If you have a mortgage it is easy to feel as though the only one with the possibility of making any money is the bank. However, since you’re going to have a relationship with your mortgage for many years to come, it is time you knew how you can make your mortgage work for you, and earn money from you biggest financial commitment.
Repaying your Mortgage
Many people still have the view that any sort of debt is bad, and therefore they will work on channeling all of their funds towards paying off their mortgage. This achieves just one purpose – their house is paid off, however, they are usually left with no other savings, no other investments and no other prospects at a time when they are likely 10 to 15 years away from retirement. When a house is paid off it is either somewhere to live, or it something you can sell to get the money, it’s not both, and if you want to have more than one asset when you retire, it is time to start making money from your mortgage.
This means avoiding repaying your mortgage early, not only because you need your mortgage account active so you can put it to good use, but also because repaying your mortgage early can attract costly exit fees. Exit fees are at their highest in the first few years after you take out your mortgage, but you will often find that exit fees are still applicable even if you pay off your loan just five or 10 years early.
More important costs you need to look at though are the opportunity costs of not using your mortgage to make you money. Home loans are one of the lowest forms of finance available so rather than worrying about the money that’s tied up in your mortgage and going towards a 7% interest rate, look at where you can be investing your money that you’ll be getting returns of more than 10%.
Finally, look at the fact that your repayments will actually be costing you less in the future. With inflation meaning that the cost of everything is always on the rise, in the future you’ll be paying more for your fuel, groceries and power, and you will probably get several pay rises over the years to compensate you for this. However, your mortgage repayments stay the same throughout the term, subject to occasional interest rate movements which go both up and down. Therefore your mortgage repayments will be worth less as the years go by, so as much as they make up a significant portion of your budget, they are also one of your best value costs.
We Know Mortgages: Making Money from your Mortgage
Defying conventional wisdom, is the plan to make money from your mortgage, and there are a number of ways you can do this. The first thing you need to look at though is the equity you have in your home. Equity is the difference in value between what you owe on your home loan and what your property is worth. When you took out your loan you may have bought a house valued at $300,000 and borrowed $280,000. Over the years your home loan amount has dropped as you made repayments, and the value of your house has gone up as the property market has improved, so you may now only owe $200,000 on a house now worth $400,000 so you have $200,000 worth of equity.
You can of course access this equity by selling your home, as it would be the profit you make after you close your loan. Alternatively you can take out a home equity loan and access that money for other investments, while you remain in your home. The portion of your loan you will need to have repaid to qualify for a home equity loan differs between lenders, but you will also want to make sure you have enough equity to make worthwhile investments, and that any fees for the new loan type will be offset by your gains. You are usually not able to access all of the equity in your property either, and instead can access around 75% in most cases, so if you have $200,000 of equity as in the example above, you can borrow $150,000 from your home loan.
A home equity loan can also be taken out as a line of credit, so you can access and repay only what you need at any one time. This means that you would have the $150,000 of equity approved, and you drawn down when you want to use those funds for an investment or purchase, whether that is shares, an investment property or improvements to your existing home to increase its value. With a home equity line of credit you make interest only repayments, and only repay the amount you have drawn down. Plus, because you are using the money to make investments, the interest you pay is tax deductible anyway.
Therefore, you can use your mortgage to make you money in any investments you choose and at the end of the year it doesn’t have to cost you a thing. So since you need to live somewhere and you’re working towards fulfilling the dream of owning your own home, why not have your home working towards some other dreams you have?