking a loan because you might spend more on the repayment with the interest rate adding to the principal amount. However, if you think about it, a house is an appreciating asset, and over the years, the property will accumulate equity, which is a profit that you have made over the years.
For instance, if you bought a home for $800,000 and made a 20 percent down payment of $160,000, the rest comes from a home loan. If your home is in a prime locality where the real estate is booming, you could expect a ten percent appreciation in one year, and this means that by the end of a five-year loan period, you have made a 50 percent profit on the cost of the home.
However, it is important to remember that the case might not be the same, and you could run the risk of barely making a profit. But it would help if you remembered that a home mortgage improves your credit worth at the end of the loan period, unlike your vehicle loan. This is because you would possess a valuable asset in your portfolio. Many people tend to flip their home, put it up on the market, or lease it out after having a mortgage to gain additional benefits from their investments. However, the decision to do so or continue staying in the home is entirely upon you!
The financial institution, banks, and lenders are always looking for borrowers whom they can trust. Lending money involves a huge risk as the borrower could evade payments, declare bankruptcy, or disappear into thin air. All this makes lenders skeptical and questions every borrower. And that is why there is so much paperwork and background verification involved while applying for a mortgage or a loan.
However, if you have a long-standing home loan or just finished repaying one, the lenders see you as a trustworthy borrower. The consistent and timely payments that you made over the years will make it easy for you to secure a second mortgage, a vehicle loan, or a personal loan without any questions. Besides that, this trustworthiness could also help you land a loan at a cheaper rate of interest!
While there are numerous benefits to getting a home loan, it also has numerous disadvantages. Yes, you could risk losing your entire savings and the property if you fail to repay the loan. When you skip a few mortgage repayments, the lender can take possession of the home and auction it, leaving you homeless and bankrupt.
Besides that, buying a home is a long-term commitment, which could go for over five to thirty years, and a lot can change over this period. You might be stuck with the responsibility of repaying the mortgage even if your employment status, family commitment, and earnings change. You might also not be able to invest your earnings of sources with a higher return because loan repayment becomes a priority. Besides that, you would also end up paying a lot of money on the closing fees and documentation that cannot be covered by the home loan.
Pros and Cons Having a Mortgage
However, if you sit to compare the pros and cons, most investment experts and wealth managers would agree that the pros of a home loan outweigh the cons. It would prove to be a worthy asset, a growing investment, and a booster to develop financial discipline. Most investments that grow at the same rate as a real estate investment come with a high risk, never, is a stable and constantly growing asset that would yield high returns when you decide to sell it. So, make sure you understand these details before you make a final call.