Ever since I’ve been a financial advisor — more than 30 years now — I’ve recommended the virtues of getting as big a mortgage as you can and never paying it off. I’ve got 11 great reasons why this is advice you should strongly consider.
But with the new tax law, is this advice still valid?
It sure is!
True, the tax law now limits the deductibility of mortgage interest to new loans up to $750,000. And interest paid on home equity lines of credit (HELOCs) is generally not deductible at all. On top of that, the standard deduction is now twice as high as it used to be — meaning many taxpayers won’t itemize their deductions when they file their 2018 tax returns next year. For them, the mortgage interest deduction will be of no value at all.
So, doesn’t all of this materially alter my long-standing advice for you to carry a big, 30-year, fixed-rate mortgage?
Nope. And here’s why.
The mortgage interest deduction was never a significant part of my rationale — it’s buried as Reason #4 on my 11-reason scale. So, the new tax law has minimal impact on the validity of my advice.
I won’t list all 11 reasons here — you’ll find them in a separate article on our website and in my books, The Truth About Money and Ordinary People, Extraordinary Wealth — but I will highlight two of the most important reasons you should strongly consider getting a big, long mortgage.
Mortgages Offer You Liquidity
Ever met someone who is “house rich but cash poor”? Sure, they might say with pride that the house they bought decades ago is fully paid for and has appreciated in value. But if they are now retired and living on a limited income, the fact that they have no mortgage is of little consolation.
They still must pay property taxes, maintenance and repairs — as well as all the costs of living, including food, transportation and health care expenses. So, the mere fact that the house is paid for isn’t the panacea it seems to be.
But if those house-rich-cash-poor individuals had a big, 30-year mortgage, they’d have ready access to their home equity — money they could use to support their lifestyle. And if an emergency arose, say from a job loss or medical crisis, there’s money to meet the need.
Mortgages Offer Cheap Money
The ability to borrow money at today’s historically low rates is awesome — especially considering you can lock in that rate for 30 years — even if you don’t deduct the interest. (And if you do, that already low-interest rate effectively drops by as much as another third!)
These are just two of the 11 reasons to carry a big, long mortgage — and the other nine are very compelling.
The only caveat we like to emphasize is that our advice to carry a big, long mortgage doesn’t mean you should buy a house you can’t afford. Ideally, you’ll buy as inexpensive a home as you can (provided it meets your needs) — and then get a big mortgage on it. If you’re uncertain whether the house you’re thinking of buying is truly affordable, talk to your financial advisor before signing any contracts.
So even though we have a new tax law, the fundamental advice we’ve long espoused about mortgages remains intact: Carrying a big, long mortgage is still a powerful financial tool that can help you achieve your financial goals.
This material was prepared for informational and/or educational purposes only. Neither Financial Engines Advisors L.L.C (also referred to as Edelman Financial Engines) nor its affiliates offer tax or legal advice. Be sure to consult with a qualified tax or legal professional regarding the best options for your particular circumstances.