Ric Edelman: Hi! I am Ric Edelman. Many people don't understand mortgages; they think they are risky. The truth though is that mortgages are a great financial tool, if you use them right.
For years I've promoted the ten reasons to carry a big long mortgage, and now, in my award-winning book, The Truth About Money, I offer 11 reasons, here are the first three.
Number one, your mortgage doesn't affect your home's value. You thought your home would rise in value over time, right? Well guess what, your home's value will rise or fall regardless of whether you have a mortgage, and that's why owning your home outright is having money buried under a mattress.
If you pay off your home all that equity is tied up in your house where it's not earning any interest, having a long-term mortgage let your equity grow with your home's value.
Reason number two, a mortgage won't stop you from building equity in the house. Mortgages are bad, people say because the bigger the mortgage the lower your equity. They are wrong and here's why.
Say you buy a house for $300,000 with a down payment of 50 grand. After 20 years of paying your mortgage you'll add it about a $100,000 in equity, that's a lot of money, but if your house rises in value with the rate 3% a year you'll have nearly a quarter million dollars in new equity, even if your principal balance never declines.
The third reason to have a big long mortgage is this, a mortgage is cheap money, the cheapest money you'll ever be able to borrow, in fact. Just compare the rate of a mortgage to that of a credit card. Credit cards charge high rates because they have a higher risk of not being repaid, they have no collateral, Visa can't reposes a sweater that you bought, but mortgages have collateral, your house, and that reduces the bank's risk, so that they can loan the money for much less and in much larger amounts.