Why is a big, long mortgage smarter than being debt-free at retirement?
Some financial advisors recommend a big, long mortgage for several reasons. Here are just a few:
- You aren't tying up your money in a house,
- mortgage interest is generally tax-deductible,
- as long as housing prices rise, you continue to build equity regardless of the size or length of the mortgage,
- you may be able to spend or invest the money you aren't putting toward a mortgage payment, and
- 30-year mortgage payments are generally more affordable than a shorter-term mortgage would be.
In addition, inflation usually reduces the real value of money over time. For example, according to the Bureau of Labor Statistics, it takes $1.67 in 2010 to equal what you could buy with $1 in 1990. So if you have a fixed-rate, long-term mortgage today, it is likely that the dollars you pay it back with will be worth less in the future than they are today. The higher the future inflation rate, the more advantageous a long-term fixed-rate mortgage can be.
On the other hand, by paying extra principal on a 15-year mortgage, you may not only be mortgage-debt free by retirement – a huge advantage when you are on a fixed income – but you will likely pay thousands of dollars less in interest over the term of the mortgage. So the choice depends on your financial goals and personal approach to mortgage debt.
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