4 Critical Considerations For Every Mortgage Borrower

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Ignore at your own risk!

In my post from a few weeks ago, Should I stay or Should I Go?, I spoke about my research into how and why retirees were faced with this tough decision. Time and time again, I found that these folks had concentrated on getting their mortgage paid off as quickly as possible. They paid extra money on their mortgage or took out shorter term mortgages of 10 or 15 years. Because all of their “extra” money was going toward paying off their house, they delayed saving for retirement or their kids’ college until they finished.  After all, their parents had told them debt was bad and they should pay it off as quickly as possible.

This strategy made sense at one time, but that time was decades ago. Houses were less than $100,000, usually much less, and represented less than 10% of their net worth. Today, with the median home price here in Marin approaching $1,000,000, your home has become a significant portion of your total assets. You probably wouldn’t ignore the investments in a million dollar IRA or brokerage account, but many folks ignore the financial side of home ownership, even though it has such a huge impact on your overall financial picture.

Since all home purchases are financed (yes, even you cash buyers are financing your purchase), the wrong financing decision can cost you hundreds of thousands of dollars (in many cases even more!) from your retirement and legacy nest egg. So let’s take a look at some of the key considerations.

First, how much would you invest in an account that was guaranteed to earn 0% rate of return? What is the rate of return on your home equity? Hint, it is the same for everyone! Your home equity earns a zero percent rate of return. I know what you are thinking, “my house has gone up in value” but the change in value had nothing to do with how big your mortgage is. So in order to break even, your house must appreciate at a rate at least equal to the amount you would have earned on your equity, had you invested it elsewhere.

Second, am I safer with my house paid off? Well if you believe that diversification reduces risk, then the answer has to be no! If I have a mortgage for $500,000 and $500,000 in a liquid account, there is no debt on your balance sheet. When home prices dropped during 2008, if I had my equity in a safe liquid account, I didn’t worry about the drop in value, all the risk belonged to the bank!

Third, paying off your mortgage might increase your taxes. I have taught many classes on this to other financial professionals, including the California Society of CPA’s. It is one of the most valuable tax deductions we have. So many folks put money into IRA’s and 401k’s, defer their taxes and simultaneously kill the one tax deduction that could help them enjoy more of what they saved! Most retirees are shocked to find out how high their tax bill is after they stop working.

Fourth, aren’t you better off if you are in control of your money? If I have paid off the house and I need to access the equity for any reason, the decision isn’t mine. I either have to get a banker to agree to lend me money against my equity (which wasn’t generally available during the Great Recession), or sell the property and get a buyer to give me the money (which again wasn’t generally available during the Great Recession, except at a big discount). Even if you could access one of those options, the costs can be huge! Most folks would be better off having their equity available to them when needed.

There are many reasons to own a home. The memories and feeling you get from controlling the property can’t be measured in dollars and cents. However, the financial impact of poor purchasing and financing decisions can create a hole in your planning that you may never dig out of. If you want to see more detail on this subject, or get a free mortgage analysis from someone other than a loan officer, contact our office and we can set up a “Mortgage Master Analysis” appointment for you. It could add thousands to your financial security.
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