Mortgage
From Debt Free Dude
Usually when people talk about getting out of debt, they aren't considering a home mortgage. The idea is that if you didn't have a mortgage you'd need to rent so you'd be spending the money anyway. Also when you rent you do not build up any equity and for many people, their home is the biggest portion of their net worth. Normally over time, home prices go up at least keeping pace with inflation, so a lot of people see a home mortgage as a necessary and prudent investment.
A mortgage on a reasonable sized home falls into a different class of debt that high interest credit card debt and other "bad" debt. However, it is still something you should consider very carefully. House prices do not always go up. When you buy a house on credit, you may find yourself in a situation where the house is later worth less than what you owe on it.
For example, if you purchase a house for $100,000, the first few years very little of your payment goes toward the principle. So after two years, you may still owe $96,000 on the house. If your job forces you to move, you will not really make any money on the house. In fact, it is likely you will lose money because of the fees and realtor commission.
Worse still, if the housing prices go down, your house may be worth significantly less. If a couple large employers go out of business or lay off a number of workers, there could be many houses on the market as people look to relocate to different areas of the country where jobs are available.
Even though you paid $100,000 for your house, it may only be worth $75,000. That means if you sell it, you will be required to come up with the difference between the selling price and what you owe on the house. In this example that would be $21,000. People in this situation often find they can't sell their houses because they can't come up with the cash to complete the transaction.
When you look at taking on a mortgage, be sure to consider that house prices don't always go up. Be sure to think ahead about how you will handle selling in a down market. This might mean you buy a much smaller house than what the bank says you can afford. With a cheaper house you can retain money in savings to pay the difference if it becomes necessary. Also with a cheaper house you can pay off the principle more rapidly in order to get more equity--money you don't have to repay when you sell your house.
It is also important to take a good look at the true cost of renting. When you factor in property taxes and other expenses, renting may be a good solution. This is especially true if you are unsure how stable your income may be.
There is nothing wrong with taking out a mortgage for a home, but it is important to understand the risks that go along with borrowing large sums of money.
[edit] Cash Out
During the height of the housing bubble it was common to use a mortgage to get cash out of the equity of a property when it was being purchased. For example, if a house was being purchased for $100,000 but an appraiser said it was worth $125,000, the buyer could take a loan out for more than the purchase price. So in this example they could take a loan out for $125,000, pay $100,000 for the property and be left with $25,000 to do repairs or pocket.
While this might work fine in theory it turns out there is a lot of variability in the way houses are appraised. In many cases loans were being made for $125,000 on property that couldn't even sell for $100,000. To make matters worse some lenders would even loan 125% of the properties appraised value. So in this example, the health selling for $100,000 could qualify the buyer for a loan of over $150,000. It's easy to see how banks started getting in trouble when they were forced to foreclose on property that at best was worth only two thirds of what they had loaned on it. In many cases the property was being purchased for more than it was actually worth due to speculation or localized housing bubbles.
Due to new rules and banks being more careful, it is a lot more difficult to get cash out at closing days. Most banks will only loan you money for the lower of the appraised value or the purchase price. So if you have a house that appraises at $125,000, but your purchase price is $100,000 the bank will only loan you $100,000. In the past this wasn't a big deal because you could simply refinance and pull cash out of the value of the house. But the new rules have also changed that. Once you purchase the property you can't refinance and use the appraised value for at least six months. If you try to refinance before the six-month waiting period, you must use the original purchase price. This obviously prevents you from pulling out any value in the form of home equity unless it was actual cash you put down a purchase.
