10 Reasons Why You Should Get as Big a Mortgage as Possible

Every home buyer expects the property to rise over time (if you thought it would fall in price, you wouldn’t buy it). The mortgage won’t have any impact on the future price. In other words, owning your home outright is like having money buried under a mattress; any equity you have is essentially earning no interest. You wouldn’t stuff ten grand under your mattress, so why stash $400,000 in the walls of the house? Having a long-term mortgage lets your equity grow while your home’s value grows.

Say you buy a house for $500,000, and you get a $450,000 30-year mortgage. As you make monthly payments, your mortgage balance declines – increasing your equity. And if you make extra monthly payments, your equity rises even faster.

But that’s a canard. The truth is that making payments does not really increase your wealth. That’s because all you’re doing is moving money from one place to another – you’re taking money you could have invested and used it to reduce your mortgage balance. That’s not truly building equity. A genuine increase in equity occurs when the property’s value rises – which will occur (or not) regardless of your payments.

Every dollar you spend on mortgage payments is a dollar you didn’t invest.

Mortgages are the cheapest money you will ever be able to borrow. Because the loan is backed by real property, lenders charge much lower rates than for credit cards or personal loans. Why pay 10% of an auto loan or 21% on a credit card when you can instead pay 5% on a mortgage?

These two points are related, and together they offer you important benefits to carrying a mortgage.

Interest paid on loans to acquire your residence (up to $1 million) is tax-deductible. The deduction is taken at your top tax bracket. Thus, if you’re in the 32% federal tax bracket, every dollar you pay in mortgage interest saves you 32 cents in federal income taxes. You also reduce state income taxes in many states, too.

And here’s the best part: When you earn profits from investments, those profits are taxed at 20% or less — even if you are in the 32% tax bracket.

The monthly payment on a 30-year fixed-rate mortgage never changes – but your income will. Thus, the payment becomes cheaper relative to your rising income.

If you want to access the equity in your home but you don’t want to sell, you can simply refinance and increase your mortgage balance – giving you the money you want while keeping your home.

Many people make big down payments when they buy a home so their monthly payment is lower. But financial advisors will tell you that the goal isn’t to lower your payment; your proper goal is to increase your wealth.

Here’s where it gets counter intuitive. It might seem that a lower mortgage payment helps you create wealth because the lower monthly payment frees up cash that you can invest. Although that’s true, it’s only half the story. The other half of the story is that you have a lower monthly payment only because you made a larger down payment.

Consider buying a $500,000 home. With a $50,000 down payment on a 30-year loan, your monthly payment will be $2,416. But if your down payment is $70,000 your payment is only $2,308. That’s’ $108 less.

If you were to invest that $108 each month and earn 10% per year (the average annual return of the S&P 500 Stock Index since 1926), you’d accumulate $244,133 after 30 years (ignoring taxes).

But to enjoy that outcome, you had to increase your down payment from $50,000 to $70,000. If you had instead invested the extra $20,000, you’d have accumulated $348,988 after 30 years – or $104,855 more. Clearly, the bigger mortgage gives you the opportunity to create greater wealth.

In Reasons 8 & 9, we saw how a lower down payment leads to greater wealth than a bigger down payment.

And the smaller down payment means you get to retain more of your money – money that you might need if you lose your job, suffer a major illness or injury or incur some major expense.

If you use all your available cash to make as big a down payment as you can, and if you make extra payments each month with all your available income, you might indeed reduce your monthly payment or pay off the loan quicker. But if you suddenly need cash, you won’t have any – and that’s the risk you need to worry about. If you’re “house rich and cash poor” you might have to sell your house during a financial crisis – a crisis you can avoid more easily by having lots of money in savings and investments. And the big mortgage increases your ability to build those savings and investments.