The Issue of Debt: Part 5, Mortgages

Recently, a client decided to pay their mortgage in full, and live their retirement years mortgage (and other debt) free. While this may not be something to consider for many people, for my clients it was a very real option, and I was happy to help them make it a reality.

As you know, there are many types of mortgages. Fixed, adjustable, long, short, etc… the options are seemingly endless. Over the years during my home buying endeavors, I’ve had many mortgages. Without them, I couldn’t have bought as many homes as I have. I’ve leaned towards the fixed rate mortgages for their simplicity and unchanging payment structure. My goal has been to become debt free prior to retirement. This can be done by getting the right size mortgage and when you are able, make additional principal payments and retire your debt early.

I know people that hope to never pay off their mortgage. They are using their low monthly payment to finance their slightly higher, less affordable lifestyle. There are advisors that recommend the same, never pay off your mortgage. Their assumption is their investments will outperform the interest cost. This may be true in the long run. However, over the past two decades we’ve seen a great deal of volatility. And with that volatility, we’ve seen investors make poor decisions and lose a great deal. Investors don’t always keep their investments in the markets. In my experience, those with no mortgage worry less about market fluctuations. I’ve also heard the mistaken argument about losing their tax deduction. “I’ll lose my tax savings.” But you will retain more  of your own money if you don’t pay any interest.

Over the long run never paying off your mortgage may be, objectively, the better route. However, upon entering retirement feelings and the subjective decision criteria usually win over and it is determined by many, including the client I just helped, happiness comes without a mortgage.

My guidelines:
1. Get a much smaller house than you can “afford.” Smaller will save your more in lower heating, air, upkeep, maintenance, etc… This will allow you larger budgets on other necessary expenses.

2.  A mortgage payment should be no more than 25% of your take home pay.

3.  Put 15-20% down on a 15 year or less mortgage.

4. Pay it off as soon as possible given your other spending needs like education, retirement accounts funding and paying cash for cars.

Robin’s Input:   
Dan asked me if I had anything to say about mortgages and I had to laugh and say, “I don’t know much about them other than we own a few of them, and someday it will be great when we own the homes they represent.”  I am not a financial planner but I do have a strong opinion about mortgages. I can remember a conversation Dan and I had years ago when we had just become engaged, and how I  hoped we would plan our finances around one salary because my dream was to duck out of my nursing career when the babies came. A few months later he purchased our first home based on his salary, while we saved all of my salary for vacations, education, and long-term savings.

This forethought afforded us relief in life’s setbacks, and options while attaining our dreams. Life does hand us hard times such as we experienced when we were starting our family.  Between our two sons we had lost a baby at 20 weeks. I was on bedrest for four weeks until the baby died in utero, and the grief that followed was intense. The next baby was high risk, putting me at Rammstein Army Hospital for four weeks and more bed rest. Because we had based our  lifestyle and mortgage on one salary, I could concentrate on my own recovery without the stress of earning a salary.

Life is expensive and unpredictable, but the best insurance you can give yourself is living below your means. Couples who base their mortgage on 25% of one salary find the freedom to take a lower paying position to advance a career- we see this often with folks going back and forth between the government and private sectors. The “one salary” option gives a couple freedom to take turns advancing their education while going part-time at work. And lastly, when starting a family both men and women can take turns dipping in and out of their careers to take care of babies. If you are single, look at Dan’s guidelines to base your mortgage on 25% of your take home pay; to allow yourself relief when times are tough and freedom when life hands you opportunities.

Look at you life goals and ask yourself if a big mortgage will hinder any of those plans.

Dan and Robin Joss

The Issue of Debt- Part 5, Mortgages

Previous Debt Articles
The Issue of Debt: Part 1, The Role of an Advisor
The Issue of Debt: Part 2, 5 Types of Debt Defined
The Issue of Debt: Part 3, How We Avoid Credit Card Debt
The Issue of Debt: Part 4, What to do When Family has Debt