Mortgages – Are They Good, Bad or Necessary

Of all the types of debt there is this is perhaps the hardest one to completely avoid for most people. The truth is that most people will continue to use mortgages to buy homes, regardless of their otherwise serious efforts to eliminate debt. I understand why, and though it would be better not to have a mortgage at all it is just hard to avoid for most working people without truly extreme measures, and while the fantasy of living in a tiny home or a camper enthralls millions the reality is that very few will actually take that leap. Those that do are extreme and abnormal – and while  I do fall into that category, I know most people do not and don’t want to, and that’s fine.

That leaves two primary choices then, a mortgage or continuously paying rent. While I do realize there are millions of life long tenants out there, it is not the best way to go financially in the long term for most people. There are some instances where people work jobs that frequently transfer them from one area to another, and others who frequently move on their own for one reason or another, and in such cases renting can be better than owning a home, especially when compared to buying a home with a mortgage. But most working people who reside in the same city or town long term would be better off buying a home.

This is true for many reasons. Homes generally, over the long term anyway, do tend to appreciate in value becoming worth significantly more than they originally cost. There are exceptions – so beware and never blindly assume it is guaranteed. But in general if you buy the right house in the right area it will be worth more than you pay for it in a  few years, and sometimes even within a few months so long as you don’t pay more than current market value for it. You also have more independence and freedom than if you rent, so there are additional personal benefits in addition to financial benefits of owning a home.

Ideally it would be nice to buy a home with cash – no mortgage at all. If you have the cash and shop around patiently you can buy a very nice home, probably for a lot less than you may think. Even so, few people have that kind of cash money. The catch 22 is that even those earning a very good income must have an immediate roof over their heads while they earn that income. That means paying rent or a mortgage and that’s money that cant go toward savings to save up enough to buy or build a home with all cash. Not without it taking many years to do anyway.

If you have ever read anything I have ever written about personal finance then you know how I feel about debt. I HATE debt. Debt damages and destroys many peoples lives and most of it is easily avoidable. While there are no good debts, of all the debts you can have a mortgage is the most justifiable. That does not mean it is a good debt – there is no such thing as far as I am concerned. It simply means that it is the single hardest debt to avoid if you want to own a home without going extreme, and that it is a tolerable debt for most working people. Even those who want to become debt free.

So should you use a mortgage to buy a home? Only you can answer that question. If you are more interested in moderate debt elimination than you are in extreme debt elimination then maybe so. Still there are some things you should consider before going mortgage shopping. First is to get rid of all your other debts such as credit cards and consumer loans. Have a monthly budget and make sure you are able to stay on it for several months. If you have financial problems now then buying a home with a mortgage is only going to make things worse.

Save up an emergency reserve fund equal to at least three months of your total current living expenses, then save up at least twenty five percent of the purchase price of  what you expect to spend on your new home. Take some time to learn the basics of real estate and how it works and of home ownership and how it works. Learn who all the players are in typical real estate transactions, such as sellers, listing agent, selling agent, mortgage broker, mortgage lender, appraiser, home inspector, closing agent or attorney etc.,  and what roles they all play. Take the time to learn who pays them, who they really work for, and what they are supposed to be doing.

Research mortgage loan basics and become familiar with the fundamentals. Then when you are ready choose the best mortgage lender for you and then get pre-approved. Buy less than you can afford to borrow. Many people don’t – they want to know how much they can qualify for and then that is what they borrow, as much as they possibly can and that is a big mistake.

Personally if you decide that you will have a mortgage I think the best possible mortgage is a 15 year fixed rate mortgage where you put down as much as possible on the purchase of the home – at least 25% though 50% would be better. Yes this requires effort, planning and determination but it is doable without becoming too extreme. Keep in mind also that if you are going to borrow money to buy a home you will be better off finding an adequate home at an affordable price than if you try to buy your dream home. Dream homes generally cost much more, and that means much more debt.

If you look at the bigger picture and buy an affordable home that will work for now, then in time you can either remodel and build on to it to make it your dream home or rent it out as an investment property or even sell it for a profit later. Getting it paid off and paid for in full as quickly as possible should be a major goal. If you have chosen a property at the right price and have your other affairs in order you should be able to consistently make additional payments toward the principle and pay the home off much faster than 15 years. How fast? Maybe in 5 years if you work at it hard enough – which incidentally is how long many people finance new cars for.

Here are a few more things to consider. People have strong feelings about whether mortgages are good or bad, and most point out all the benefits. The biggest problem of having a mortgage on your home is that you can very easily lose your home in the event you cant make the payments anymore. Get fired, layed off, injured or your company just goes under – what ever the reason is – if your income stops then your countdown to becoming homeless begins. The next biggest problem is that all the money that goes to that mortgage payments cant go to work for you in other ways. so if you are maxed out with a big mortgage payment and have all the other typical debts and expenses most people have – then it becomes very hard to ever get ahead because you will remain forever too busy just getting by. In such a situation (and this is NORMAL life for millions) all that has to happen is for one or two little events to occur and everything can come crashing down. An illness, or a job loss or even a reduction in pay can trigger a situation that makes it impossible to make all the payments on time.

This is why it is very important to look at your situation and at all available options. Then choose wisely. If you do decide to use a mortgage to buy a home then do it the smart way – and that takes effort. Get your affairs in order, get your finances in order and buy the right home at the right price and pay off that mortgage as fast as you can.