Advantages of a mortgage
- You’ll achieve homeownership. A mortgage allows you to purchase a home without paying the full purchase price in cash. Without a mortgage, few people would be able to afford to buy a home.
- You can cash in your equity. Equity in your home — the difference between the market value of your home and the amount you owe on the mortgage — can give you access to money when you need it. Many homeowners take out home equity loans or home equity lines of credit (HELOCs) to pay for home improvements, medical bills or college tuition.
- Your credit score may improve. Having a mortgage loan in good standing on your credit report improves your credit score. That credit score determines the interest rate you are offered on other credit products, such as car loans and credit cards.
- You may have extra tax benefits. The tax code currently provides tax benefits of homeownership. You may be eligible for a deduction for the interest paid on your mortgage, private mortgage insurance premiums, points or loan origination fees and real estate taxes. And when you sell your primary residence, you may be able to exclude all or part of your gain on the sale of your home from taxable income.
Disadvantages of a mortgage
- Your risk losing your home. Because your house is collateral for the mortgage, the lender has the right to take your home if you stop making payments. If the lender takes your home in a foreclosure, you’ll also lose any money already paid up to that point.
- Your home’s value could drop. Any property you purchase can lose value over time. If the real estate market drops and your home loses value, you could end up with a mortgage balance greater than the value of your house. This is called being “underwater,” and it can put you in a situation where you have to pay down the loan balance to sell your home since the loan balance is higher than your home is worth.
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