by Christy Bieber | Updated Aug. 27, 2021 - First published on Nov. 2, 2020
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The reason may surprise you.
Former Vice President Joe Biden, the Democratic nominee for president, has made his recent tax returns available. There's a lot of details in Biden's returns, but one of the most interesting is that Joe and Jill Biden claimed $15,796 in mortgage interest as a deduction on their taxes in 2019.
This may seem surprising when you consider that the Bidens have earned millions of dollars in recent years. They almost assuredly could have paid for their homes without borrowing.
We can't know for sure what guided their financial decision to secure a mortgage. But many very wealthy people borrow for homes they could pay for outright. And there are a few simple reasons for that.
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The fact is, mortgage loans are not just for people who can't afford to buy a home. Even the wealthy commonly use mortgages to purchase property. This is because they can borrow to buy a home at a very affordable rate and avoid tying up their cash. Put simply, there are better things to do with their money than buy an illiquid asset with a low rate of return.
See, if you tie up a lot of money in your home, you're giving up the chance to do other things that could be more financially advantageous. And the opportunity cost isn't really worth it when the interest you'll pay for a home is so low.
The Bidens and other wealthy people likely have good credit and plenty of income. As such, they qualify for loans at the lowest mortgage rates available. And while the Bidens secured their mortgage loan before today's record low mortgage rates, they almost assuredly have a rate under 5.00%. Mortgage rates have been at or below that threshold for decades.
In comparison, index funds that track the stock market have historically produced average annual returns of around 10%. And the risk they present is minimal. If you buy your home outright, your return on investment equals the money you would save in interest payments, and you can likely earn much higher returns on the stock market even with a beginners brokerage account. It makes little sense to tie up your money in your home when you could take out a mortgage and invest instead.
That's especially true since most people don't view their home as an investment -- it's a place to live. It's possible that property values could rise and you could end up making money on your house, but you won't realize those gains until you sell. And you may not plan to do that for a very long time.
For those who itemize, like the Bidens, the interest on a mortgage loan is also tax deductible. That means it costs even less to borrow for a home and reduces any incentive to buy a house with cash.
Now, there may be many reasons why the Bidens have opted to have a mortgage instead of paying cash for their homes. But the tax incentives and the opportunity cost of buying with cash likely played a role in their decision. And if you're also deciding whether to borrow for a home or put down a larger amount of cash, you should consider these same factors.
With mortgage rates currently at record lows, it may make more sense than ever to take out a mortgage. That way, you can use your money for other things.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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