Is A Mortgage Worth It?

When deciding whether or not to get a mortgage, there are many factors that should be taken into consideration.

There is no one-size-fits all answer to this question because every individual has different needs and goals in life.

But is a mortgage worth it? A mortgage is definitely worth it. The benefits of a mortgage outweigh the negatives for people who are on stable, secure incomes. Aside from the mortgage tax deduction, buying a home is typically cheaper than renting when factoring in property taxes and maintenance costs.

This blog post will explore some of the pros and cons of getting a mortgage so you can make an informed decision about your finances.

Is A Mortgage Really Worth It?

Getting a mortgage for your first home is worth it, and there are many reasons why.

Choosing between renting or owning is one of the biggest decisions that new homeowners will have to make before they buy their first house.

Renting can be less expensive than buying because rent payments do not include mortgage interest rates, private mortgage insurance premiums , property taxes, and homeowners insurance.

While renting may be a great option for some people, mortgage payments can actually be cheaper than rent in most areas of the country.

The cost-benefit analysis is different for everyone depending on their personal financial situation; however, deciding to buy will likely result in building equity that could eventually lead to owning a home.

If you’re considering a mortgage, it’s important to keep in mind that the monthly payment includes more than just the interest on your loan; there are also taxes, insurance and other costs associated with ownership.

You’ll want to crunch these numbers for yourself before making any big financial decisions!

Here is a list of the benefits of taking a mortgage:

  • The cost of buying a home, down payment and closing costs can be much less than renting.
  • There are tax deductions associated with buying a home, such as mortgage interest and property taxes.
  • Homeownership can help you build equity over time.
  • Building wealth through real estate investment has been shown to be one of the best ways to grow your money.
  • Homeownership usually comes with more stability.
  • You have the freedom to paint and decorate your home as you please, making it feel like a place that is all yours.

Pros & Cons Of Getting A Mortgage

There are plenty of pros to getting a mortgage. One of the most important is that it’s the main path out of renting and onto your own property. While saving up for a down payment can be tough, mortgages often come with lower monthly costs and as such allow you to be in control of your housing situation sooner than waiting until you have enough cash to buy outright.

One downside is that unlike traditionally renting, your house then becomes an asset on which banks will loan money even when it can’t produce any more income- like when rates go up or when you want to make home improvements. Mortgages also limit how much money you’re free to expand and grow elsewhere- if a financial crisis arises in which all debts are called at once, you might not have the cash to make the payments.

However on average, you’re often better off with a mortgage if you can afford it- at least until interest rates rise again or your home’s value declines in comparison to what was paid for it years ago.

How To Get A Mortgage?

One of the most common avenues for getting a mortgage is by applying for one through a bank. You will need to submit an application with various papers including your salary, home information, and get approved prior to receiving the money.

Another way is through someone’s retirement account or Roth IRA account. This falls under the category of self-employed mortgages and there are certain qualifications you’ll need to meet before approval can be granted. 

The first step is going to your bank and talking to a banker about what type of product would suit your needs best. They should be able to set you up with their trusted mortgages specialist who will walk you through every step of the process, guiding you towards success in acquiring your new home.

Financing options range from an all-inclusive package that includes negotiation and legal fees, closing costs, even title searches–even down to interest only or investment loans where there are no monthly principal payments.

Contacting someone at your bank can help you gain information on which financing option suits your needs best.

What If You Are Unable To Repay A Mortgage?

If you’re unable to repay a mortgage, you should speak with a lender as quickly as possible.

The first thing they will do is work out what can be done to prevent you from defaulting on your mortgage. If you’re recently unemployed, they may be able to waive the missed payment(s).

You may also be eligible for a loan modification, where after making reduced payments for several months (interim period), you then would have the opportunity to catch back up on missed payments.

You can sell your property via the market but you may be restricted to accepting offers that are lower than what you owe or even choose to walk away with nothing at all.

One option is to agree on a sale price that covers as much of the mortgage amount as possible and enter into an “equity release” or “equity transfer” plan in which your housing can be sold for cash on its own without having to make any repayments of the loan whatsoever.

While it’s by no means preferable, bankruptcy could provide some relief from payments for a period of time (usually 3-5 years), at which point your debts would likely need another form of solution.

What Are The Benefits Of A Mortgage?

One of the benefits of a mortgage is how well mortgages work for property investment.

I know it’s scary to take on debt, but if you invest in an asset that appreciates with time, compounding interest will really help you build your wealth faster than saving without the benefit of debt.

Another benefit that I’ve found is how it simplifies my finances. The down payment and monthly payments act as discipline mechanisms – ensuring that I either save enough before buying so as not to need a mortgage, or face having too much month at once and needing to cut elsewhere.

Mortgages allow people who don’t have huge wallets more access and opportunity when looking at real estate investment – because they can borrow money from other sources to buy property, and pay it back with time-indexed payments.

Mortgage is a form of leverage – allowing people to invest more money into an asset than they have in their bank account at any given moment.

This can be used as a force for good by using the borrowed funds wisely; or conversely, as a force for bad by using the borrowed funds in unwise ways.

Here are the main benefits of a mortgage:

Getting into Real Estate Investments

A mortgage can be a good way to get into real estate investment for many people. There are different types of mortgages some that have fixed interest rates and others which have variable rates.

The type of mortgage you choose will depend on your current financial state and whether or not you want more flexibility with the rate changes.

Mortgage terms are generally set at 30 years so if it is too expensive one might consider other options like apartment rentals or becoming an Airbnb host.

If you believe that real estate prices will rise significantly in the future, then mortgages can be good for investment.

Security

Mortgages can be an excellent way to provide stability.

If you’re renting now and decide to buy, in most cases that purchase will increase your net worth by a substantial amount. In comparison, if you were to rent a place for the next 30 years, there’s no guarantee that you would have any equity left at the end of those 30 years because property prices could go down and your rental payments would stay constant.

The nice thing about buying is owning that home outright provides financial security against inflation as well as tax benefits. If you never own anything then there are few tax breaks available for renters.

Tax Breaks

A mortgage is one of the best tax breaks out there.

A monthly mortgage payment comes with tax benefits, which are typically used by homeowners like yourself. The IRS offers some deductions for interest paid on mortgages and loan points paid in real estate transactions.

A mortgage provides all homeowners with two major types of benefits.

First, it’s a deduction from your taxable income because you are borrowing instead of spending funds that you have on hand.

Second, when the home is sold, generally any gain (the difference between the sale price and what was originally paid) is not taxed either because it’s considered to be capital gains or an investment asset.

It’s worth mentioning that not every mortgage is the same and depending on the situation, a mortgage may or may not be able to offer any particular tax advantage.

But in general, those with investment properties or commercial property will likely find themselves better off by taking out a mortgage instead of paying for it all upfront with cash.

Leverage

The mortgage process provides a unique type of leverage. A Mortgage provides leverage because the terms are based on an individual’s ability to repay, not collateral.

Technically, the borrower is leveraging their ‘future self’.

However, please remember that the goal of a mortgage is to provide many years of stable housing which is very important for raising a family. This typically means a 30-year conventional mortgage with 20% down payment and LOTS of borrower breathing room.

There are mortgages available that allow you to buy more house now like limited cash out refinances but these can be costly in terms of ongoing interest payments and they reduce your buying power over time because the equity line shrinks.

Building Up Your Cash Reserves

A mortgage helps you build your cash reserves because the monthly payment is typically used to make a loan repayment of principle + interest from the money saved for a down-payment, which over time reduces the balance owed on that loan.

If all a person’s income went towards paying his mortgage, and he didn’t have any other long-term debt, then they would eventually reach zero balances on their loans by continuing to make those payments every month for years.

This is exactly why some financial planners recommend buying property even if you don’t plan to live in it (as an investment).

If nothing else, it will likely contribute positively towards your net worth – which is something many people feel they need as security when considering whether or not to purchase property.

Additionally

Homeowners may also reap additional and/or refinancing benefits like added cash back from their lender (when they are ready to refinance), not having to pay as much interest on their investments because of lower rates and a more predictable environment with little risk, being able to change careers without as much scrutiny or uncertainty of change in income.

Factors Affecting Your Mortgage Rate

The three factors that typically determine mortgage rates are:

  • Interest Rates offered by the bank in question,
  • type of desired mortgage, and
  • length of time requested.

Other personal factors can affect rates as well such as credit score or credit card usage. There are a variety of additional factors that affect the mortgage rate. Some of these include:

  • the market rates for variable and fixed interest rates,
  • prevailing inflation rate,
  • employer’s promises on future pension payments,
  • and the consumer price index

Property prices are also an important factor that influences pricing—especially if you’re living in an appealing area such as Los Angeles or NYC where property values are on the higher side (leading those places to have higher mortgage charges). 

That being said, homeowners who plan on selling their homes can offer potential buyers rebates or other benefits which would help lower fees for both parties.

A mortgage can be a good option when it comes to investing in property, but the key is research and knowing what you’re getting into before signing anything on the dotted line.

Existing Debt

Existing debt can affect mortgage rates, but it doesn’t mean the borrower needs to keep paying any of that debt.

Existing money owed, such as credit card bills and student loans, can contribute to a lower score when applying for a new loan. Borrowers with high scores are able to take advantage of low interest rates in the market and save in monthly payments. The higher your credit score is the better and more offer you’ll get from lenders as well as the chance of getting approved for financing options that have better interest rates and terms than those denominated on your current credit worthiness.

A low existing balance applied against new debt or an existing good history with the bank will enable borrowers to negotiate favorable lending terms.

Typical types of existing debt that can affect your mortgage are:

Student Loans: Student loans have a major impact on mortgage rates. In most cases, the borrower will need to show their loan is not affecting their ability to make monthly payments with making an extra payment. 

Auto Loans: A car loan affects the mortgage rate in relation to your credit score. This could happen if missed payments or other factors negatively impact your FICO score which in turn might affect the interest rates you receive on mortgages because of it. You can find out more about mortgaging your car here.

Payday Loans: A payday loan could affect your mortgage rate by causing you to be unable to make maintenance payments that are required monthly on the mortgage.

How To Qualify For A Mortgage

Qualifying for a mortgage is not nearly as complicated as it seems at first.

With a decent credit rating, income to show that you can afford the loan (or the ability to make significantly more than the monthly payments), and a little bit of patience, there are tons of great mortgage options just waiting for you.

Most people associate qualifying with strict financial requirements like paying off your student loans or having an excellent credit score.

But this isn’t true at all!

Most lenders will approve someone if they have steady income, employment history, and enough down payment money. To be approved, your gross monthly income should be about 2-3x higher than what you’ll be paying in your monthly payments (after taxes).

Choosing The Best Mortgage For Your Needs

Your goal is to find the best information you can and make the most informed decision about which mortgage you want.

One of the first steps in this process may be to compare your short-term needs with your financial goals for the future. For example, do you think that in 10 years it will mostly likely be more expensive?

If so, a variable interest rate mortgage might be better for you because this type of interest rate typically fluctuates with current market rates and reflects changes in both banking costs and inflation rates.

This way as labor markets tighten or increase unemployment levels, monthly payments adjust accordingly to reflect any change in market conditions without requiring an immediate refinance of your loan into a fixed-interest rate one. 

So, how do you decide which is the best mortgage for you?

Figure Out How Much You Can Afford

Your goal is to be able to afford the mortgage without taking on too much of a financial burden. Mortgage payments are typically proportioned from 30-35% of monthly income, depending on the lender you go with.

Generally speaking, if your budget can’t handle a stricter percentage, it’s better to go with a lower amount than higher. This should help determine what types of properties you’re in search for and how to prioritize them based on price range (lowest interest rate) or whatever metric is important for you and your family.

Set A Savings Goal For The Upfront Costs

When it comes to saving for the down payment on a house, it really depends on your priorities. Saving money is always useful, but there are many ways to save and invest that entail carrying more or less risk.

Here are some tips that can help anyone, whether they’re trying to build up for retirement or plan for their next home purchase:

  • Develop an emergency fund before saving anything else! The aim is 3-6 months of income saved up in case you lose your job or someone in your family gets extremely ill.
  • develop the discipline to make a budget, otherwise known as “cost cutting,” by prioritizing necessities first before adding extras (e.g., car payment before cable television)
  • be strategic about investing in products which can be turned around for higher ROI (e.g., rental properties)- paying down any credit card balances that exist 
  • calculate how much you can afford monthly after taking into account your debt and loan payments
  • develop a savings plan- prioritize debt repayment, then build your emergency fund; consider credit card balance transfer to consolidate balances and lower interest rates
  • create an actionable budget that will allow you to save more while still meeting financial obligations. A key component is making the most of what you earn by reducing expenses rather than increasing income
  • build an investment portfolio that matches your risk tolerance with a mix of stocks, bonds, mutual funds or ETFs (e.g., low-cost index fund)

Consider The Length Of The Mortgage

The longer the mortgage, the greater your interest will be in that time. When you borrow $100,000 for a 10 year loan, you pay around $21,500 in interest but when you borrow $100,000 over 30 years, that same amount of interest might cost closer to $72,000.

Exactly how much interest you’ll pay will depend on the duration of your mortgage and the current mortgage rates. The shorter it is, the less total interest you’ll pay. 

Choose The Right Type Of Mortgage

Fixed and variable-interest rate mortgages are the most common methods of financing. Homeowners must pay back the original sum as well as accumulated interest on these types of loans.

Fixed-interest rates will remain stable for an agreed period or term, whereas variable-interest rates will vary depending with market economic conditions. 

Homeowners can also opt for a variation of these types of mortgages in which they make fixed payments over a set time period, such as 15 to 30 years, with their monthly payment being interest only (not including principal) during that time span before converting to a full loan at maturity date. 

A common type is an ARM mortgage also called “Adjustable Rate Mortgage.” During an adjustable rate mortgage’s introductory period, the monthly payments are low since there is a fixed introductory rate, then after that time period they adjust to market rates.

Homeowners can also opt for an Interest-Only mortgage where the borrower pays only interest on his or her loan during its duration before paying off the principal at maturity date.

Factors Affecting Interest Rates

More than just the length of your mortgage affects the interest you’ll pay. Your credit score, income and current debt are all factors that play a role in determining how much you’ll pay each month for your home loan.

The two most influential components are the loan’s size (in relation to your monthly net income) and its term (basic contract requirement).

Common Mortgage Myths

The mortgage industry is a complex one. There’s a lot to know, and it can be difficult to figure out where to get started. I’ve compiled the most common myths about mortgages so that you can start on the right foot in your journey towards homeownership! 

Pre-qualified Means The Same Thing As Pre-approved

A pre-qualified mortgage is a lender’s estimate of how much you can borrow based on your income, assets, credit score and other qualifications. Pre-approval means preliminary approval for the loan when all documents have been submitted.

If you are ballparking the size of the property budget, then being qualified is still an important step in determining whether or not you should pursue a purchase.

The qualifying process is usually easier than applying for pre-approval because it only requires that you supply some basic personal financial information to show that you are in good enough shape financially to handle a home purchase on top of all of life’s other expenses. Pre-approving for the property will require more back and forth with lenders but if they think you are a good risk for the loan, then they will be more likely to approve your mortgage application.

You Need 20% Down

You don’t need 20% down at all. In fact, 5% is the standard downpayment for a house. Twenty percent is a huge amount of money to be putting into equity right off the bat; it’s 10x what most people are willing to do and I just don’t think that’s necessary. A well-priced house with a good mortgage will likely return more than 20% equity on your investment over time, even without any increases in the value of your home.

If You Are Denied A Mortgage Once, You Will Never Be Able To Get A Mortgage

Usually, you can reapply for a mortgage after being denied one time. However, the application process may be more rigorous after being denied a first time.

Keep in mind that lenders use different criteria, so your success may depend on the lender you approach but it is possible, and nearly always worth trying. 

You Need An Excellent Credit Score To Get A Mortgage

You do not need an excellent credit score to get a mortgage. You can still get approved for a mortgage even with lousy or nonexistent credit. The key to ensuring that you’ll have the best chances of approval is demonstrating a stable income and securing at least two more references for different lenders.

If you have a 580 or higher FICO score, you should be able to get approved for a loan without issue. One exception (depending on how old it is) could be student loans which may not count towards your debt-to-income ratio since they are still being paid off.

Final Thoughts

So, is a mortgage worth it?

In short – yes.

But as with all big decisions in life, there are factors that should be taken into consideration before making the final call. For people on stable, secure incomes, buying a home is typically cheaper than renting, even when factoring in property taxes and maintenance costs.

If you’re considering buying a home and want to know what your options are or if purchasing property is right for you, feel free to reach out!