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Длинновато, многа букафф, но ознакомиться, думаю, стоит.
Откровенно говоря я не согласен.
Brandon DuncanFollowFollowingUnfollowBrandon Duncan
Principal Staff Engineer, NYC Site Director at LinkedIn
Every few months my LinkedIn or Twitter feed has a feel-good article about someone who paid off their mortgage early. For example, Andrea Stewart and Jerimiah Honer paid off their home in 7 years through extreme saving and frugality. Cheers to them, but I noticed these stories don't mention any of the drawbacks to doing this, aside from the obvious no dinners out or movie nights while you save. Even personal finance gurus like Dave Ramsey laud the early mortgage payoff without explaining why this might not be best for everyone. Below I list some reasons to keep that mortgage around as long as possible, if you think of others be sure to add comments!
Your House is Not Liquid
A paid off house is a nice asset, but it's not liquid. If you are suddenly faced with a big medical bill or have to replace a worn out car, the equity in your home isn't going to help you. That's because it will take time to tap into it. A cash-out refinance may take over a month, even longer if the appraisers are backed up. Not to mention all the fees associated with getting the loan. And if the reason you need the money is because you lost your job, good luck getting a bank to approve the loan with no income. Equity in your home is like that song Hotel California - you can put as much money in as you'd like, but you can't get it back out (easily). Depending on the state you live in, you can get a HELOC which does solve the problem of getting equity out quickly, but keep in mind these are variable rate (and can float monthly) and many times are recourse loans meaning the lender can come after other assets if you default.
There's two more potential problems with getting the extra equity out if you need it. We currently have historically low interest rates (thanks central banks!) and most predictions are that it will rise in the future. If you need to refinance your home, you will get the prevailing interest rate at the time - so kiss goodbye to the 30 year fixed rate loan at 3% that you had. The second problem is that if you've reached the peak of the mountain and completely paid off your home, you can't get a conforming loan on it. Ironically Fannie Mae won't buy loans from banks that were made against free-and-clear homes which means the bank won't make that loan to you. You'll need to get a non-conforming loan (usually at a higher rate) and wait 6 months (the time limit for Fannie Mae) and refinance a second time (with all the fees) to get a conforming loan.
A Mortgage is an Inflation Hedge
In 1974 my parents bought the home they still live in. The monthly payment on their 30 year mortgage was $400. They told me that for the first few years, the $400 felt like $4 million because they were so stretched! But by the end of it, in the early 2000s, $400 a month felt like nothing at all - less than a car payment. This is because for 30 years there was inflation, and they got to pay back fixed payments (always $400) with inflated dollars. Their income tended to go up over the years, so their monthly cash flow increased. And this was during a time of relatively low inflation. Ignoring a spike in the late 70s, for the past 30 years in the US inflation has been about 4% annually or lower. If there are sustained periods of high inflation in the future, having a fixed monthly payment will convey ever larger benefits in addition to the value of the home increasing in nominal dollars. To take it a step further, if you believe there will be higher inflation in the future, rather than pay off the mortgage early take the money you would have used to do that and buy TIPS from the US government to boost the advantage further.
Missed Opportunities
Buying TIPS instead of paying the mortgage early is an illustration of Opportunity Cost, an economic concept I've described before. In short, if you choose to pay down your mortgage faster, you forgo all the other things you could have done with that money. You need to consider these opportunity costs. For example, the money could be invested in stocks or bonds. Instead of paying back a 3% loan faster, the money could buy stocks that grow 8%. This is called arbitrage, and it's basically how a bank works. The bank pays depositors 1% and then loans the deposits out at 5%. Of course, buying stocks and bonds carries risk. So we are comparing a not-guaranteed 8% return versus paying off the loan faster, which is a guaranteed 3%. But remember that stocks and bonds can also provide income in the form of dividends and interest, unlike your home which provides no income*. This income may be tax advantaged, and it's income that can be put towards your monthly mortgage payment.
* unless you are over 62 and get a reverse mortgage
Going back to my parents, when they first got their mortgage in the 1970s the interest rate was 10%! But this was also a time when you could earn 7% just putting money in a FDIC-insured savings account at the bank. Now we have historically low rates - both for mortgages and savings accounts. But ask yourself what is the likelihood rates will stay this low for the entire duration you stay in the home? If they increase, you can effectively use arbitrage at low or no risk with CDs, TIPS, etc, while your mortgage is still at 3%.
The converse is also true. If you choose to do something other than paying down your mortgage faster, then you've passed up the opportunity to pay down this debt. Which means you need to be smart about it. Don't go buy a new jet ski, don't splurge on a Hawaiian getaway. If you've decided you can put an extra $500 per month towards the mortgage, then I'm suggesting alternatives for that money such as TIPs, 401k contributions where you get company matching dollars, etc.
Откровенно говоря я не согласен.
Don't Rush to Pay Down that Mortgage!
- Published on October 31, 2016
- Featured in: Real Estate
Brandon DuncanFollowFollowingUnfollowBrandon DuncanPrincipal Staff Engineer, NYC Site Director at LinkedIn
Every few months my LinkedIn or Twitter feed has a feel-good article about someone who paid off their mortgage early. For example, Andrea Stewart and Jerimiah Honer paid off their home in 7 years through extreme saving and frugality. Cheers to them, but I noticed these stories don't mention any of the drawbacks to doing this, aside from the obvious no dinners out or movie nights while you save. Even personal finance gurus like Dave Ramsey laud the early mortgage payoff without explaining why this might not be best for everyone. Below I list some reasons to keep that mortgage around as long as possible, if you think of others be sure to add comments!
Your House is Not Liquid
A paid off house is a nice asset, but it's not liquid. If you are suddenly faced with a big medical bill or have to replace a worn out car, the equity in your home isn't going to help you. That's because it will take time to tap into it. A cash-out refinance may take over a month, even longer if the appraisers are backed up. Not to mention all the fees associated with getting the loan. And if the reason you need the money is because you lost your job, good luck getting a bank to approve the loan with no income. Equity in your home is like that song Hotel California - you can put as much money in as you'd like, but you can't get it back out (easily). Depending on the state you live in, you can get a HELOC which does solve the problem of getting equity out quickly, but keep in mind these are variable rate (and can float monthly) and many times are recourse loans meaning the lender can come after other assets if you default.
There's two more potential problems with getting the extra equity out if you need it. We currently have historically low interest rates (thanks central banks!) and most predictions are that it will rise in the future. If you need to refinance your home, you will get the prevailing interest rate at the time - so kiss goodbye to the 30 year fixed rate loan at 3% that you had. The second problem is that if you've reached the peak of the mountain and completely paid off your home, you can't get a conforming loan on it. Ironically Fannie Mae won't buy loans from banks that were made against free-and-clear homes which means the bank won't make that loan to you. You'll need to get a non-conforming loan (usually at a higher rate) and wait 6 months (the time limit for Fannie Mae) and refinance a second time (with all the fees) to get a conforming loan.
A Mortgage is an Inflation Hedge
In 1974 my parents bought the home they still live in. The monthly payment on their 30 year mortgage was $400. They told me that for the first few years, the $400 felt like $4 million because they were so stretched! But by the end of it, in the early 2000s, $400 a month felt like nothing at all - less than a car payment. This is because for 30 years there was inflation, and they got to pay back fixed payments (always $400) with inflated dollars. Their income tended to go up over the years, so their monthly cash flow increased. And this was during a time of relatively low inflation. Ignoring a spike in the late 70s, for the past 30 years in the US inflation has been about 4% annually or lower. If there are sustained periods of high inflation in the future, having a fixed monthly payment will convey ever larger benefits in addition to the value of the home increasing in nominal dollars. To take it a step further, if you believe there will be higher inflation in the future, rather than pay off the mortgage early take the money you would have used to do that and buy TIPS from the US government to boost the advantage further.
Missed Opportunities
Buying TIPS instead of paying the mortgage early is an illustration of Opportunity Cost, an economic concept I've described before. In short, if you choose to pay down your mortgage faster, you forgo all the other things you could have done with that money. You need to consider these opportunity costs. For example, the money could be invested in stocks or bonds. Instead of paying back a 3% loan faster, the money could buy stocks that grow 8%. This is called arbitrage, and it's basically how a bank works. The bank pays depositors 1% and then loans the deposits out at 5%. Of course, buying stocks and bonds carries risk. So we are comparing a not-guaranteed 8% return versus paying off the loan faster, which is a guaranteed 3%. But remember that stocks and bonds can also provide income in the form of dividends and interest, unlike your home which provides no income*. This income may be tax advantaged, and it's income that can be put towards your monthly mortgage payment.
* unless you are over 62 and get a reverse mortgage
Going back to my parents, when they first got their mortgage in the 1970s the interest rate was 10%! But this was also a time when you could earn 7% just putting money in a FDIC-insured savings account at the bank. Now we have historically low rates - both for mortgages and savings accounts. But ask yourself what is the likelihood rates will stay this low for the entire duration you stay in the home? If they increase, you can effectively use arbitrage at low or no risk with CDs, TIPS, etc, while your mortgage is still at 3%.
The converse is also true. If you choose to do something other than paying down your mortgage faster, then you've passed up the opportunity to pay down this debt. Which means you need to be smart about it. Don't go buy a new jet ski, don't splurge on a Hawaiian getaway. If you've decided you can put an extra $500 per month towards the mortgage, then I'm suggesting alternatives for that money such as TIPs, 401k contributions where you get company matching dollars, etc.
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