Should You Pay-off the House?
|September 13, 2011||Posted by Roshawn Watson under Uncategorized|
By: Roshawn Watson
You should maintain adequate liquidity, especially in today’s challenging economic times. Since the Spring of 2008, I have AGREED with Suze Orman: keeping at least an 8 month emergency fund (more on this in an upcoming post) seems reasonable to me AFTER you are debt-free excluding the house.
I submit to you that this IS risk-adverse and also a NECESSARY precaution. Consider the following as the rationale: 1) job-security is an illusion, 2) most real estate values have seen significantly better days, 3) it’s hard to convince yourself to sell equities in an emergency (especially if the market happens to be down), and 4) it may be hard to obtain loans from banks when you need it the most (instead they may close your line if they aren’t certain they will be paid back).
Paying $10,000 to Save $2500
Perhaps the most absurd reason to keep mortgage debt is to take advantage of the tax deduction. Now, I’m not denying that the tax deduction is beneficial, but I will submit to you that it may not be financially wise to pay the bank $10,000 per year (i.e., your mortgage) in order to avoid paying the IRS $2,500 per year (i.e., the extra amount you would pay in taxes if you didn’t have the mortgage). If you really want a tax deduction without wasting money, consider giving some money away to a charity and itemize. Of course, you would have the added benefit of doing some good in the process while increasing your bottom line. I suspect that is a lot better than merely making your lender richer for the privilege of keeping a mortgage around for longer than necessary.
Everyone is in Debt… oh Really
First, to assume that everyone has a mortgage is faulty. According to the US Census Bureau, about 30% of homes are owned free and clear, with the housing expenses of those with mortgages being approximately 3.5 times that of nonmortgage homeowners. Of course, many people rent as well. What I find more interesting is not the fact that people operate without debt but rather who operates without debt. Sometimes there is the presumption that if you don’t use debt, you are not financially sophisticated. However, this is an unsubstantiated claim. Consider that, since debt is typically your second greatest expense, eliminating debt often liberates one to build wealth. That’s because your income is your most powerful wealth-building tool. Accordingly, it should not surprise you that 75% of the Forbes 400, the 400 richest Americans, say that the best way to build wealth is to become and remain “debt-free.” In other words, keep the debt at your family’s own financial peril.
But They Approved Me
Some people confuse making enough to obtain a loan with financially winning. All the former means is that the lenders deem you a worthy enough risk to make them rich. Congratulations …I guess! However, who is making you rich? Just because you can obtain a property doesn’t necessarily mean that the cost of maintaining that property won’t BURY YOU. Do you know with certainty that your housing costs do not exceed what’s reasonable given your income level. Despite more stringent lending standards, some people are still getting taken for a ride. It’s simply a fact.
The sooner you get rid of your housing debt the sooner your living expenses shrink and the real fun can begin. Again, your most powerful wealth-building tool is your income, so it would serve you well to not burden your income with loans, especially long-term loans. My fellow savers and investors know what it is like to be able to bank a mortgage a payment or two on a regular basis; if you do this consistently, you will be in a position to GIVE away a mortgage payment! (If you find that statement shocking, this is where the increased liquidity associated with reducing one’s housing expenses may come into play)
No house is worth your financial security, nor is that house a badge of honor. It’s the paid-for house that is the true badge of honor! Are you going to be (or are you already) a part of the 30% who will make this YOUR reality?
Copyright 2012, Roshawn Watson, Pharm.D., Ph.D. All Rights Reserved.