Good Debt, Bad Debt: Mortgages Can Save Money

AMA4-18-13For generations, parents have drummed the principles of financial responsibility into the brains of irresponsible offspring: pay your bills on time, save all you can and above all, stay out of debt. While the first two certainly still apply, in today’s financial climate, that last one may not be as ironclad a marker of savvy money management as it used to be. As financial and investing experts point out, some debt can actually be good – such as the mortgage on residential or investment property.

Keeping a mortgage rather than paying it off is a cornerstone of Jason Hartman’s investing strategies, and a new Bankrate article offers more compelling reasons for not paying off that loan, particularly since current interest rates remain so low.

Lenders typically allow borrowers to make additional payments or to pay a larger amount in some payments in order to shave months or years off the term of the loan. While eliminating mortgage debt may be admirable, experts point out that the money spent to do that can actually be better used for other purposes.

Bnakrate’s financial gurus point out that many mortgage holders shouldn’t put extra money toward paying off a mortgage until they’ve paid down high interest credit card balances, established an emergency fund to cover living expenses, and added money to retirement plans or college savings funds. Because of the low rates and the numerous refinancing options offered by lenders eager to keep customers, a mortgage payment may actually be one of the least pressing financial obligations a property owner can have.

For investors, that strategy has clear advantages. Since rental income goes toward mortgage payments and the many tax deductions available to property owners whittle down costs, the benefits of paying off a mortgage are negligible. That’s especially true for those who own multiple properties.

Advocates of paying off mortgages as soon as possible point to the many struggling homeowners in jeopardy of losing their homes because of problems making a monthly mortgage payment. Eliminating that payment altogether as soon as possible creates more financial stability Although that may be true, the many refinancing and mortgage assistance programs offered by major lenders and government mortgage servicers make it possible to negotiate new terms with lower interest rates. And, financial experts point out, owning a property free and clear eliminates some tax deductions, such s mortgage interest or losses due to vacancy.

Holding a fixed rate mortgage at low interest rates is a cornerstone of profitable income property investing – and it lets you save your money to cover more pressing financial concerns. (Top image: Flickr/dormanchester)

The American Monetary Association Team

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