Counting Mortgage Payments as Savings: A Comprehensive Guide

When considering whether to count the non-liquid portion of your mortgage payment as savings, the answer is yes, but with some caveats. This topic is crucial for understanding your financial health and planning for long-term investments. This article provides a detailed examination of the principal portion, interest, and property tax payments, and how they relate to your overall savings strategy.

Understanding Principal Payments as Savings

The principal portion of your mortgage payment is indeed savings. As you diligently pay down your mortgage, you are incrementally increasing your net worth. The monthly principal payment reduces the outstanding balance on your loan, making your overall financial position stronger. While this amount is illiquid, meaning you cannot immediately convert it into cash, it does represent a form of savings that you are actively building towards.

For instance, let's say your monthly mortgage payment is $2,000. Of this, $500 is allocated to the principal amount. Over time, as you continue to make these payments, your equity in the home increases, enhancing your net worth. When you eventually sell your property, the remaining mortgage balance will be offset by the equity you have built up, providing a return on your investment.

Evaluating the Illiquidity of Mortgage Principal Payments

It's important to recognize that the principal portion of your mortgage payment is not considered liquid savings like cash in a bank account. With cash, you have immediate access and can spend it as needed, whereas mortgage payments, particularly the principal, are tied up in the equity of your home. However, despite their illiquidity, these payments do count as savings because they reduce your overall debt burden.

Adjusting for Taxes and Other Factors

The mortgage payment often includes both interest and property tax. To get a clearer picture of the cost of living in your home, it can be helpful to calculate the equivalent of virtual "rent" using these components. For example, if your monthly mortgage payment is $2,000 with $500 dedicated to principal and $1,500 to interest, and your property tax is $800, the total cost is $2,300.

To find the adjusted "rent," apply your tax bracket. Suppose your combined state and federal income tax rate is 30%. Then, $2,300 adjusted by 30% would be approximately $1,610 in virtual "rent" per month. However, you should be aware that the new IRS regulations may have changed the way property tax deductions are handled.

Mortgage Payments as Savings: A Conditional Yes

While mortgage payments can be considered a form of savings, whether they constitute a substantial saving depends significantly on several factors:

Home Needs: If your need for more space is justified, such as for a growing family, paying for a larger home with a mortgage can be a smart financial decision. Rental Market: In areas with high apartment rental costs, purchasing a home can be more cost-effective in the long run. Interest Rates: Good interest rates can make a mortgage more financially sustainable. Ensure you get a competitive rate to offset the increased monthly payments. Down Payment: A minimum of 20% down payment can eliminate the need for mortgage insurance (PMI), which adds additional costs but also contributes to quicker equity accumulation. Appreciation: Over time, the value of your home may appreciate, increasing your equity and overall net worth.

Additionally, there are significant tax benefits associated with mortgage payments, particularly the property tax and interest deductions, which can further enhance your financial stability.

Conclusion

While mortgage payments are not cash savings, they do play a critical role in building your net worth over time. The principal portion of your mortgage payment is a form of savings that, when considered in conjunction with the other components of your mortgage, can be a valuable addition to your financial planning.

Whether it makes sense to count mortgage payments as savings ultimately depends on your personal financial situation, housing needs, and overall financial goals. Understanding the nuances of this topic can help you make informed decisions and ultimately achieve a more robust financial future.