Mortgage debt is good debt. But why are so many homebuyers having such a bad time with borrowing?
Financial experts often tout the virtues of home loans, arguing mortgages are the cheapest money you will ever borrow. Yet many homeowners are ruing the day they took out a big loan, and some are falling behind on payments and losing their homes to foreclosure.
As these folks have discovered, home equity loans are a double-edged sword. The leverage can magnify your gains but it can also leave you in a nasty bind.
If you need to borrow, you will be hard-pressed to do better than a home loan. Not only are interest rates typically low, but that interest is usually tax deductible. To get a mortgage, you need to own a home or agree to buy one. But once you have that debt, the effect is to leverage all your assets. That can be highly profitable.
Still, prepaying a mortgage can be attractive, especially if the alternative is to purchase bonds or money market funds in a taxable account. The mortgage’s after-tax interest cost is likely higher than the after-tax yield on these conservative investments.
Like the idea of supercharging your returns with low-cost leverage? Before you take out a hefty home loan, make absolutely sure you can handle the monthly payments.
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