MTM: Mortgage Advantages and Disadvantages


There are certainly lots of advantages when it comes to home ownership.  However, it can come with an equal set of disadvantages.

Today's Money Tip Monday is going to cover some of the aspects of why it can be advantageous to own a home, but you may want to make sure other finances are taken care of first.

From Jonathan Pond's Ponderings:

A home will probably be the second best investment you'll ever make (education is first, although marrying someone worth $10 million is even better). True, a home is a ceaseless drain on our hard-earned money, but home ownership still beats renting, despite many opinions to the contrary. Aside from the quality-of-life advantages of owning a home, there are two very significant financial benefits of home ownership, particularly for baby boomers (beyond the obvious, but overrated, tax deductions for mortgage interest and property taxes, now curtailed by last year’s new tax rules):

  1. A home gives you the opportunity to be mortgage-free by the time you retire or shortly thereafter. Owning a mortgage-free home can dramatically improve your odds of enjoying a financially comfortable retirement. In fact, paying off your mortgage could be the single most important thing you do to achieve your retirement dreams between now and the time you retire.
  2. A home is a potential source of additional income during retirement. Retirees who sell or downsize their homes can put up to hundreds of thousands of dollars of gains, most or all of which is federal income tax free, into their retirement kitty.

The financial savings of mortgage prepayment are easy to quantify. For example, making one extra payment a year on a $200,000 mortgage could save you more than $60,000 in interest.

Exceptions to Jonathan’s mortgage prepayment entreaty.  In reckless defiance of the criticism that's been heaped upon me, I still urge you to make extra payments against your mortgage, but if and only if:

  • You've pretty much maximized any and all available retirement plan contributions, including your retirement savings plans at work and an IRA. While there are lots of financial benefits of reducing your mortgage sooner rather than later, tax-advantaged retirement savings plans offer better ones, so you should generally put as much as possible into retirement plans first.
  • You've paid off all other higher interest loans, including credit card loans and car loans. It makes no sense to make extra payments against your, say, 4% mortgage while you've got an 8% car loan and 18% credit card balances.
  • You've got a stash of non-retirement savings sufficient to pay at least six mortgage payments. This will protect you in the event you lose your job or some other calamity befalls you. Everyone needs some readily available rainy day money. The fact that you've been reducing your mortgage payments doesn't enhance your standing with the lender; if you fall behind on your payments due to lack of an emergency fund, don’t expect to receive any special treatment.