To Your Health
July, 2008 (Vol. 02, Issue 07)
The Pros and Cons of Mortgages
By Stanley Greenfield
Mortgages truly are the eighth wonder of the modern world. You might think that's a bold statement, but think about it for a moment. You decide you want to live in a house. So, what do you do next? Humor me for a moment, and let's assume mortgages haven't been invented yet.
What do you do first? Start saving money? If the house costs $100,000 (more humor), how much can you save a year? After expenses and taxes, let's say you're lucky enough to save $5,000 to $8,000. That means it will take you anywhere from 12 to 20 years to save enough to buy a home. Yes, you will earn some interest on that money, but realize "Murphy's Law" also might come into play, which might force you to take some of that money out for emergencies.
Let's take the analogy a step further. You get lucky and along comes Max Mortgage, the man who invented the mortgage. Now you can buy that home you've been dreaming of today. How amazing! You can live in your home and enjoy it while you pay for it. Ronald Rents (yep, the man who invented rent) might not be too happy about this new development, but you now have the home of your dreams. All you have to do now is come up with enough money for a partial or down payment and some legal fees, and you can move in and start paying off the balance.
Not so fast. Since Max came up with his idea of the mortgage, many variations have been created. The so-called basic mortgage is one where you pay off the house over a 30-year period after the initial down payment. Since you have borrowed the funds, you do pay interest for the use of that money. The IRS has determined that it's a good thing to own a home, so it decided the interest payments are tax deductible. The ninth wonder of the modern world!
In the early years, the vast majority of what you're paying is interest and is tax deductible, so your "net" cost after taxes is even lower. If your monthly mortgage payment is $1,000 and you're in a 30-percent tax bracket, your net cost is only $700. At this point, I think I can safely say mortgage money is the cheapest money you will ever buy. Don't ever lose sight of that fact.
Like I said earlier, there have been many variations on the basic mortgage idea. You can get a mortgage that only runs for 15 years. But why would you do that? You're paying interest on the amount borrowed, so the shorter the payment period, the less you pay in interest. However, since mortgage money is the cheapest money you will ever buy, why would you want to pay it off early? It might be a personal decision, but it's not a good financial decision.