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Saturday, July 18, 2015

Pay Off the Mortgage or Not?

Just my opinion, but.... this hotly contested question is really the wrong question to ask.  Which is why there is so much debate about it, perhaps. 
The important question to ask is "how much does housing cost me every year?"  And the answer tells you whether or not you can and should pay off the mortgage, or if you should have a big juicy mortgage the rest of your life.   

What?  NOT pay off the mortgage -- ever??? 

The idea of not paying off my mortgage came from Ric Edelman in his book The Truth About Money," 4th edition.
He outlines great reasons to carry a big, long mortgage.  
  • A mortgage is cheap money. 
  • Greater liquidity.  
  • You can sell without selling (get your equity back by refinancing your mortgage). 
  • The list goes on.  Most telling is the story about the widow who had a lovely $500,000 home - paid off.  But had no cash to maintain it, travel, etc.  It's an important read.
Whether you pay off your mortgage or not, you still have monthly maintenance, taxes and insurance.  You'll never be without housing expenses.  And these expenses are subject to inflationary pressures.   Just a few years ago in my state a law was passed that allow insurance companies to charge you up to a 2-3% of the home value as a deductible for damage from a "named storm," i.e., Hurricane.    Hmm..

Reverse mortgage you say?  Yes, you will get to stay in your home until you die.  But not only are reverse mortgage fees very expensive, the idea that you can stay in your home until you die holds water only if you can afford to have someone come to your home while you age (ever priced the cost of in-home care?).  If you don't have the cash to keep paying your long term care insurance premiums that might also cover a portion of your inhome care, then you could end up in a nursing home, and once the bank finds out?  Your house is gone. 
The oft-touted psychological lift or feeling of safety you might have after paying a mortgage is a great reason to pay off your mortgage, most people think.   And sure, I think having $500 less a month in fixed costs would feel great.  
But what if I took that $500 a month and blew it on  new furniture, or even -- a BOAT!" god forbid.  Or if I added on a new kitchen or bedroom upgrade with that money.   Lifestyle inflation creeps in and then I'm not living within my means.  
Psychological Safety Comes From Living Within Your Means - Not Necessarily a Paid Off Mortgage. 
If you think about your overall housing costs instead of dwelling on all the distracting elements such as whether or not your mortgage is paid off, you realize that the most important question is "what is my annual housing cost and can I really afford it?"  
In my opinion, real psychological safety comes from living somewhere I can afford each month that is  less than 30% of my income (including ALL costs), in a neighborhood where I feel physically safe.    And feel connected to my friends -- I can invite them over and enjoy social gatherings.    If that means my mortgage is paid off and I still have enough cash to live on comfortable?  Great.  If not?  Then the mortgage can be a blessing and give you cash to live your life well.   

MIRL story

I’ve been renting for two years.  It was a good financial move in that the amount I paid in rent each month ($1,050) was equal to how much I was putting out in P&I, Taxes, Insurance, HOA dues and Maintenance in the town home I owned.   I rented out the townhome and got a great tax break.   I go more in depth into how I calculated this here and how I did, if you are interested.
Next month I’m going to buy and take on as much mortgage as possible, because the entire P&I, HOA dues and Maintenance  ($9,282) will be less than what I’m paying in rent ($12,150 annual) , as long as nothing catastrophic happens .  (The $9,282 includes an $1,800 annual sinking fund for maintenance, but that may not be enough).  

I used Michael Blue Jay’s Deluxe Rent Versus Buy calculator to figure my yearly output of renting versus buying.  It gave me the ability to compare using inflation adjusted figures, various interest rates, you name. it.  Can’t recommend it highly enough! 

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