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An increasing number of homeowners are considering paying off their mortgage early. While paying off debt generally is a sound strategy, homeowners also are aware that mortgage interest is tax-deductible, so paying off a mortgage early may not be in the best interest for all homeowners.
MAKING SENSE OF THE STORY
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Ric Edelman, America's #1 independent financial advisor 09' & 10' (Barron's magazine), inductee into the Financial Advisor Hall of Fame, #1 selling author, amongst many other honors/awards, made a big commotion in the mortgage world a few years ago with his blog post: 10 Great Reasons to Carry a Big Long Mortgage. Never own your home outright. Instead, get a big 30-year mortgage, and never pay it off — regardless of your age and income.
When I first read it I was thought he was just trying to get people to read it with a controversial headline, or just crazy, until I did the math myself. Ric is 100% right. There is really never a reason to pay off the house, get a 15 year loan, or even make extra principal payments towards the mortgage; and it can be counterproductive to actually achieving our goals.
Here's his article (it's been updated a few times over the years). http://www.ricedelman.com/cs/education/article?articleId=232
Since that revelation I've changed the way I council my clients. Most people are not receptive to the truth at first, and some never want to hear it, but for those that do they had the right information to make the best possible decisions with their mortgage and are in a better place for it now.
First thing, I never advocate that someone refi any and every time they have equity. Each person's situation is going to be different and should be looked at as such. I like to sit down with the borrower and his/her financial planner when they make that decision to make sure they are doing the right thing and have a solid plan with achievable goals.
So, now that we have that cleared up. No one lost anything when the market turned for NOT paying extra towards principal. Just like Ric explains the only way to get at your equity is to sell or refinance. Well, when the market turned that would be the worst time to try and do either of those, something that would be impossible to do for a lot of people and just so happens to the be the time most people needed to do it. You're making my point for me. Now this loan officer you speak of may have given bad advice, I have no idea, however if all he said was not to pay down your mortgage any faster than you have to what did any of these homeowner's lose when the market turned? If they followed his advice all they lost was risk, which was left with the bank.
(continued)Also, in times like these, after the market turned, a lot of people lost their jobs/income. Cashflow is more important now than it ever has been. Say you're 5 years into a 15 year loan that you've been trying to pay off as quickly as you can. You're budget allows an extra $100 towards the principal on top of your payment and, oops, down economy's here and you lost your job. Well your mortgage balance is significantly lower than it would have been if you had gotten a 30 year loan and never paid any extra to the principal but now you have no money saved and no income! A lot of good that lower balance is now, you're about to lose your house anyways (that 15 year payment is a lot harder to make with no income than the lower 30 year payment would be). And, since this is happening while homes are at their lowest value in 8 years, you're taking a big loss too. Now you've lost your house and all that extra money you put into the mortgage, and have nothing. While your neighbor got a 30 year loan 5 years ago, he lost his job too (you worked at the same place). But he put the difference of the amount between what you put into your mortgage, and his 30 year payment, into low/moderate risk investments. His mortgage balance is quite a bit higher than yours but he has enough extra saved to make his mortgage payment for another 4 years if he had to.
You're right, having your house paid off at retirement is usually the difference between a nice retirement and a bad one, except you have it backwards. Most people that retire with their home paid off have much less wealth and income than they would have otherwise had. Someone that wisely saves/invests will always have a more comfortable retirement compared to the person that puts that extra money into their mortgage just to have the house paid off. A LOT of those people retire with nothing.
(continued)I don't know about you but I'd rather have (I'm just making these numbers up) a $1,000 mortgage payment with a $3,000 monthly income and $300,000 in the bank/retirement accounts than $0 mortgage payment and a $1,000 a month income and little to nothing in the bank. While the differences don't have to be that dramatic, they usually are. I see it all the time. My retired clients with a free and clear property or that almost have their home paid off have little to nothing for savings/income, they put it all into the house. A lot of them are looking for reverse mortgages (products I don't like if they can be avoided) just to be able to have any sort of dignified lifestyle. While my clients at or near retirement that have money in the bank and a more certain retirement in front of them almost always have a mortgage, usually one that wasn't originated all that long ago. They can make their mortgage payment and have plenty in monthly cash flow and reserves. Heck, a lot of them have enough to pay the mortgage off in full. But they don't, because they are smart.
Of course there are some variables. In a down economy like this one some people may not be able to sell when they might have wanted. Some people may decide to work an extra year or two before retiring. But you know what? Those decisions would be no different if they put money into their mortgage instead of saving/investing it over the years. The difference is the person with the smaller loan will be less wealthy and have a smaller monthly cash flow. Every time. It's the "Smart Sam" & "Nervous Nick" thing.~Greg
For a qualified opinion on your personal situation, see a CFP or a CPA. My personal opinion - home ownership isn't just about money. It's about a place that is part of you and your family. It's something that is part of our legacy that we leave to future generations, along with the memories that were created there.Let's face it though - if you never pay off the mortgage, you don't own the home. You're just paying rent to the bank.
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