What is a tax free mortgage?

Tax free mortgage? Sounds too good to be true

When you are trying to qualify for a mortgage in today's economy the idea that something may be tax free and a mortgage is rather confusing.

We all know what has happened in the U.S. with the foreclosures. Similar situations have occurred here in Canada. We have been more conservative in our lending so the situation is not quite as dire. Many people have over extended themselves and now find themselves unable to pay for their home. The house goes on the market, likely at a reduced price. It is not uncommon to find a requirement for a higher down payment and you need to show that you can make the monthly payments.

Insurance questions tie into financial planning. Planning ahead is always useful. What seems to be consistent in all financial planning is how you handle debt. We have gone looking for some advice on this subject and are pleased to present this article as the first of a series from specialists in this field.

Taya Weiszhaar has shared her insights on getting a handle on debt. We do believe that you have to try and control events or they will control you. This applies whether it is insurance or your long-term retirement funds. We thank Taya and provide her email if you have further questions: moc.prgegagtrom|ayat#moc.prgegagtrom|ayat and for more info check out her website.

Debt seems to be something on a lot of people's minds these days, with many thinking about taking on additional obligations due to the low interest environment we're in. Others are more worried about eliminating debt, concerned with the downward trend in the overall economy. Either way attitudes toward borrowing money are changing, so I thought an examination of debt might be of some interest.

Leaving aside the question of the bigger economic picture for the moment, debt can be divided into three basic categories: Bad, Good and Best.

Bad debt is easy to identify, with the degree of "badness" determined by the interest rate. Bad debt can be categorized as any money borrowed for the purchase of something that will decline in value over time. A prime example would be a car loan. Fully financing the purchase of a $25,000 automobile results in an immediate loss of about 10%…within five years the vehicle is worth maybe $10,000 if you're lucky. High interest credit card balances are obviously the worst, with the purchases often related to goods and services with zero residual value.

Good debt by contrast relates to borrowing for the purchase of things that will increase in value over the years. The best example is of course a home purchase. Home ownership is a common goal in Canadian society, and one which makes a lot of sense. It costs money to occupy a residence regardless of whether you rent or own…so why not have that occupancy cost go towards building equity. For many people their home represents their greatest source of wealth, and a retiree with a paid off mortgage has a number of options available should the need for capital arise.

Best debt is a concept that will probably be foreign to some. Like good debt it relates to the borrowing of money for purchases which will increase in value…but with a kicker. With best debt the commodity being purchased qualifies the borrower to write-off the interest expense on the loan. For specifics you need to talk to your mortgage specialist but it typically relates to the purchasing of equities such as stocks or even mutual funds.

You may have heard ads talking about 'the tax free mortgage', which relates directly to the concept of 'best debt'. As an example, a person who inherits $25,000 could use the money to pay down a mortgage, then turn around and leverage against the equity in the home to invest in the market…with the interest payments on the loan now being tax deductible.