Over the last decade, it has been more popular not to pay off your mortgage and countless investment brokers have encouraged investing the extra money in something else – like the stock market. Today, we find ourselves on the edge of the largest mortgage meltdown in history, facing the largest financial crisis since the Great Depression.
My grandfather’s advice to pay off my house is starting to sound like a good idea. Personally, I don’t have my house paid off, but it is part of my long term goals.
Last February, JD from the popular personal financial blog decided that paying off his home was a worthy goal, which you can read about here.
A year earlier, JD wrote an interesting article about the subject. He makes the case that among several financial authors and personal financial bloggers, the options vary from one side of the argument to the other.
One interesting quote says,
“This is really remnant of Depression mentality that has persisted from generation to generation,”
But, if we are headed back into a depression era, then doesn’t it make sense to return to the financial ideas that were most popular at that time?
In light of the new reality that the market is collapsing and the era of easy money is disappearing, America is beginning to realize that the entire decade of prosperity was a fantasy. The primary ideas behind putting money into the stock market instead of paying off one’s house was a bad idea because home values were not actually increasing in value like they were perceived to be. The primary financial forces of ‘low inflation’, ‘rising home values’ and ‘low interest rates’ that made paying off your home look like a bad idea will soon be gone. And they are disappearing so quickly that it’s very difficult to change positions and move your money back into your home.
Times are changing very quickly and we will very soon be looking at high inflation and higher interest rates. The window is collapsing and now is perhaps a very good time to pay off your house – while you still have a high paying job. The unemployment could drastically increase in the next few years, while many other jobs could be forces into taking pay reductions.
Age of Foreclosures
I read a story the other day about a young couple that bought a new home a few years ago and as the value went up, they took a home equity loan for an additional twenty thousand dollars and used the money to add things to the house, like a rap around deck, new landscaping and finish the basement. But, now they cannot afford the house payments and are in foreclosure because they couldn’t sell the house at a loss. On top of that, they think the government should use taxpayer money to bail them out so they can keep their large home with the rap around deck.
I think they made a mistake and should be allowed to suffer the consequences of their actions. They are young, have plenty of time to recover and the next time they buy a house maybe they will think twice before adding a rap around deck with money that they don’t have. I don’t have a rap around deck on my house. But, I would rather keep my house then add a rap around deck.
Here are 10 reasons to pay off your house.
1. Financial Security
Owning your home is quite possibly the most financial secure decision you can make. After a mortgage, food and energy, everything else in a family budget is optional. Paying off your home gives your entire family (including your extended family) financial security, because everyone knows that no matter what happens – you will still have the house.
In the years ahead, the economy could put a lot of people out of work. We are quite possibly at the beginning of a Depression, like in 1929 when the stock market crashed, yet it wasn’t until 1932-33 that the economy hit the bottom. This is a good time to consider the financial integrity of your extended family. You may need to help a family or two within your extended family. Consider what that might mean for your family finances so you are better prepared for it when it happens. Having your house paid off could make a big different in a difficult situation. You may also consider two families living in one house, as in an Indian style living.
2. Peace of Mind
A home is usually the single largest family purchase and therefore the largest bill in the budget. Besides the largest monthly bill, a mortgage usually takes the longest to pay off. Thirty years is long time to go without a disruption to your family income, yet a mortgage is not optional like other items in a family budget. The reason that a mortgage causing stress on family finances is because it is the largest bill for the longest time and is not an optional expense. For this reason, paying off your mortgage brings peace of mind. Peace of mind is comforting in an economic crisis when everyone else is anxious and afraid of what direction the economy is going to take next.
3. Increase Cash Flow
Paying off your mortgage eliminates the largest expense in a family budget and drastically increases a family’s cash flow. The increase in cash flow can be used for any number of things, like increasing a savings or emergency account or paying off other debts like school loans or even helping your children pay for college. Part of the reason I would like to pay off my house within the next few years is so that I can redirect my additional cash flow to the education of my children, starting with a private high school. If a family can pay for their home in fifteen years that is about the time that children need a considerable amount of money to pay for their education. Paying off your home could likely be the ticket to your children’s education.
4. Freedom to Help Others
When you have your home paid for, you are in a position of freedom to choose what to do with your additional cash flow. One of the options is to help friends or family members who are struggling to support their own families. Life is not fair. Not everyone has the opportunities that you do or the ability to plan your family finances. Helping others is much more efficient then the government’s way of redistribution of wealth through the process of taxes. The more people you can help the less the government needs to take from you.
Also, when you give people money you get to decide to give it to. Even better than that, they learn that somebody cares for them and the enjoyment of that experience, knowing that you gave them money out of the kindness of your heart knowing that you could have purchases more goods for yourself, is powerful enough to last a lifetime. I have found that the impact of giving people money is perhaps the most useful things that money can be used for. People never forget when you give them money, but they forget government money the minute they spend it.
5. You Have To Pay For It Sometime
Sooner or later, we all have to pay for a roof over our head. Once you decide on the roof that you are going to live the majority of your live under, then get on with paying for it.
The popular opinion of the last decade that your house will appreciate faster than you can pay for it was dead wrong – as is now evident. The truth is that your house will not pay for itself. You have to pay for it and the sooner you realize that the better. On top of that, it’s more likely that your house will cost you more money in the future, as taxes and maintenance continue to increase.
6. There Are Better Tax Deductions
Everyone has heard about how it’s better to have a large mortgage to take advantage of the tax deductions from the interest paid on your loan. The only problem with this argument is that the tax deductions are not that big of a deal for most middle income families.
For example, last year I paid about $5000 in interest on my home loan and managed to stay under the 15% tax bracket with my child, education, and donation deductions like millions of middle class Americans. At best, I saved ($5000 x 15%) = $750, but my effective tax rate was closer to 6%, which reduces by savings to ($5000 x 6%) = $300.
To me, $300 is not worth the additional headache of continuing to pay my mortgage. A much better deduction is to invest in your own small business, because the tax advantages are much higher. The tax laws favor small business and you are growing an asset that has a future value, which also provides financial security in times of financial stress. For more about this, here are a few great articles; Get Your Own Customers, Leverage is Everything.
7. Less Risky Then the Stock Market
Paying off your mortgage is much less risky than investing in the stock market. If you have money to risk, than you can take your chances with the stock market, but first consider paying off your mortgage or at least having enough cash to pay off your mortgage. Too many people in America are risking too much money in the stock market. Up to 50% of American’s have money in the stock market, compared to 10% in most other parts of the world. It goes back to my ideas about starting a business, if you only have $5, stick to selling Kool-Aid at the end of the driveway and leave the house-flipping to Donald Trump.
A lot of people are risking more than they can afford to lose in the stock market. The benefits of the government supported saving plans like the 401k have been over marketed. Why investing in a 401k is a bad idea.
8. Very Practical and Visible Goal
Financial planning is about setting goals and achieving them one by one. Paying off your mortgage is one of the most practical and visible goals that a family can have.
If you are thinking about making this one of your goals, then consider setting a goal to pay off your house in half the time of a typical 30 year mortgage. Paying off a home in fifteen years is a practical goal for most families without the family having to starve trying to meet the goal.
Also, as you get close to the end, consider paying the last several years in one chunk. That way you reduce your risk of depleting your cash reserves before your house is paid off. The last thing you want to happen is to suffer a financial setback just before paying off your house and having to lose your investment, do to bankruptcy or foreclosure. Consider holding the last few years of cash in the bank and then paying it off in one chunk to protect your investment from a financial setback.
9. Relocating Costs Money
Every time you change housing locations, a lot of people get some of your money. Bankers, realtors, moving company, mortgage closing companies all get some of your money when you relocation. Relocating can cost you up to 10% of the value of your home. Very few consider this when purchasing a home.
First of all, if you don’t know how long you will be living in an area, then don’t purchase a house. Consider renting a house or apartment. If you do plan on living somewhere for a long period of time, than your best option is to purchase a home and pay it off as soon as possible. It’s not in your best interest to purchase a home knowing that you will likely need to sell within the next few years. When you purchase a home, keep in mind that relocating will cost you money. Keep that in mind when you consider your lending options (ARM, Balloon, fixed rate) and the risk you are taking if you were to lose part of your income sometime in the future.
10. Alternative Income
If you lose your job but have your house paid off, you can start your own small business and use your house as your business office. In fact, the housing boom produced so many large homes that are now selling at low prices, that I think we could see many homes purchased for business use in the next few years. Especially when interest rates increase to the point where new office space construction becomes very expensive.
Construction companies looking for a new markets should consider going after this idea. They could purchase cheap homes, convert them to office space and then sell them to small businesses.
If the owners live in the house, they can also take advantage of the tax deductions for part of the house that is being used for the business.