Friday, June 17, 2011

But don't take my word for it.... Mortgage debt

Paying off your mortgage early is a perennial sources of debate on personal finance blogs and taking out a mortgage in the first place is also debated, though to a lesser extent. I've never had a mortgage, but I've also never purchased a house. My SO and I were approved for a mortgage while house hunting before I decided to attend business school. Our plan was to put 20% down and ensure that our 15 year, fixed-rate mortgage payment would not be higher than the rent we'd paid in the past including insurance and taxes.We didn't consider a 30 year, the expense of the interest over the life of the loan would have been too expensive for our taste.

Though we might have been able to pay cash for a house since we were looking a small town with low house prices, we didn't want to since it would have made us highly illiquid. Going cash would have also been essentially sinking all of our non-retirement life savings into an old house in a small economically depressed town. My net worth would have been very concentrated in real estate, 50% of all of my assets in one property. So to maintain liquidity and diversification we'd decided to leverage debt to the tune of 80% of the purchase price over 15 years while considering the option to prepay depending on the other investment opportunities available to us.

That was our decision, based on our circumstances. We decided that a mortgage was the right decision and that prepaying it wouldn't necessarily be. But you don't have to take my word for it, here are some other bloggers' takes:

Get Rich Slowly has has reader question on paying off your mortgage today (no, I came up with this post idea all on my own.....).  JD's take basically boils down to guaranteed returns are good, do what feels right for you.  As JD notes in today's post GRS has covered the topic before but with a little more complexity.  He argues that prepaying has more benefits the earlier you do it.

That is exactly the point that MoneyMamba rants on in Mortgage Math Lesson: A Myth that Shouldn’t be Repeated. JT has also written about this before if you want more clarification on his point that paying off your mortgage isn't the best way to go.

My Money Blog has a review of the question that covers a lot of the tax issues and proposes a possible strategy.

MoneyNing has a reader write in that sounds a lot like me and my SO when we were looking at buying.  The conclusion? buying in cash has a ton of perks but leave yourself plenty of breathing room.

Pinyo at Moolamy covers mortgage prepayments for rental properties with two reader questions but doesn't go into much detail and neglects to consider the tax implications which can be really key when looking at rental property cash flow and gains.

The Wisdom Journal gives five reasons to accelerate your mortgage payments.

Financial Samurai won't be paying off his mortgage until he retires.  His reasoning centers around liquidity and cash flow.

Yes, I am Cheap has a video about Why You Should Invest and Not Pay Off Your Mortgage Early.

Budgeting in the Fun Stuff gives a great background on her house situation, mortgage and strategy and reasoning on prepaying her mortgage.

Mr. Money Mustache takes a different tactic, advocating that you should use "springy debt" as your money cushion (emergency fund) and put the rest of your money towards paying down debt.

MoneyReasons has very realistic and pragmatic reasoning on why paying off your mortgage early is better than investing.  Hint: many people might not actually invest the money they're keeping out of their mortgage payments.

So that's ten different bloggers' opinions on the subject of paying off mortgages early.  You certainly don't have to take my inexperienced opinions on this one and can form your own.

And for some different thoughts see

How about you? Paying down your mortgage early or investing instead?  Anyone out there doing cash-only for buying a house?

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  1. I want to thank you for this exhaustive list of posts that I can now go and read. My feeling has been one of liquidity regarding prepayment of a mortgage. I have heard stories of someone who was diligently prepaying a mortgage and was close to paying it off then lost his job with the recession. With no job and in the midst of a credit crunch, this individual could not access the equity in the house so ended up losing the house pretty quickly when he fell behind. The bank was more than happy to foreclose since they could easily get back the small amount of the loan even in a depressed real estate market. Something to think about.

  2. I second cashflowmantra. Kudos for all the helpful resources.

    I don't really consider buying a house as an investment. You're paying for a roof over your head and its not generating cashflow, which makes your primary residence more of a purchase than an investment.

    If you want to make an investment, why not buy a house in a depressed area, or score some type of foreclosure deal so that you can at least generate some positive cashflow out of it.

    However, IMHO, these houses are generally not in areas you want to be living in.

    If you really want to invest, why not buy a house - use it as a tax benefit and secretly rent it out for the cashflow to help pay off the mortgage. Then rent housing somewhere cheaper.

  3. Thanks for the link, NoDebtMBA.

    Even though I don't like the concept of paying off a home early, and instead find investing a better use of resources, I do see why some people might see opposite.

    In general, leverage is something that I don't necessarily fear. The opposite is probably closer to the truth; if I'm not making full use of available leverage, then I feel like I'm falling behind.

    For what my uneducated opinion is worth, I think you made a wise move in synthesizing both views. Going for a 15-year loan makes a lot of sense, and you can always choose to prepay if necessary. Meanwhile, you still have plenty of liquidity, a safety net, and access to capital at the cheapest it has been in...well, forever.

  4. Paul - When we were looking at houses both of the ones we put offers in on were foreclosures. One was gorgeous and 90% meticulously renovated and the other needed some serious work but had an enormous yard in a really good location. I would have considered both an investment. I think trying to find a bargain or house with good long-term prospects is important if only because you'll be sinking so much money into your primary residence. For many people it's their forced nest egg. Might as well be a good one.