You are debt free, you have a large savings, you are investing 15% of your income into retirement, and your kids college is being saved for if that is what you chose to do. So what is next? The controversy and disagreement with Dave continues with this baby step, pay off your mortgage. There are a lot of different opinions on this subject and we can see some of the reasons other people present as to why their take on this decision makes sense. However we tend to favor what Dave teaches for this example and we will explain why.
Risk- Your house is one of your largest assets and if you have a family it becomes an even more valuable asset. By paying off your house you lower the risk that anything bad will happen. You give yourself more flexibility to move plus if you were to go through a rough time financially, the last thing you would want to worry about is being able to afford your mortgage payment. Paying off your house is the safest thing to do for peace of mind.
Allows You to Save that Payment for Something Else- Let’s just say your mortgage payment is $1,500. We hope that is your highest bill per month that you pay. If you did not have that payment though, what could you do with that $1,500? That is not a small amount of money to be playing around with. If you invested that money or even just put that into your monthly budget, big things would happen.
Limits Cash Flow- This goes hand in hand with the above point, but what many people (and businesses) struggle with is cash flow. You could have all the best stocks, investments, and assets, but if you can’t get to the money easily if it was needed quickly in an emergency, you are setting yourself up for possibly a very difficult situation. Freeing up $1,500 using the example above no matter what you decide to do with it, gives you the potential to ease the burden on where your money is going.
What are some reasons for a mortgage? Lets take a look at what we have heard as the most common reasons
Are Not Going to Pay it Off Anyway- A lot of people have the mindset that they will not be in the house for 30 years so why pay it off? Invest a little into it, sell it, and hope to break even or make a little on it. Why put money into something that has a low return on investment in terms of immediate benefits?
Interest Rates Are So Low- Why would I want to pay something when the interest rate is only 3%, 4%, or 5%? If you have debt that has higher interest rates you may want to tackle that first. Or if you believe that houses are investments/assets, you may argue that since that interest rate is so low, you could use the money for another mortgage.
Can Use That Money for Other Things- Which is similar to the point above and also saving that payment for something else. This is the flip side though. By keeping the mortgage and not putting more money into it, you can use it to invest, save, spend, whatever you want to do. It is just a reversed way of thinking than the points we made above.
This is definitely a baby step where we do not claim to be experts as we are looking for our first house. There is so much that goes into buying and owning a house that it should not be lightly made decision. We think that is where a lot of the trouble happens. People buy houses they may or may not have been able to afford, don’t have an emergency fund to pay for expenses, and don’t factor in extra expenses owning a house. With work becoming more and more remote, for some people the need to own a house is less of a desire and renting actually becomes a better option. We would sum up our points like this. Debt in general is risky and can be stressful. Owning a house has many variables that also adds stress and risk that need to be fully prepared for. If you get into buying a home and don’t fully understand everything that comes with it, your house as Dave would say, does not become a blessing, but a curse.