Your Mortgage: Liability or Asset?

There are many schools of thought that will argue the above question until the end of time. There are those that believe that we should never pay off a mortgage because we need the tax benefits. There are others that believe that we need to pay off the Mortgage as fast as we possibly can. Owe No one would be their credo.

Whether you are the former or the latter you have your reasons and you are entitled to them. I think that for the public to form their own opinion on the subject, it would be wise to first define Asset and Liability.

*Asset – any item of economic value owned by an individual or corporation, especially that which could be converted to cash. Another definition is an item of valued owned.

Assets = cash:)

Assets = cash:)

This can be very tricky to many but think about a car real quick. Who has the pink slip if there is a loan on the car? The answer is not you! It is the banks asset and your liability. As for a mortgage, if you owe the bank then the Real Estate Market will determine if you can convert that to cash or not. Only when you own the home free and clear do you have the control of cash conversion. (ASSET)

*Liability – An obligation that legally binds an individual or company to settle a debt.  Also, one that acts as a disadvantage.

Don't be handcuffed by your mortgage

Don't be handcuffed by your mortgage

Basically the definition states Binding, Debt, and Disadvantage. All words that seem to have a negative connotation to them when we are talking about becoming wealthy.

Dave Ramsey, accomplished author that has written the bestseller The Total Money Makeover, A proven plan for financial fitness; talks about the mortgage in his book. He states that there are two myths 1) it is wise to keep a mortgage to get the tax deduction and 2) It is wise to borrow all I can from my mortgage because of great rates and then I can invest it.

While I believe that there is never a completely correct answer Dave Ramsey raises a few good points. If you pay mortgage interest in the year and you are in a 33% tax bracket then having a mortgage saves you 33 cents on the dollar. If you did not have a mortgage you could have saved the whole dollar and given Uncle Sam 33 cents at the end of the year. You do the math. 

Would you rather pay the IRS because you have no debt or save some of what you would pay the IRS because you have a mortgage. Your Choice.

Second I do not think that it is bad to borrow from your home if you reduce the term of the loan. For Example. If you take out 50K to do some remodel and you have had your mortgage for 6 years out of thirty then get a twenty year when you take out the money. Do not start back at 30 years as it will set you way back.

Another thing to consider is that to get a 30 year and pay extra to pay it off in fifteen is not as good and cost more than getting a fifteen year fixed mortgage period. (This is a whole other blog topic).

In conclusion, your mortgage by definition is a liability until you have the deed to the property. Until you own the home free and clear your mortgage is a liability with some benefits that other liabilities don’t have. If you are looking to accumulate wealth in your lifetime then I would think it to be wise to consider how to pay off your mortgage. The mortgage is a necessary liability to home ownership. Learning to structure the liability is the key. Do not buy a property that stretches your debt to income to the max. Your mortgage payment should be no more than 28-31% of your gross monthly income. Also, I think that it is important to see what your other obligations you have and evaluate if paying them off first would help.

I beleive that it is important to have a plan, know where you want to go and consult professionals to help you get there.  As most of this is simply an opinion shared by some and not others it is simply one point of view. It is merely illustration.

*The definitions were taken from investorwords.com and Merriam Webster on-line.

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