Advantages and disadvantages of having a mortgage

The dream of owning a home might more accurately be described as the dream of paying off a mortgage. A mortgage is the biggest single debt most folks will ever owe, and it likely takes a big bite out of your budget each month. So, it might seem like a no-brainer to get rid of your home loan as quickly as possible.

But before you raid your bank account to make payments ahead of schedule, think twice. Believe it or not, there actually are some advantages to having a mortgage. Here they are, along with the disadvantages — plus advice on how to make the best decision.

Benefits of having a mortgage

While you may curse the cost of it, having a mortgage and making those monthly payments isn’t all downside. Here’s why.

It put a your own roof over your head

Let’s face it: Most people in the U.S. would never be able to buy a home outright — especially given the current record-breaking prices. For these folks, financing is the only realistic path to homeownership, and a mortgage is the best borrowing tool out there (much lower interest rates than a credit card or a personal loan, assuming you could get one for a $400,000 purchase). And, despite its hassles, homeownership still has several pros. You are not subject to the whims of landlords and rising rents — which, depending on your location, could be higher than monthly mortgage payments. Plus, a piece of property is an asset, one that:

• enhances your net worth as it appreciates
• can become a source of cash (see below)
• can be handed down, building wealth through the generations

It’s a forced savings account

If you think of your home as a wealth-building asset, then paying your mortgage is like investing in that asset. That’s why, to quote National Association of Realtors (NAR) Chief Economist Lawrence Yun, “A monthly mortgage payment is often considered a forced savings account that helps homeowners build net worth.” Every mortgage payment buys a bit more of the home, increasing your ownership stake, aka home equity. Accumulate enough equity over time and you can borrow against it, via a home equity loan or line of credit (HELOC). In other words, a mortgage in good standing allows you to turn your home into cash without having to sell it.

It boosts your credit score

Although your credit often takes a temporary hit when you get your mortgage, paying down the balance can help maintain and even improve your credit score over time. Lenders like to see a credit mix — different types of debt —  in a credit report. Also, a mortgage is considered “good debt,” because it’s going towards acquiring an asset; showing you can manage it responsibly (via regular, on-time payments) burnishes your record. A higher credit score translates to everything from better terms on other loans to more loan options.

You might see some tax benefit

If you itemize deductions rather than claim the standard deduction, you could include the mortgage interest deduction, which allows you to deduct the interest on up to $750,000 of total home-based debts.  (If you bought the home prior to Dec. 15, 2017, that amount increases to $1 million.) If you itemize, you can also deduct property taxes.

You could put the extra funds to work elsewhere

To pay off your mortgage early, you might need a large sum of cash. If you continue to pay your mortgage at a steady monthly rate instead, you can put that money toward other financial goals, including saving for retirement or investing.

Drawbacks of having a mortgage

Of course, there are downsides to maintaining a mortgage. Here are the biggest ones.

It’s still debt

When you take on a mortgage, you’re committing to repaying a debt for a long time, often decades. Even if you’ve eliminated all your other obligations, having a mortgage remains a major expense, effectively tying up your income and affecting your cash flow.

Risk of foreclosure

A mortgage helps you acquire an asset. Unfortunately, it can also lose you that asset — if you don’t repay it. A mortgage is secured debt: Your home acts as collateral for the loan (that’s why mortgage interest rates are lower than those for credit cards or personal loans). Fail to make payments for several months, and your lender has a legal right to foreclose on your home, and take it from you.

The longer you have it, the more interest you’ll pay

Hanging onto a mortgage for the full term means you’ll pay the entire interest amount. If you pay off your loan early, you could save yourself a bundle on these charges.

Most homebuyers opt for fixed-rate mortgages. If you have an adjustable-rate mortgage (ARM), you’ll almost certainly pay more over time as your rate changes. This can squeeze your monthly budget or, worse, make your payments completely unmanageable.

Less flexibility in selling

A mortgage is a lien on the home — a common one, to be sure — but it still has to be settled before you sell the place. In fact, most mortgages have an alienation clause that mandates they be paid off if and when the property changes hands. This legality can affect the market price you place on your home — assuming you’ll need the proceeds to cover the mortgage balance — which in turn can affect how easily it sells. Not to mention, how much of a profit you’ll make.

Selling could also be a problem if the value of your home or neighborhood depreciates or the housing market crashes. You could have a home worth less than the amount left on your mortgage, aka being underwater. Obviously, this situation doesn’t enhance your marketing prospects, unless your lender agrees to a short sale.

Alternatives to getting a mortgage

The alternative to getting a mortgage is buying a home with cash. The upsides there: You don’t have to qualify with a lender or make any monthly loan payments, nor pay interest like you would with a mortgage.

To compare, if you were to take out a $390,000 mortgage with a 30-year term and a fixed 7.6 percent rate, the interest over the life of the loan alone would come to $601,329, making the loan cost $991,329 total. With a cash purchase, you’d spare yourself close to two-thirds of the cost.

Paying cash has drawbacks, however. One problem is that your liquidity is limited — even when real estate is owned free and clear, it can be difficult to extract cash from it. You can take out a home equity loan or a HELOC, but that raises all the issues associated with obtaining a mortgage, including getting approved and paying closing costs.

Owning a home without a mortgage might not be as “free” as it seems, either. The cash you used to purchase the home is now money that can’t go towards other important goals: saving for retirement, starting a business or paying for college. Yes, a home is an investment — but it’s important for individuals to be diversified in their investments. Do you really want everything tied up in real estate?

Also: Because you paid all cash, you might not have much money left over for home improvements, maintenance and repairs — an ongoing cost of homeownership, and one that’s not getting cheaper. In fact, the average annual cost of owning and maintaining a single-family home in the U.S. is 26 percent higher now than it was in 2020, according to a recent Bankrate study.

How to make the right financing decision for you

Ultimately, the decision to take out or continue paying a mortgage hinges on whether you have the funds on hand and, if so, whether there’s something better your money could be doing.

Can you keep making your monthly payment and put the remaining money in investment vehicles that’ll help it grow? If so, you might want to stick to your mortgage repayment schedule. If you value peace of mind more than anything and want to own your home outright, it might be worth making payments ahead of time.

Additional reporting by Maya Dollarhide