Purchasing a Home with a Mortgage

Buying a home is the biggest purchase the overwhelming majority of people make, and this includes everyone from those of modest means to the very wealthy. A lot of people who could afford to purchase their own home out of their own funds still seek a mortgage to finance these purchases, due to wanting to keep their funds for other purposes.

Given that financing rates for homes with mortgages are very reasonable, it can make a lot of sense to get a mortgage and invest the funds that you could have used toward the purchase, and seek to make more from your investments than it costs to service the mortgage. This isn’t that difficult to do, even though there is of course more risk associated with the investments, and paying down your mortgage or avoiding one does not involve any risk at all to the client aside from those involved in real estate investments generally.

Purchasing a Home with a MortgageInvestments do tend to do better than mortgages, which is a considerably more conservative investment typically, with the risk to the lender being limited to losses if the borrower defaults. People do default on mortgages of course so it’s not that this risk isn’t meaningful, but this is priced into the rate of the mortgage and will be priced according to the risk category that the borrower is in.

This is less sensitive than an unsecured lending product though due to the collateral of the property being able to be relied upon, and more than anything, this affects the borrower’s motivation to keep the payments current and avoid default. People will rightly seek to avoid mortgage default and this should be and usually is the last thing to fall if someone is facing financial difficulty.

Even in cases of people going bankrupt, they will often save their mortgage, and even if they do include the mortgage in the bankruptcy, they will have to continue to make housing payments, by renting, so this is not an expense that can be avoided. One can pay a lesser amount of course for housing and this does cause people to default, for instance with a couple breaking up where neither can afford the payments alone, but people will put a lot more effort into staying current with mortgages than with any other lending product.

Mortgages Are Almost Always Necessary to Buy a Home

It usually takes people 20 to 30 years to pay off a mortgage, and few people have the assets at their disposal to just buy the home outright, so the decision comes down to saving for the home or borrowing the money for it by getting a mortgage.

When people look to save rather than borrow, the biggest influencer of this decision is how much time will be needed in order to save enough money. So, if it takes this long to pay off a mortgage, it’s going to also take a very long time to save up to buy it, and a couple of decades is a long time to wait.

People generally want things now if they can get them now at a reasonable additional cost, and this is what drives personal borrowing generally. If you only have to wait a relatively short period of time in order to save up the money to buy what you are looking for with your own money, while people may still choose to have it now and pay a small financing cost, it’s at least realistic to save if one wishes.

When we compare the time it takes to pay off a mortgage, the 20 to 30 years, this is with all of one’s housing costs being devoted to paying it down. Unless you are living at home and not paying rent though, for 20 to 30 years of your career, you aren’t going to be able to do that, because this money is going to have to go toward paying rent.

So, this won’t be long enough or even close to it, and it’s likely that you could try your best to save up to buy a home and never be able to do that in your lifetime. You’d probably just be renting forever until the day you die with this strategy. In the meantime, you’d be paying off mortgages, just not your own, someone else’s, the landlord. You’d be paying off several mortgages worth along the way as well.

Given this, for the vast majority of people, if they ever want to own their own home, a mortgage is simply required. The good news though is that home ownership is a fabulous investment, given that property values tend to rise on average by a significant amount, and by having control over the ownership of the property, these increases in value become added to your net worth over time.

An Investment with Tangible Benefits

Home ownership is by all accounts an investment, and usually a pretty sound one at that. While one must usually take a lot of care whenever they borrow money to invest, investing in real estate has proven to be a very solid and reliable investment over time, much more so than investing in securities of any sort.

Getting a mortgage is very much like borrowing a large sum of money to use to invest, where the expectation is that over time, the return on the investment will well exceed the costs of borrowing. While this doesn’t always happen in the short term, over the long run, this is very reliable.

The best part about getting a mortgage to buy a home is that you get to live in the home as well, using money that you’d have to pay out anyway to someone in exchange for a place to live. Since you do need a place to live, you might as well be the person doing the investing and reaping the rewards, building the wealth, rather than building the wealth of someone else.

Since this is a leveraged investment, you do get the benefit of having the gains of the investment magnified by the leverage, while at the same time not needing to be terribly concerned with the fluctuations in value of the investment.

If you’re only putting 5% down on a home, and the investment returns 5% per year on average,  you have earned an effective return of 100% on your money each year. You will be making payments on the mortgage but when you consider that you’d be paying this money or something similar for rent, your initial investment by way of your down payment can be seen to pay some pretty fantastic dividends indeed over time.

Of course, one can take on a bigger mortgage with bigger payments than one had been paying in rent, but however you slice it, the investment you make over and above the nominal cost of renting is going to be pretty impressive indeed.

While this does assume a rising market for real estate, and at times the market can pull back, this is the case with pretty much any investment, and the reliability of real estate over the long term as an investment is as solid as they come.

Profiting from Mortgages

Buying a home is a long-term investment by nature, so that matches up well, and while people can choose to only live in a home for a few years and sell it, people usually don’t sell low like they do with other investments, like stocks.

If the value of your home has gone down and you owe more on the mortgage than the home is worth, you aren’t going to want to panic and sell it at a loss. This seldom is even an option for people, as the lender has a lien on the home and you’re going to have to borrow the shortfall to do this, and while that can be done, people usually aren’t too fond of losing money on mortgages and with good reason.

In these cases, people tend to be very likely to stay the course. Some never sell, and just pay the mortgage off over time, and capture the full value of the home on their side of the ledger in the end. If people do sell, the idea is to get enough from the sale to pay off the mortgage an also provide a nice profit from the venture.

Often times, people will sell their home and purchase another one, although sometimes people sell in order to rent and don’t get another mortgage. It’s generally always better to own though and even though one may seek to downsize, after the kids have all moved out, or when people get older and lose mobility and desire a smaller place, they can and almost always should look to continue owning their home.

If you owe money on a mortgage when you sell and are looking to still own and still need another mortgage, lenders usually allow you to port the mortgage and essentially move it to the new property, which is usually preferable to paying off the old mortgage and getting a new one, due to porting reducing or eliminating penalties involved in early closure.

This allows us to stay the course with home ownership while seeking a home that better suits our needs at the time, which may just involve buying a better and more expensive home as our income rises. The more expensive the home generally, the more we will tend to make from the investment, so unlike most upsizing, buying a better home actually has investment advantages, provided that we can afford to make the payments on the larger mortgage.

Unlike most other forms of borrowing, mortgages tend to pay us dividends on the borrowing, as well as providing us a place to live, and therefore are usually an excellent choice provided one can qualify for a mortgage.

John Miller

Editor, MarketReview.com

John’s sensible advice on all matters related to personal finance will have you examining your own life and tweaking it to achieve your financial goals better.

Contact John: john@marketreview.com

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