It’s easy for a mortgage to seem frightening to a first-time property owner. After all, a mortgage is a huge, long-term debt! Most of us were raised to fear debt, so signing up for a particularly large one doesn’t sound too appetizing. The same thing goes to first-time real estate investor; with so many things to learn, getting your hand dirty with taking a mortgage is daunting.
But here’s the thing: The reality is that mortgages are among the most powerful financial tools we’ll use in our lives, and they can give us the power to achieve our personal and financial goals.
How mortgages work
When all its complexities are stripped away, a mortgage is just a loan. To be more precise, it’s a long-term, collateralized loan. That means that the debtor puts something up as collateral – if they fail to pay the debt, then the organization that loaned them the money gets to take the collateral.
Collateralized loans are a little safer for banks and other loan organizations than uncollateralized loans, because the collateral prevents them from taking a total loss. That’s why collateralized loans (like car loans, in which the bank can take your car if you don’t pay) tend to have lower interest rates than uncollateralized loans.
In a mortgage, of course, the collateral is the property.
Why mortgages make sense
If you don’t pay your mortgage, the bank can foreclose on your home. But if you pay the mortgage, you’ll eventually pay off the debt entirely and own your house outright. And you’ve been able to live there the whole time while you paid off the debt! That sure beats living in a cardboard box until you have enough cash to buy property outright.
Of course, there’s another way to live in a home without getting a mortgage: you could rent. But when you rent a property, you have more limited rights (what if the landlord wants to raise your rent – or demolish the building?). And you’ll pay rent forever, not just until you pay enough. With a mortgage, you eventually finish paying – and you’ll have a huge asset to show for it, too!
On top of all of this, mortgages have tax advantages (the government likes to encourage home ownership) and low interest rates (it’s a collateralized loan, after all!). Some types of mortgages, like USDA home loans, feature low or non-existent down-payments, giving you financial flexibility and making it easy for some home buyers to get their dream homes without emptying their savings accounts.
It’s important, of course, to keep your budget in mind as you work with your real estate agent and hunt for your perfect home. Not every person can afford every type or size of mortgage. But if you stay within your budget, you’ll find that mortgages can be a healthy type of debt that can improve your life in the short term while getting ready to embark in your real estate investing journey.