Thursday, December 13, 2007

So here I am, feeling all strong and stalwart for having paid double my mortgage over the last 18 months, halfway through my 3 year goal. And there's an article in the Bulletin saying,

"Wrong! Mortgage breath, wrong!"

Saving for retirement, they say, is more important. Paying off credit cards with higher interest rates is more important. Having savings for emergency is more important. You need mortgage to save on taxes. It is stupid to tie up money in an unliquid investment.

I'll even add a couple of arguments which I've heard but they didn't mention. The dollars I pay for my house in the future may be less than the dollars I pay now, meaning that my payments relative to income actually may decrease. Inflation is a friend to a person with a mortgage. Plus, 15 years is a long time to wait for the benefit, in this uncertain age.

O.K. I buy the arguments. But here is where I make like a real estate agent and ignore reality.

I'm still gonna do it, dammit.

If I pay double for three years, I more or less cut the mortgage to 15 years, which is exactly the time to my retirement. (Not that I'm going to retire.) That pretty much answers to tax argument. The fact that I may not enjoy the benefit since it's so far away, well maybe my wife will or my kids. I can dig that.

The not having six months earnings to fall back on in savings. Yeah, right. I've heard that from my first year of business, and it was crazy then, and almost as crazy now. I've got a bit of savings, but six months?

The credit card payments. Absolutely, but credit cards will always be with me. I've managed to keep them relatively low.

The being house poor? Hell, when haven't I been? From the time I got out of college, I've almost always paid more than half my income on housing, after my first few experiences with roommates (where have you gone, record collection? Why do you hate me so, phone company?)

The retirement? Well, I intend to make the maximum donation to my IRA each year that is allowed by taxes, but this will be my second year. No way that is going to do much for us. I've always known that inheritances, such as they are, are going to be the bulk of our retirement, plus whatever we can get from our businesses. Both types can fall through, I know, but there it is.

Finally, the fact that the money is tied up, that it isn't liquid.

Well, exactly. That's almost the point. I can almost guarantee you that if I hadn't paid the extra mortgage, that that money wouldn't be around; in savings, in IRA's, in credit card payments. It's the very fact that I can't get it out that makes it good for me.

Besides, when you've spent half of your career in the negative, and not just a small ways into the negative but way, way down, just being even is a huge improvement.

But mostly, I think a person needs to do what works for them. I know myself, and I know that this is one positive thing I can accomplish.

6 comments:

BilboBend said...

I think you have answered your own question of why the BULL wants people to NOT pay off their MTG.

The more cash don't put into your MTG, the more cash you have at your hands to spend at the shops of the people who advertise in the BULL. The BULL probably loves HELOC's for this same reason.

Not shopping continually 24/7, and buying everything you see in the BULL, is by definition an act of terrorism.

Lastly, you can be damn sure that the folks at the BULL are not following their own advice, most likely they're trying to pay off their HOME ASAP, because they know the gravy years are over for a long time.

I'll answer your question, because you didn't really get to the reason its important to pay down BIG if you can.

1.) The difference between paying off a $300k in 15yr vs 30 is the difference between paying $400k and $600k, Why give someone $200k more?

2.) If you payoff quick, lets say first 7 yrs at 2X, then you have dropped your debt by a 1/3, which generally means you can REFI at 1/2 your original payment, and then when things get bad, they aren't bad. For instance, lets take a $300k home, 20% down, $240k, that $1300/mo ( ouch ), but if you get it down to $180k, you can get a payment later for $900, or less, which isn't as painful, for instance if you anticipate less cash-flow in future.

The above are two good reasons to PAYOFF quick, when I was young I ONLY did 15yr-fixed, now I generally do 30yr-fix, why? Because I have paid off many houses, and it doesn't mean anything to me anymore, to have houses paid off at the end of the day, is a big "SO WHAT".

It's most important to keep payments LOW as a percentage of your income, and NOT to pay 2X, or 3X long-term for the house.

Duncan McGeary said...

The article wasn't really a Bulletin article, it was published there. It seems to be the advice of the 'experts' nationwide.

So of like, exercise, eat right, save money...

RDC said...

The advice of those experts are based upon the numbers for how one can make out better. However, most people do not have the descipline to really make the numbers work. As a result instead of investing the difference they just spend it. So in the end they get a higher cash flow at the cost of spending far more on the house.

As I tell people if the tax savings is so important then I will give you 50 cents back (more then max amount of tax savings for any income) for every dollar you want to pay me and I will do that for as many dollars as you want

BilboBend said...

Duncan McGeary said...

The article wasn't really a Bulletin article, it was published there. It seems to be the advice of the 'experts' nationwide.


*

Duncan,

Not to be redundant, but the BULL never 'publishes' nor writes anything, they print Press-Release Verbatim, and they Cherry-Pick national wires.

To suggest that something is not deliberate because the BULL didn't write it is meaningless, because there is no one at the BULL that writes.

They very carefully pick 'copy' that they feel will please their advertisers.

End of story.

*

Regarding taxes, yes I didn't mention taxes, a big JOKE, ya give the bank 40% of your gross, and not the IRS, either way you lose.

Like the 'man' said, NEVER plan your life around IRS CODE, enough said.

You have said, and I'll say it again, home-ownership is a FORCED saving's program. Liquidity is lost, but home ownership is illiquid so cannot be spent, thus when the game is over, you have something to show for your years of work.

Which is WHY I KEEP telling you to buy your own commercial office space.

Jeff said...

So if I have an extra dollar, should I use it towards paying off the remaining mortgage, or save it in a tax-qualified retirement account?

I've asked this question many time. Academic research suggests that your newspaper article is right .... Given the U.S. tax system and assuming you have a reasonably low mortgage rate (5.6% in my case), you'll make more money by investing the extra dollar in a retirement account.

However, I prefer to use the extra dollar to pay down the debt on my house. There's something satisfying about having no debts.

RDC said...

Jeff,

Yes that is correct. The problem is that many people if not most, take the advice and mortgage as much as they can, and then spend the extra money instead of saving or investing it. Taking the money and putting it into a tax advantaged plan such as a Roth IRA would in moast cases yield benefits.

The other question is also what do you have in terms of stable income and debt vs assets. The answer to those questions can have a big impact. If you do not have an emergency reserve then I would probably put the extra money their first. Simply because if you have an emergency such as an illness or loss of job it may be difficult to access the equity, especially in todays credit crunch.