Mortgage, such a mixed feeling even just by thinking of this word. If you pause for a minute and give some thoughts to this word, what picture or emotion that comes to you first? Is it one of the followings?
A place you can call home where you live and relax after a long day?
A place where you share with your family and raise children?
A largest bill paid periodically that hangs over your head and burdens you?
A fear that comes to you whenever you have a doubt to your job or income security?
It is a feeling of joy mixed with obligation we take on. We call the place we live in “home”, but we also know that we don’t actually “own” it yet until one day down the road we pay it off.
For many of us, mortgage is the biggest loan we could ever borrow, if not single biggest. It allows us to have a place called our own without having to pay it right away. It is also the biggest expense we carve out to secure our lives including our children’s. Magnify Money puts mortgage stats together that give us a great glimpse about what American mortgages are averagely.
Total mortgage debt: $10.3 trillion
Average mortgage balance: $148,060
Average new mortgage balance: $260,386
Homeownership rate (share of owner-occupied homes): 64.4%
Homeowners with a mortgage: 63%
Median credit score for a new mortgage: 758
Average down payment required: $28,932
Mortgages originated in 2017: $1.75 trillion
Share of mortgages originated by banks: 40%
Share of mortgages with a delinquency rate of 30 days or more: 3%
After 2006 big recession, banks continue to screen customers on the tight credit score and income basis, but customers who take on mortgages are taking on bigger loans than ever before.
Average unpaid balance of new mortgage is about $260,000 according to data from the Consumer Financial Protection Bureau
Comparing to credit card debt, borrowers are more likely to ensure timely payment for mortgage. It gets prioritized on household spend so that they know they have a roof above head called “home” especially when they have children. Because of this, financial institutions are all over the consumers to push for more mortgage loans.
The easy accessibility pushed some to borrow beyond needs or affordability.
Actual initial loan size continue to increase, partially driven by real estate pricing, but partially by decreased down payment consumers put in when initiating mortgage loan.
With mortgage being such a significant portion of consumer spend, we can’t help but wonder,
is the mortgage an investment or debt?
Is mortgage a good loan or bad debt?
While you hear people get rich through mortgage and real estate investment, very likely they are in different phase of their financial management. If you are still in debt and have not reached financial independence, borrowing more mortgage that is beyond your means will bring you down to deeper debt that is a lot harder to get out. The stress of owning a large debt can drive you to make irrational decisions along the way. This is especially true if you are borrowing mortgage merely for your own living, which is 100 percentage expense.
Before you reach to financial freedom and have enough side money to allow you make big investment like real estate, consider to purchase the house that is just enough meeting your needs and within your current affordability. The biggest mistake many of us make is to be optimistic about our future income and live in a condition that is dependent of future success. Your future will be much more likely to be successful if you take steps now making good money decisions towards it. Here are some downsides for a bigger mortgage:
The more expensive the house, the more tax and maintenance come with it, the more surprising expense you face such as landscaping and repair etc. All expenses that go to maintain a house will lose the opportunity to grow bigger and make you rich one day.
The bigger the house, the higher tendency of filling in stuff we don’t need, the more purchases you make. You always will need another room to store the things that you don’t even get chance to use. Then it comes cleaning expense or time that you could spend to enrich your life otherwise.
More importantly, the more expensive the house, the more stress and mindset and time you consume with it especially if you need to stretch yourself in repayment. That is the opposite of financial freedom and independence.
To sum it up, mortgage is a debt and expense, not an investment before you reach to financial freedom.
You should try to keep it as low as possible and pay it off as fast as you can.
If you keep your mortgage low and affordable, manage your income stream and be debt free elsewhere, the day of mortgage is an investment will come, for now, it is a bad debt we want to get rid of.
Here is my free mortgage calculator to help you understand the debt of a mortgage.
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