Planning to take out a home loan, but unsure if it’s right for you? Here is a short guide explaining the pros and cons of home loans to help you make an informed decision:
Pros of Home Loans
Here’s why taking out a home loan is worth it:
Possibility of Homeownership
As housing prices and living expenses reach new heights, homeownership has turned into a foreign concept. A home loan is one of the only ways for people to own a house. It establishes a sense of stability and allows first-time homebuyers to build net worth.
Due to capital appreciation, property values increase over time. Therefore, a mortgage allows you to invest in a better, profitable future.
Tax Benefits
A mortgage can also lead to tax benefits. Take, for instance, the mortgage interest deduction policy, which allows borrowers to deduct the interest paid on up to $650,000 of their total home debt.
Improved Credit Score
A home loan can improve your credit score in numerous ways. For instance, when you make timely monthly mortgage payments, it represents your effort towards financial stability. Experts recommend using a home loan calculator to get an accurate estimate and plan accordingly.
A mortgage also indicates credit mix in your credit history report. This can help you secure loans with more favourable terms and conditions in the future.
Cons of Taking Out a Home Loan
As much as we’d like it to be, taking out a home loan is not without cons.
Long Term Financial Commitment
Despite having favourable repayment terms, a mortgage is still a debt. It’s a huge financial commitment that can significantly impact your living costs and choices over a prolonged period. From medical bills to entertainment costs, every aspect of your personal life will be affected by your home loan.
Risk of Foreclosure
When you miss mortgage payments, you start losing the ownership of your property. A mortgage is a secured debt, and your house acts as collateral. Your lender will first contact you to discuss the missed payments. If you still fail to meet the deadlines, they have the legal right to initiate foreclosure proceedings.
High Interest
Mortgage experts recommend paying off your loan as early as possible. They recommend making lump sum payments every few months and using a frequent schedule, such as bi-weekly payments. The reason is quite simple: The longer you wait, the higher your interest gets.
This is especially true when the mortgage begins to reach its full term, such as 20 or 30 years. In many cases, borrowers end up paying more than the property’s original value due to interest.
Mortgage Stress
Mortgage stress is more common than you’d think. It kicks in when a homeowner begins to spend a disproportionate amount of income paying off a home loan. It can occur due to a sudden job loss, medical expense, or a need for urgent home maintenance. Mortgage stress is becoming a rising concern in Australia, with more than 31% of mortgage holders at risk.
