Why Take On Debt When Your House Is Paid Off?
While paying off debt and keeping it off is always appealing, mortgage loan debt is often considered a good debt because, over time, it can increase your wealth.
Low Interest Rates
Today’s mortgage rates at the time of writing are hovering just over 4% for a 30-year fixed-rate mortgage. By contrast, 20 years ago, the best rate you could have gotten would have been just below 7%.
In this low-interest environment, doesn’t it make sense to take the bulk of your cash back, get a mortgage to buy your house and find another use for your savings? What if you invested that money? What if you had major renovations for your new home in mind?
It may seem counterintuitive, but having no debt isn’t the key to being a good credit risk. In fact, it’s probably going to hurt you when it’s time to get a mortgage loan.
By having mortgage debt and repaying it faithfully and punctually, you’re building a favorable credit history. In the future, when you need a loan, it’ll be available to you, and at the lowest possible rates.
It’s important to note that it will help to have a preexisting credit history with credit cards, personal, student or auto loans prior to getting a mortgage. Your home loan is just one more thing that helps add to your history.
Having a solid history of repaying debt is only one factor that lenders analyze when evaluating your creditworthiness. Another factor they consider is your credit utilization ratio, which is the amount of credit you’re actually using at any given time. Lenders like to see that you know how to manage your credit.
Liquidity, Or Cash On Hand To Invest
If you’re an investor or you want to become one, you know the value of having cash on hand. While mortgage rates are low, and the stock market and real estate investments are offering the potential for high returns, it makes more sense to get your cash back out of your home and use it to build your investment portfolio.
When considering an investment strategy, make sure to evaluate your risk tolerance and balance your portfolio periodically to mitigate risk.