How about another Mortgage based thread

[MrsPete]

When I look at my whole portfolio, its actually quite risky . . . You have to look at your whole picture. For us, we are a two income family in industries known to have downturns. Minimizing the expenses we need to make each month insulates us from the downturn. Its both a quantitative and qualitative decision.

I could say the same thing. My husband and I earn pretty good salaries right now, but both of us grew up dirt poor (me more than him) and have no desire to revisit that portion of our lives. We're middle-aged now, and we've all heard how difficult it can be for people who lose jobs at this stage of life: it's not so easy to find an opening, we're not willing to work for entry-level salaries anymore . . . I have as much job security as anyone, but my husband's job is on the chopping block every year or two. It could easily be his turn one of these days.

Having a paid-for house means that our monthly income could, if necessary, be cut to the bone. We could keep our family running on much, much less than a family with a mortgage. It's insurance against difficult times.

 

[hannahsmomma]

Yes, your house is an investment, but for us it would not be wise to pay off our home. Actually we just went from a 200k Mortgage to a 500K mortgage. We pulled out the 300K in equity and are investing it in other properties. We buy rentals that we are making money on every month and in 3-5 years will sell them and triple our profits. And, might I add taking a trip or two to DW in the meantime. What good is all that money just sitting in your house, when you can be using it to make even more money. Well, I guess the big difference for me and dh is that we are still very young, and we don't plan to stay in our current home forever. Just wanted to add my 2cents.

 

[bellarella]

For anything other than a house, I'd agree that it'd be foolish to have so much money tied up in one place; however, a house is a unique kind of investment: you both USE IT and PROFIT from it.

My 401K money is genuinely is "tied up" -- I get no benefit from it today; at most, I could borrow against it. However, my house dollars are not really "tied up" because I'm USING that investment every day, all day.

So I cannot agree. A primary-residence is an investment category all to itself, and it's difficult to compare it to stocks, pension plans, or any other investment.

Another way of looking at it, though, is that because you use a house every day, you would less want to have your assets all tied up in it. If everything really hit the fan and you needed more cash than your emergency fund had, if too much of your assets are tied up in your house, you could lose your house. You can cash out a 401k or a 529 -- yes you would pay penalties, but you can tap the money. If you have a mortgage on a house, you can often work with your lenders. You actually have leverage when you have a mortgage because banks do not like having to foreclose. It's a royal PITA for them and a long drawn out process. But if you've actually paid off your mortgage and make yourself "house poor" a sale may be the only way to get money out. Without a job a refinance isn't easy, since the banks won't see how you are going to start making payments, and since you don't currently have a mortgage that could be going into default, they have little incentive to take you on as a new risk. Selling your house, and all of the costs that go with it, could be your only option.

Again, this isn't the case in all situations. But I do see a lot of people who only have minimums in categories like emergency funds, retirement, and other liquid assets dump a huge percentage into their homes to pay down their mortgages.

 

[bellarella]

I flip flopped around on it a lot myself. I actually considered remortgaging when rates were around 4%, because I knew I could use that money to make more money pretty easily. When I ran the numbers, the "safe" investments weren't worth the efforts, and throwing my house into the stock market not worth the risk. I'm half an accountant by training (going back to school and basically a college Senior as far as my accounting degree goes), so I was pretty sure I knew what the differential was. But note that the degree is Accounting, not Finance - I'm fiscally conservative by nature.

I know your decision worked for you and your family, but your post does illustrate that you do need to look long term when dealing with mortgages. While when you were looking at a refinance you may have felt you'd have to invest agreesively to out earn your interest rate, now all you would need to do is set up an ING or Emigrant account. I guess I'm just conservative in a different way. For me, a low interest mortgage is insurance against inflation and economic downturns resulting from it.

 

[jenr812]

Another way of looking at it, though, is that because you use a house every day, you would less want to have your assets all tied up in it. If everything really hit the fan and you needed more cash than your emergency fund had, if too much of your assets are tied up in your house, you could lose your house. You can cash out a 401k or a 529 -- yes you would pay penalties, but you can tap the money. If you have a mortgage on a house, you can often work with your lenders. You actually have leverage when you have a mortgage because banks do not like having to foreclose. It's a royal PITA for them and a long drawn out process. But if you've actually paid off your mortgage and make yourself "house poor" a sale may be the only way to get money out. Without a job a refinance isn't easy, since the banks won't see how you are going to start making payments, and since you don't currently have a mortgage that could be going into default, they have little incentive to take you on as a new risk. Selling your house, and all of the costs that go with it, could be your only option.

Again, this isn't the case in all situations. But I do see a lot of people who only have minimums in categories like emergency funds, retirement, and other liquid assets dump a huge percentage into their homes to pay down their mortgages.

This doesn't make ANY sense to me at all. To me, house poor means your mortgage payment is so high that you can't afford anything else. If your mortgage is paid off, that is a huge amount of monthly income available to a family. If something happened, the mortgage is usually the biggest expense a family has so it would ease the burden for that to be paid. Home equity LOC are still available in the event of an emergency that wouldn't be covered by an emergency fund, and obviously the equity in the home is the most it could be when it's paid for Referring to your last statement, I totally agree with others who have said that unless you have a fully funded emergency fund, fully funded retirement funds, etc. than paying the mortgage early doesn't make sense, so that wouldn't apply

JHMO YMMV

 

[Julia M]

It's not something we're doing. We already have it worked out to where our house will be paid off when our youngest starts college. My dh would just then be eligible to retire (at 55).

We have made some decisions that many people here wouldn't agree with......sending our kids to private school, paying for competitive sports.......that do impact our ability to prepay our mortgage, save a huge amount of our income and so on. But, we are happy with our choices, and feel we are financially responsible and aren't looking to anyone to "justify" or "defend" our choices.

In a different world, I like the idea of paying down the mortgage...I like the idea of no payment. That's why I like Suze Orman.......her books really focus on what your own personal issues are, not a one size fits all like Dave Ramsey.

I tend to think Dave Ramsey's style works best for people who need structure, someone to give them a specific way to do things, and something to follow. Especially when you've been "out of control", structured control can help alot.

I think Suze Orman's style is better for someone who already has their ducks somewhat in a row, and just needs to figure out "why" they do certain things.

Bottom line, it's not just about what works for you financially, but what works for you emotionally.

julia

 

[dvcgirl]

For us, it was a cash flow deal. We could have $1500 a month going to our mortgage, or $1500 a month going to savings or somewhere else. I'm a cash flow fan. And our mortgage was an ARM. So we paid it off early. Its a guarenteed 6% return. I have other investments that do better, but I've had years where the 1.04% on the money market account beat nearly everything else, too.

We had a cash flow scare a few years ago when my husband was nearly laid off - and the stock market had crashed, so our investments weren't worth much. The lesson I took aways is that when it rains, it pours. I want my obligations to be as near zero as possible, since if we hit a rough patch, it may be a rough patch for more than just us.

Same for us....it's a cash flow issue. My DH tends to go where the best opportunities are. Sometimes that means we go a few months every few years with no salary. Not having a mortgage payment certainly helps this also, we use that hypothetical mortgage payment to invest monthly in our portfolio of mutual funds. We have invested large chunks of money in the market when we had the opportunity, but dollar cost averaging helps us to off-set any major downturns because we're buying at all times.

I also agree with Steve on probably not wanting to head out and splurge solely because the mortgage was paid off. I recently read an article by Liz Pulliam Weston where she wrote about the day that she and her DH became millionaires (meaning their portfolio hit that magical number). She described it just like any other day....in fact, it had happened a little ways back and she didn't even know it. And so the day that they did notice...they went to work, just like they normally would. I know that's not quite the same as paying off the house, but I guess my point is that it just becomes automatic....a way of life. I guess that's how I look at things.

 

[dvcgirl]

Yes, your house is an investment, but for us it would not be wise to pay off our home. Actually we just went from a 200k Mortgage to a 500K mortgage. We pulled out the 300K in equity and are investing it in other properties. We buy rentals that we are making money on every month and in 3-5 years will sell them and triple our profits. And, might I add taking a trip or two to DW in the meantime. What good is all that money just sitting in your house, when you can be using it to make even more money. Well, I guess the big difference for me and dh is that we are still very young, and we don't plan to stay in our current home forever. Just wanted to add my 2cents.

This is an incredibly risky game though, and getting riskier these days by the minute....sometimes you win, and sometimes you don't. Yes, I know, there is risk with any investment. The money that goes into my mutual funds this month may see a short term loss. The difference is, I didn't leverage the house that I live in to make my investment. Also, where do you live? Have you bought these rental properties recently, as in the past year or so? The real estate market is cooling off in a big hurry and tripling profits, well, that's mighty tough to do unless you've had those rental properties for a *long* time.

We hit the market at just the right time with our personal residence in NJ and doubled our money in four years. However, that was an incredibly rare phenomenon that isn't likely to repeat itself for quite a long time. There are an awful lot of investors in the hot markets, particularly those who recently purchased condos, who are in for a world of hurt in the not too distant future. Also, you need to factor in that sometimes you'll have difficult renters, or empty rentals, and those payments still need to be made.

I hear commercials on the radio all of the time...."Hey...are you tired of everyone making money in real estate except for you....now you can get in too!!" And I cringe....... I have no mortgage, and an on-track retirement portfolio, and I'm not running out to get a mortgage to invest my 550K of equity....no thanks. I'm not saying what you are doing is foolish, just that it can indeed be very risky, and isn't a slam-dunk financial move by any means.

 

[mickeyfan2]

I second that I would not pull money out of my home to invest in a mutual fund or individual stocks. For those who do, I wish you the results that you wanted.

 

[golden1]

Paying off my mortgage is one of the last priorities I have. I really don't want to tie up that amount of cash in one spot. Real Estate is not a very liquid asset. Interest rates are volitle. For anyone who is locked into a low interest mortgage, I would look a long time at where the rest of your money is before I would pay off a mortgage ahead of schedule. Heck, I make more in interest from an ING account than I would save by paying down my mortgage. While paying off a mortgage might feel good, it's important to realize that you are pretty much locking up that money and throwing away the key, so you just need to be sure that you have other assets that can act as a safety net.

I agree with this in general. The only thing i will add is that paying off your mortgage is a guaranteed return on your money. Stocks are unpredictable. You can't go wrong by paying off your house but you may be giving up a higher return.

 

[disneysteve]

This is an incredibly risky game though, and getting riskier these days by the minute....sometimes you win, and sometimes you don't.

Well, I'm not sure I would call it "incredibly risky" as long as you are buying positive cash flow, because at least the property is making money for you. Now as for "tripling" your investment, that's basically a crap shoot. But as long as the cash flow is positive, you can just keep the property until the value warrants selling it.

 

[DVC Sadie]

Everyones financial strategy for retirement or personal wealth is different. Plus risk tolerance levels are different as well.

Thats why I always recommend a good Certified Financial Planner to help families reach their goals within their own comfort levels.

What works for one family may or may not work for another family. For us owning homes and renting them out has worked very well for us. The renters pay off the mortgage and the extra income goes into other mutual funds etc.....

 

[dvcgirl]

Well, I'm not sure I would call it "incredibly risky" as long as you are buying positive cash flow, because at least the property is making money for you. Now as for "tripling" your investment, that's basically a crap shoot. But as long as the cash flow is positive, you can just keep the property until the value warrants selling it.

I meant incredibly risky right now....very tough to buy in many areas and even cover your expenses. We're seeing that now. I'm not opposed to investing in real estate, just prefer to do so within a REIT because I personally don't have the time or interest in becoming a landlord. We've talked about getting more involved in real estate as we near retirement, however I want to be buying when everyone else is selling . Clark Howard was talking about this recently...he's a big real estate guy. He mentioned how he hasn't been buying now for sometime because he can't cover expenses....he's been selling instead. And he'll start quietly buying when the news reports that the "sky is falling" in the real estate world. I think we're a ways away from that.....lots of air still needs to come out of the bubble.

 

[bellarella]

This doesn't make ANY sense to me at all. To me, house poor means your mortgage payment is so high that you can't afford anything else. If your mortgage is paid off, that is a huge amount of monthly income available to a family. If something happened, the mortgage is usually the biggest expense a family has so it would ease the burden for that to be paid. Home equity LOC are still available in the event of an emergency that wouldn't be covered by an emergency fund, and obviously the equity in the home is the most it could be when it's paid for Referring to your last statement, I totally agree with others who have said that unless you have a fully funded emergency fund, fully funded retirement funds, etc. than paying the mortgage early doesn't make sense, so that wouldn't apply

JHMO YMMV

Actually "house poor" is typically a phrase used to describe people who have cash flow issues, but have a good deal of money tied up in their home. The have their house, but otherwise are "poor." It is very often a condition you see among senior citizens who have run out of liquid assets, but own all of their home, but could apply to anyone who owns their home (or a good portion of it) but doesn't have enough cash flow to easily cover all of their other expenses.

And actually my last sentance was the key -- if you have a generous emergency fund, retirement fund, etc., then by all means go ahead and pay off your mortgage -- you shouldn't be in a position to be house poor. But I hear of a lot of people who only have 3 mos worth of expenses in an emergency fund and while they may be socking away the max for their retirement, because they've only been doing it for a little while so the total value of that fund isn't substantial, yet they are putting away large sums of money into paying off their mortgage. That's where I think there needs to be caution. Especially with interst rates rising, if instead of sending that money to the mortgage company, you can set it aside in a high yield savings acount or money fund (many of which are probably starting to pay close to what some people's mortgage rate is). That way, the money can still someday go to your mortgage, but you won't be risking having paid down a 5% loan only to have to borrow back a good chunk of that money at 8 or 9% (or higher, if rates keep rising, since if you are in a cash flow crunch, you can't count on qualifying for prime rates). And in the mean time, you will probably be close breaking even with the interst you are earning (and one or two rate hikes from now, may be out earning your mortgage in a regular savings account) and can use that money to pay down your mortgage once you have bulked up your other assets.

Again, if you are flush with liquid assets, then sure, go ahead and pay down the mortgage. But if there are any issues with liquidity, then I would set aside the money for future mortgage pay off, but not actually send those checks to the mortgage company.

 

[crisi]

Actually "house poor" is typically a phrase used to describe people who have cash flow issues, but have a good deal of money tied up in their home. The have their house, but otherwise are "poor." It is very often a condition you see among senior citizens who have run out of liquid assets, but own all of their home, but could apply to anyone who owns their home (or a good portion of it) but doesn't have enough cash flow to easily cover all of their other expenses.

And actually my last sentance was the key -- if you have a generous emergency fund, retirement fund, etc., then by all means go ahead and pay off your mortgage -- you shouldn't be in a position to be house poor. But I hear of a lot of people who only have 3 mos worth of expenses in an emergency fund and while they may be socking away the max for their retirement, because they've only been doing it for a little while so the total value of that fund isn't substantial, yet they are putting away large sums of money into paying off their mortgage. That's where I think there needs to be caution. Especially with interst rates rising, if instead of sending that money to the mortgage company, you can set it aside in a high yield savings acount or money fund (many of which are probably starting to pay close to what some people's mortgage rate is). That way, the money can still someday go to your mortgage, but you won't be risking having paid down a 5% loan only to have to borrow back a good chunk of that money at 8 or 9% (or higher, if rates keep rising, since if you are in a cash flow crunch, you can't count on qualifying for prime rates). And in the mean time, you will probably be close breaking even with the interst you are earning (and one or two rate hikes from now, may be out earning your mortgage in a regular savings account) and can use that money to pay down your mortgage once you have bulked up your other assets.

Again, if you are flush with liquid assets, then sure, go ahead and pay down the mortgage. But if there are any issues with liquidity, then I would set aside the money for future mortgage pay off, but not actually send those checks to the mortgage company.

Yep, You don't want to have every penny tied up in your house and no mortgage, but not have any liquid money left. Its one of the reasons that I was driving my husband nuts. He could see the money in the bank, but I wanted to pay the house down with money in the bank LEFT OVER. However, if you aren't disciplined enough not to blow the money you set aside (a problem for my husband, who sees it and spends it) you might as well sink it into your home. Having $10,000 liquid in the bank is better than having $10,000 less on your mortgage, but both are better than blowing $10,000 on a Disney trip (speaking only financially, not emotionally). And at some point you need to make sure you balance your assets, $10,000 in the bank is great, but too much sitting in a savings account isn't wise either.

 

[hannahsmomma]

This is an incredibly risky game though, and getting riskier these days by the minute....sometimes you win, and sometimes you don't. Yes, I know, there is risk with any investment. The money that goes into my mutual funds this month may see a short term loss. The difference is, I didn't leverage the house that I live in to make my investment. Also, where do you live? Have you bought these rental properties recently, as in the past year or so? The real estate market is cooling off in a big hurry and tripling profits, well, that's mighty tough to do unless you've had those rental properties for a *long* time.

We hit the market at just the right time with our personal residence in NJ and doubled our money in four years. However, that was an incredibly rare phenomenon that isn't likely to repeat itself for quite a long time. There are an awful lot of investors in the hot markets, particularly those who recently purchased condos, who are in for a world of hurt in the not too distant future. Also, you need to factor in that sometimes you'll have difficult renters, or empty rentals, and those payments still need to be made.

I hear commercials on the radio all of the time...."Hey...are you tired of everyone making money in real estate except for you....now you can get in too!!" And I cringe....... I have no mortgage, and an on-track retirement portfolio, and I'm not running out to get a mortgage to invest my 550K of equity....no thanks. I'm not saying what you are doing is foolish, just that it can indeed be very risky, and isn't a slam-dunk financial move by any means.

I guess I should have added that dh is a Realtor, and even though the market is cooling off, a house always goes up in value. Also our market is still really good. The last house we sold, we were able to make 65k in 10 months, without doing anything to it.
I know "trippling" our money sounds like a lot but, if we put 10k down today in three to five years we will be able to sell it and make 40k not including the money we make every month. That's just an example of course. And, no this is not something for everyone, but it works well for us. We have been truly blessed and DH is very good with money.

 

[stemikger]

You are all too damn smart for your own good. This was part of my problem with sticking to my plan. I start reading some of your advice and I really do see both sides of this and they both make sense. I think you all have given excellent advice.

But because I recognize part of my problem was to stop flip flopping and just stick to a strategy, I think I will have to bite the bullet and continue with the baby steps.

I think when all is said and done at the end of the mortgage payoff I will be a happy camper.

Like I posted previously, I am maxing out my 401K but not contributing to my personal IRA right now. My emergency fund is 4 months worth of expenses. So if I could pay off the mortgage in 6 years I will start maxing out my IRA and put some more liquid money aside.

But you all know your stuff and I have learned a lot from you guys. Thanks.

 

[disneysteve]

a house always goes up in value.

There are lots of people in various parts of the country who have learned that this is not true.

 

[fac]

And actually my last sentance was the key -- if you have a generous emergency fund, retirement fund, etc., then by all means go ahead and pay off your mortgage -- you shouldn't be in a position to be house poor.

I have to jump back in as I saw a few references to this. if I have all of the above, why do I need to have the security of owning a home?

Aside from some's emotional decision (say DH's example) or the tempation of spending the moeny, I think the decision should be based on rate of return and risk

This reminds me of my toothpaste scenerio. I always like to squeeze out the last bit of the toothpaste and one day I was very upset because it was very difficult for me to really get the last bit of the toothpast e out, then I suddenly realized why I was so obsessed in getting the toothpaste out, then I realized it was what I was taught, but how much had I wasted in not getting the toothpaste out? In general, people believe in the security of home ownership, but we are discussing about mortgage rate that is 4% to 6% which anyone can easily achieve in putting the money in CD. I may have a different opinion if the mortgage rate were 13%.

BTW, sorry to use a toothpaste example but it was true. The bottom line, it represents a different world.

To put the discussion in context, I am assuming when some of us discussing paying off mortgage early was by paying extra each month. The argument of not paying early would be to invest the same amount, sometimes it can be difficult if the dollar amount is not that much.

I think it depends on what works best for each family.

 

[dvcgirl]

I guess I should have added that dh is a Realtor, and even though the market is cooling off, a house always goes up in value. Also our market is still really good. The last house we sold, we were able to make 65k in 10 months, without doing anything to it.
I know "trippling" our money sounds like a lot but, if we put 10k down today in three to five years we will be able to sell it and make 40k not including the money we make every month. That's just an example of course. And, no this is not something for everyone, but it works well for us. We have been truly blessed and DH is very good with money.

Yeah, well, Dave Ramsey was not only a realtor, but a broker. I'm not sure if you're familiar with his story, but he became an investor in rental properties, got in way over his head he ended up bankrupt overnight. Also, houses do not always go up in value within a 5 year period....or even over a 10 year period. I can use the very house I live in for an example for an eight year period of time. This house was built for $255K in 1990, and it was sold to the people we bought from in 1998 for $255K. Didn't appreciate one nickle in 8 years. Our nextdoor neighbor has a comparable house....he bought in 2002 for $280, and so that would mean our house appreciated about 35K in *12* years. That can and does happen. And after the run-up we've seen....this market will not only lose some of its gains, but should be relatively flat for another few years. I wish you all the best in this though....I hope it works out for you.