There are many benefits that come with a home loan.
These benefits make mortgage debt good debt.
Some financial gurus – such as Dave Ramsey – advocate paying off a home mortgage as quickly as possible. I do not agree with this approach and think that mortgage debt, especially when it is leveraged properly, can be truly good debt.
I’ll share a couple of reasons why I think mortgage debt is good debt, as well as why I advocate paying the minimum on mortgages instead of paying in additional funds.
1) Home Values Should Increase Over Time
When people say that “a home is the biggest investment most people will make in their lives,” they aren’t kidding. It truly is the biggest investment most people will make. Despite short-term real estate bubbles, home values should increase over time.
If people were unable to finance their home purchase they would have to wait years – if not decades – to make their home purchase. By taking out a home loan people are able to get exposure to a relatively large investment without needing all the money to pay for the investment. Mortgages allow people to slowly pay off their investment, gain more and more equity in their home, and set themselves up for retirement.
2) Low Rates Offer Investment Opportunities
The biggest advantage of home loans is the ability to free up funds to invest in stocks and other investments. In the United States almost every home loan offered today is a fixed-rate loan. Fixed rate loans offer many advantages to those who have home loans. Planning repayments is easier with a fixed rate home loan, but fixed rate loans also offer the ability to take advantage of low interest rates.
In a previous blog I talked about why you should pay the minimum on student loans. The logic behind this post can also be applied to home loans. If you have a mortgage that is at an 8% or lower rate, there is potential for big savings by investing funds instead of paying more towards a home loan.
Another nice thing about the home loan market is that there are opportunities to refinance. Perhaps you took out a home loan when interest rates were 12% and they have since dropped to 3.5%. You can refinance your home loan at that lower rate. This can make a huge impact on retirement savings if you only pay the minimum and invest the rest in stocks.
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Between the fact that homes appreciate in price over time and the opportunity to take advantage of low interest rates, there is a strong argument that mortgage debt is good debt.
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On the spectrum of debt types, mortgage debt is definitely one of the less bad ones. Mortgage interest deduction, super low rates, decent appreciation of your asset, hedging against the housing market, etc. It makes a lot of sense to have a mortgage for a lot of people. But it’s definitely still debt! Being house poor can be just as terrifying and awful as having lots of credit card debt perhaps worse if they take the place.
Agreed.
As soon as you are financially strong enough to afford a mortgage, and geographically stable enough to know that you will be in your home for at least 5-8 years, I think that a mortgage backed house purchase is a no-brainer.
However, there are too many people jumping into a mortgage that they are not ready for just because they think that the right thing to do is getting on the property ladder!
The sooner you pay off any debt you have, the more income you can put toward investing and retirement. This idea of minimum payments on debt should be avoided at all cost.
I think the secure feeling of owning your home outright is just too alluring for most of us to pass up!
I would tend to agree. While I don’t like having the mortgage, of course, the rate is so low and we derive value from it so I’m not going to kill myself trying to get it paid off significantly early. I’d much rather put that extra cash in the market so I can have it work for me and grow it for retirement.
I am torn on this one. I certainly agree with the logic of not paying off your mortgage and minimum payments toward student loans because of the ability to plow more money into investments, which will pay off in the long run. But for whatever reason I still can’t operate that way. For one, I think it may be my age. I am in my early 40s and want to be done with debt. Second, if you want true financial independence and potentially early retirement I think you have to be totally debt free. Third, you have to have the discipline to take that extra money and invest it. At least by paying off debt you know you are getting an instant return (but I like the idea). Finally, there is the idea of risk. What happens if, god forbid, you lose your job, spouse, etc and it makes it a little easier to deal with when you don’t have a mortgage payment.
That said, I get the logic and for someone a bit younger or who has a long time to go in the workplace this advice is really good.
We have such a low interest rate on our mortgage (3.8%) that we don’t plan to pay it off ahead of schedule. We prefer to have our excess cash invested–like you said, it’s a better opportunity for our money. We’re also planning to buy our next house in all cash (it’s hard to get financing on the type of acreage we’re looking at), so, we need to keep our money fairly liquid.
taylorqlee Definitely did not mean to say that mortgage debt is ALWAYS good debt, but if you take out the right loan on the right house at the right time in your life, it can be truly “good” debt that can be leveraged.
moneystepper I think mortgage debt has been given a bad rap since the housing collapse. There is definitely a lot of factors that go into whether a mortgage is “good” or “bad” debt. If it’s leveraged in the proper way it can be truly good debt.
KyleSadler I totally disagree. It’s simple math. If you can get debt at 3% and the market returns AT LEAST 8% on average, you lose money by paying off that debt faster than required.
kay ~ lifestylevoices.com I agree. Psychology plays a huge role in personal finances, and if I suddenly came across a million dollars I would be VERY tempted to pay off my mortgage in full (not that i have a million dollar mortgage, just threw out a number haha).
FrugalRules I’m with you John. There is definitely a psychological aspect that comes into play whenever debt is involved. If you can get over the psychological feeling of having debt and leverage it properly you can make some additional gains in the stock market.
Mrs. Frugalwoods Oh I’m very curious to hear about the plans for your next house! Mainly due to the acreage comment haha.
j3edwards Thanks for sharing your thoughts! I hear you about wanting to be “done” with debt now that you are in your 40s. I have a feeling I will be able to relate to you when I am in my 40s. You raise some great points.
We got an awesome interest rate on our house (3.75%) so I rarely feel “bad” about my mortgage debt. Its my TAXES that I wish I could get rid of. Living in Illinois, it seems like they’ll never stop going up. Thanks for sharing!
I like these arguments, because my mortgage is MASSIVE! :) And I only every make minimum payments because I can invest the extra funds at better returns like most people these days. I think the biggest benefit will be looking back in 10, 15 or 20 years, and seeing how small the mortgage payment will then seem (if still paying it), and the value of the asset at that time.
DC @ Young Adult Money Mrs. Frugalwoods we’re planning to retire early (in 3 years) to a rural homestead with a lot of land (probably 30+ acres) and we’ve discovered through our research that banks often won’t lend on high acreage properties. So, we’re planning to pay cash for a homestead but keep the mortgage on our current home, which will become a rental property.
Kate Melvin Taxes can be brutal, especially for self-employed/side income. When you combine all the taxes in Minnesota together it’s not pretty either.
Jason@Islands of Investing Yeah great point about what it will be like looking back in 10-20 years. It’s pretty crazy to think that the rate won’t increase even as inflation rises year-over-year.
Mrs. Frugalwoods DC @ Young Adult Money Very cool! That’s crazy that you want to retire in 3 years, but you aren’t alone from what I’ve read on other blogs.
good points DC. For those in a position to take advantage of the low rates and live in areas where housing is still low, this is a good time still to buy. It is truly a long term investment, though you will see some short term benefits when tax time comes around :)
goodmoneyadvice Thanks for sharing your thoughts! It’s easy to be short-sighted when it comes to financial issues. Everyone acts on emotions, which is inevitable, but if you can get past that and act on rational financial information you can benefit long-term.