Even the mere mention of a mortgage is sometimes enough to send some people running for their lives. Mortgages have a bad rep and are associated with debt, dubious financial logic and the recent sub-prime crisis.
The truth, as always, lies in the middle. Mortgages are probably the cheapest available loan and usually the only way a family can afford their first home. As any financial tool mortgages are neither good nor evil. When used properly mortgages can really leverage your life (literally).
Mortgages tend to be regarded as complicated financial tools. They certainly are for the financially illiterate but with a small effort and some will you’ll be able to figure them out quickly enough.
Housing starts are at a slump and so are housing sales and prices. The market is slowly correcting its way back to normal price levels. Some might say even overshooting down as markets that experience corrections often do.
Low interest rates, combined with what might possibly turn out to be reasonable housing prices, can create a good opportunity for potential home buyers.
So why a mortgage is an opportunity and why we shouldn’t fear mortgages?
Many people regard mortgages as a tremendous obligation weighting heavily on their backs for many years. An unsound mortgage just might do that. However, properly thought out mortgages present as much an opportunity as bad ones present a threat.
Mortgages are opportunities because they are essentially relatively cheap debt. As aforementioned a mortgage is a loan against the property bought. The property essentially serves as a sort of insurance which enables the lender to offer a significantly lower rate on a very big loan.
By taking on a mortgage you are leveraging yourself. You are making an investment with both your equity and relatively cheap debt. Your investment is your house thus enabling you to enjoy an increase in housing prices on both your equity and debt. As mortgages are considered relatively cheap debt and since buying a house is usually a long term investment chances are you’ll see solid returns on your investment. Keep in mind Leverage works both ways – losing on your investment leaves you with debt yet to pay. There are always risks involved (more on leverage and mortgage can be found here).
There are always exceptions such as the recent crisis. Keep in mind, though, that had sub-prime lenders had the ability to actually afford their mortgages they wouldn’t have lost their houses. This is where sound mortgage planning and risk management take place.
Avoiding a mortgage will save you interest payments and the necessity of making payments. However, you might also find yourself buying a relatively cheaper house which might not suite your future needs. In this case, you’ll pay more in deal costs buying a more suitable home in the future.
Related Posts:
- The Perfect Home is a Financial Nightmare - Don’t Get Caught Up In the Costly Race
- Understanding Important Hidden Psychological Aspects of Rent vs. Buy Comparisons
- Why Taking a Mortgage Is Leveraging Your Equity: Understanding the Potential Risks and Benefits
- How to Make Sure this is your Dream Home: 7 Practical Tips
- Should you Rent or Buy a Home?
- Buying a Home – an In-Depth Look at the Process
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