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An Epiphany on Home Ownership! (D’uh)

by J. Money on Wednesday, January 11, 2012

If we pay our entire house off, not only will we NOT have any more mortgage debt to pay off every month, but we’ll also have a nice stash of cash if we ever sell! Dannnnnnng, never thought about that before! Haha… how dense am I? ;)

What that means is just insane to me. Not only would we not have to work as hard, or as much?, but if we were to ever sell and go back to renting (key part there), we’d gain $XXX thousands of dollars right into the ol’ bank account again! AWESOME!!! So pretty much every dollar that goes to the mortgage, minus the underwater part – a cool $60-$70k at the moment for us – will get funneled right back out to us later. That’s pretty neat.

I don’t think it changes anything as far as my main goal of wiping it all out or anything, but it’s a huge perk to look forward to once that gorgeous day eventually hits. And could very well cure me of my wishing to rent once and for all! Haha.. imagine that?

So yeah, that’s all I got for you today on that. I just couldn’t believe I hadn’t thought about it before, and just had to share my revelation with y’all ASAP. It still sucks maintaining the house and what not, but maybe *that’s* why everyone dreams of owning so much? Cuz it’s like sitting on a big pile of cash once it’s paid off?

 


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{ 32 comments… read them below or add one }

1 Money Beagle January 11, 2012 at 9:27 am

It’s my goal to have our mortgage completely paid off by the time our kids start college, that would definitely allow for some flexibility there. It is a nice thought to think of all that money every month no longer flowing out automatically!

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2 RJ January 11, 2012 at 9:36 am

I suppose it all depends on how much the alternative cost is to keeping the money. Making 3% on a CD sitting around isn’t going to offset your 6% mortgage rate. That, and the profit from a bank CD is going to get taxed (unless you decide to invest in municipal).

However, the stock market has grown a whopping 12% on average since 1980. That means that if you rolled the money into an IRA instead of paying off the house, at retirement you would have more money through interest than savings from not paying interest (12% > 6%).

The final thing I would consider is taxes. Interest paid on a mortgage is tax-deductible. Paying it off early just means that you’re denying yourself a tax deduction for the next 30 years. And laws have changed since the great depression. A bank cannot call in a loan in full if payments are being met on time. So there really is no overhanging debt with a mortgage. The banks are locked in just as much as you are.

With a mortgage, you’re basically using other people’s money to build value on a home while freeing up your hard-earned money for other ventures. Call me selfish, but that sounds better than owning your house next week.

Just some thoughts, I know they’re primitive but they get my point across. By the way, your blog is awesome. Keep it up!

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3 SmartAssetTeam January 11, 2012 at 9:50 am

The part that gets me with mortgages is how much you end up paying in interest. I wish the ratio between what you end up paying over the term of the mortgage and how much value the home has once it is all said and done were more like 1:1. It’s crazy how much you end up paying in interest, but the idea that you own something big in the end is encouraging.

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4 J. Money January 11, 2012 at 10:24 am

@Money Beagle – Yeah, great idea! I don’t know how old your kids are right now, but that seems do-able. Keep us updated on your journey :)
@RJ – Hey, you bring up a lot of valid points for sure :) And I think that’s def. a great game plan for some people too, *as long* as you are indeed investing it into the stock market and all that instead of paying off the mortgages (a lot of people say they would, but they don’t). I think for me I’m more interested in not having to work anymore if I don’t want to, and the #1 thing standing in my way with that is having to pay over $2,000 a month for our house. If I could nix that, I’d have a LOT more freedom to do as I please ;) Either way as long as people are actively managing their money towards their priorities, I think they’re on the right paths though. Great info my friend, thx for sharing it!
@SmartAssetTeam – For sure. But if you start paying it down earlier, all that extra money can be applied to principal making it a lot more “even” than waiting towards the end to do it. It’ll still be jacked for quite some time, but that’s the game of home ownership – unless you’re a baller and can pay straight up cash for it ;)

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5 Kacie January 11, 2012 at 10:36 am

Yep, between the big cash payout once you sell, and then freeing up your monthly payment for other things…it’s a big deal! Our first mortgage payment was made on Nov. 1, 2011. Yeah. LONG way to go.

We have 20% down on it already, and it’s a low 4.5% rate on a 30-year, AND we have a 20% tax credit off of the yearly interest (Mortgage Credit Certificate) AND in years we itemize we can take the interest deduction as well.

So, it’s not as bad as it could be. We’re wanting to boost our retirement and 529 contributions even more and then maybe we can start putting more than the couple extra bucks I’m throwing at it now.

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6 cashflowmantra January 11, 2012 at 10:39 am

That is too funny! When the time comes, downsizing and paying cash for the next place (or renting) and taking a nice chunk of cash that will pay you is a nice thing to look forward to.

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7 PKamp3 January 11, 2012 at 10:49 am

As long as you don’t spend it on something else – which, as a reader with great faith in you, I know won’t happen! You should sequester the funds in a ‘savings from paid-off house’ account, haha.

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8 Tiffany January 11, 2012 at 10:54 am

I’m only 21, but the way I see it, a house is kind of another investment vehicle… for me, anyway. I bought a condo last year. I figured now should be the time while the housing market is still down… and I bought it in a college area where I’m planning on attending grad school and where my bro is currently in school. Right now, I’m not living in it and there are college student tenants… have run into some paying issues with them, but thankfully that hasn’t messed w/ my ability to pay the mortgage so all is well. I think if you can adequately absorb the associated costs, home ownership is awesome :) For me, I don’t like having all my money in the stock market… even though that money is “diversified,” is it truly? These are just my thoughts…. I’m a total amateur and still learning so take everything I say with a grain of salt!

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9 Stephanie January 11, 2012 at 10:58 am

Haha… D’uh, indeed!! This is precisely why my husband and I decided on buying. We knew we’d be in this house for the long haul, and even when you factor in the interest we’re paying on the mortgage, it still ends up being cheaper than renting a comparable home. That disparity will only continue to grow with time, since rent prices will presumably continue to rise.

And of course, not having to worry about a mortgage payment or rent when we’re retired (well, it’ll actually be before we’re retired, even if we take the full 30 years we’d only be in our mid-50s when it’s paid off) is incredibly appealing to me.

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10 Tyler S. January 11, 2012 at 11:24 am

Well I wouldn’t say dense – just focused on taking out that mortgage! :) It’s always great when you are able to see things in a new (and positive) perspective. Best of luck in staying on track to pay it down!

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11 Nick January 11, 2012 at 11:32 am

Don’t worry – most people forget that part! A bunch of people do the opposite like forget that if they sell their house they still have to pay the mortgage back even if it is under water unless they settle without recourse or have some other forgiveness like through FHA or something. Happens to the best of us.

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12 Devin January 11, 2012 at 11:39 am

J-Money, that’s why home ownership has been viewed as a primary asset building tool for decades. One of the few ways to end generational poverty is to get people to start saving in a manner that they don’t “feel” and a mortgage, even on a lower-priced piece of property, is one such way to create behavioral change (don’t get me started on whether that asset will grow in value over time, there’s a huge fight going on at the policy-maker level about that right now).

Thanks for all your work helping keep people setting up and maintaining healthy financial lifestyles. Just remember, realizing what you Want versus what you Need is the first step!

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13 Long January 11, 2012 at 12:38 pm

Yeah exactly! Like I’ve said before, wiping out your mortgage is huge! It will definitely make a difference when you are retired and are on more of a fixed income. It really doesn’t make sense to keep a mortgage for a deduction. If you do the math, you’re paying more money to keep a deduction around. Remember, the tax deduction on mortgage interest is just that…a deduction, not a credit. That means the value of your deduction varies based on your income. If your deduction doesn’t drop you down a tax bracket, it is worthless.

When the only thing you have to worry about paying for the house is property taxes and insurance (besides maintenance) it’s a great feeling! When I sent in the very last payment for my parents house I was quite relieved! I can’t even begin to tell you how much being mortgage free on their house helps relieve me of so many responsibilities, especially since they’re old and crusty now : P

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14 Joy January 11, 2012 at 1:19 pm

Someday, we’ll pay off our mortgage….If you DO pay off your mortgage and decide to rent, don’t forget that the income from your profit will be taxed if you don’t put it into another property….I’m sure you already thought of that, though!

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15 Mysti January 11, 2012 at 1:25 pm

Don’t forget about capital gains tax…if you make more than $250,000 in profit from the sale of the house, you have to pay taxes on it.

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16 Kyle January 11, 2012 at 1:36 pm

That’s what I love – when I was renting, I felt like I was throwing money away and would never see it again. Even with the interest, paying a mortgage to me feels almost like investing, because I’ll get it back at some point when I sell.

Hopefully.

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17 Angella January 11, 2012 at 1:40 pm

My goal is to pay off our mortgage in 10 years. I bought the house in September, it was a foreclosure. It was $35k and we did some minor renovations so it’s now appraised at $127k – instant equity! Mainly because we have several acres. Right now we’re taking advantage of a low monthly payment by throwing extra money at other debts I hope to eliminate by 2013, plus for now we have to pay for childcare, which is outrageously expensive. After that, every penny towards the mortgage! Then we can sell, get the cash, and move some place far better than GA for retirement.

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18 Matt January 11, 2012 at 1:43 pm

I’m with ya J$. I’ll have my house paid off in 2-3 years then I’ll have more freedom to do as I please than any renter or mortgage holder. Live it a few more years, sock away a ton of cash, then pay in full for the next place like BOSS! No worries about payment or bad tenant issues with the rental because Casa de Matt is in the asset column.

Then rent out the old place, sock away a bunch of cash, and buy the next rental property. Rinse and Repeat, take a sick vacation, Rinse and Repeat……..and so on…..then quit my job and semi retire by 40-45 or sooner if our careers keep on track.

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19 Cassie January 11, 2012 at 2:24 pm

Bingo J$! I always shake my head at the people who say that you’re throwing money away if you pay down your mortgage. “What if you’re underwater? You’re throwing that money away” – uhh, no, you’re decreasing the amount you’d have to pay up front if you ever sold your home. “Why pay it down? The interest is tax deductable (in the US)” – which would you prefer: keeping 100% of the interest money, or saving (fill in tax rate here)% of the interest money?

I’m glad you had your epiphany. I’m so looking forward to you showing your mortgage who’s the man ;)

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20 AverageJoe January 11, 2012 at 2:44 pm

I don’t know. Here’s the anti-epiphany, dude: you have to sell the house of your dreams to get at that cash (or take out a new mortgage….yuck). That’s why although I like a wise home purchase, I’m never thinking about the pile of cash at the end of my rainbow. Too many cool memories in “them there walls.”

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21 Kathryn C January 11, 2012 at 5:35 pm

OH YES. It’s forced savings. Bring it.

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22 Houston Real Estate Guy January 11, 2012 at 5:52 pm

Thanks for sharing your Epiphany. Home ownership is the way to go and the way you described the system was incredible. I am still waiting for my pile of cash!

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23 Christa January 11, 2012 at 6:07 pm

I dream of the day I can pay off my mortgage and have a fully-paid for peice of equity and more expendable cash. Sigh. It’s definitely worth the upkeep hassle.

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24 J. Money January 11, 2012 at 8:20 pm

@Kacie – Well congrats, my friend :) That’s exciting! It seems like you really put a lot of thought, and planning, into this decision which is SUPER important. You beat me in that department by a good 500%, well done ;)
@cashflowmantra – YES! That’s what we’d do too – I’m not looking to expand bigger at all. Though I have to still run that by the Mrs, haha…
@PKamp3 – Haha, that would be one super sexy account ;) I’d imagine that by the time I reach that point though, my mission to stop working for money would kick in pretty good. Unless I’ve mastered the art of passive income by then! THAT would be perfect world scenario ;)
@Tiffany – Awww, well for an amateur you’re doing well for yourself already becoming a landlord! That’s great :) I’d love to be in your shoes, hehe… as far as stocks vs real estate, etc, though, all that matters really is that you’re *comfortable* with however you’re spending/investing/saving your money. Some people like one area over the other, but there isn’t a right answer except for going with what you’re cool with. So I’d say you’re on the right track, congrats! Keep up the learning too :)
@Stephanie – YUP! That last part is the one main thing, really, keeping me IN this house right now – the fact that you could really be mortgage-free in the near future! I love it. I don’t want to be forced to work anymore if I don’t want to. I know that may sound naive, or stupid, or whatever, but it’s a dream I think we could all reach if we really really wanted to. So let’s keep it up, okay? :)
@Tyler S. – Thanks Tyler! It really is refreshing, you’re right. My plan is still in tact and what not, but thinking of it with a different angle just amps up my excitement for this stuff… I’ve been in such a “I hate home ownership” mood that I never opened up to the idea of what’s possible if I just *dealt* with it, ya know? And now that I’ve been doing that going on 4 months now, it’s all coming to light baby! I can’t wait to post about our last payment, hehe… hope things are well on your side too, bro – thanks for stopping by.
@Nick – HAH! Exactly. That’s what finally got me to budget and start paying more off every month, actually ;) The fact that I owe the money no matter what happens, so I better start getting on it before it’s too late!
@Devin – Rock on, brotha. It really is an eye opener for sure. I’m just finally glad I’m doing something about our mortgages rather than pushing them aside the past few years… I guess it allowed me to save and ivest more over this time, but still – it’s just a good thing I started jumping into a good plan here ;) Thanks for reading the bog, and leaving your thoughts – it means a lot.
@Long – HAH! I’m glad to hear it, man :) I only hope to be in that same spot one day – and I think we’re on a good path here. Thanks for always leaving comments, I love it!
@Joy – Oh yeah! I didn’t really think about that before, but I’m sure I would have eventually :) Thx for the heads up, though! Hope you all get mortgage-free too in the not so distant future :)
@Mysti – Oh, yes – good call. I don’t think that’ll be a problem for us unfortunately though, considering we’re $60k underwater ;) But you never know! Maybe by the time we’ve paid it off, real estate prices would have doubled and we’ll be sitting pretty! (Though, then we’d have to BUY or rent a place that’s now double too, bleh… but yeah – get your point loud and clear!)
@Kyle – Haha, yeah – *hopefully* is right ;) But unless we then move into our parent’s home or something, we’ll still have to buy AGAIN if we were to sell the place! At least we can downgrade though, or move to a diff. area… luckily/unluckily, Washington DC is one of the most expensive places to live, so I think we’d be fine moving away any day ;)
@Angella – WOWWWW, that is great!!! And incredible – a house for $35k??? Damn. Way to go! :)
@Matt – YES!!! That would be a most beautiful plan indeed, I like it! Where can I sign up? ;) Maybe we can be biz partners?!
@Cassie – Haha, damn straight ;) I’m gonna rock that sucker like no other, you wait.
@AverageJoe – True, true, you’re right on that. But it’s a nice option to have if you decide to cash out and move forward ;) Esp if you downgrade, or find yourself an even sweeter home where putting down straight up cash could get you in there a lot cheaper. At the end of the day, I just want the *optoin* to do as I please – whatever that means at the time. I’m not gonna be forced to do anything anymore ;)
@Kathryn C – It’s already been broughten!
@Houston Real Estate Guy – Hehe, we’ll see it one day ;)
@Christa – Yeah, I’d agree with you on that for sure :) I can put up with maintenance here and there – even if it’s high – if I have no recurring bill hitting me every month! Esp a large one like that, I mean $hit – our mortgage/rent is the highest thing we pay every month, imagine what it would be like with that gone? Crazy.

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25 jack foley January 12, 2012 at 4:00 am

Yea, i think it should be a goal for every couple to pay off their mortgage on their home as quickly as possible..

your home is not an asset – its a liability and you will always need somewhere to live so you might as well pay it off as soon as you can..

Jack

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26 The Frugallery January 12, 2012 at 6:54 am

If you live in the house for a long time the payback when you sell could be huge. I know it’s hard to remember that right now, but over a long period of time the value should (on average) go up. We are renting currently and planning on buying at the end of this year. We want to pay it off as soon as possible so when we retire we do not have any housing costs.

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27 Brendan January 12, 2012 at 9:47 am

Nice work J Money! When you’re doing things right, it’s amazing how surprises tend to turn out positive :)

To those who say put all your extra money in savings/retirement/investments:
Paying down your mortgage has such a positive impact on your emotions that it has to be accounted for when you do a “pay down mortgage” vs. “invest every extra penny” comparison.

It’s not as black and white as comparing the average annualized rate of return of the S&P 500 vs the average appreciation of a house. There is way more to it than that. The emotional return of seeing your mortgage balance decrease every moth is enough to keep lots of people on track with their financial goals. Also, the fact is that most Americans don’t have the discipline to invest extra money.

If you want a good way to visualize the affects of paying down your mortgage, make an excel spreadsheet of your mortgage balance every month (most mortgage companies let you downloand this data so you actually don’t have to manually input anytihng). Then, in the column next to that, put in your estimated home value (Zillow is accurate in my area, but for those areas where it’s not just use your appriased value like J$).

Insert a line chart that includes the mortgage balance on one line and the estimated home value on the other. Believe me, it is GREAT to visually see that mortgage balance go down while your home value (hopefully!) remains level/goes up slightly.

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28 J. Money January 12, 2012 at 6:50 pm

@jack foley – That would be the dream! Should be a damn good day when it’s been completed too :)
@The Frugallery – Exactly. Can you imagine what your expenses would look like w/out a mortgage or rent? Crazy.
@Brendan – I like it! Great idea indeed. Right now I just keep checking our “recent transactions” on our HELOC (where all my extra payments are going right now) and love seeing the “$2000.00″ decrease every month ;) It shows up 4 times so far since I’m 4 for 4, baby! Woo! Might try out your idea next, I dig that.

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29 JMK January 15, 2012 at 11:02 am

It’s my dream to sell our place in 8 years when our youngest is off to college/university. We intend to have the mortgage paid off in the next ~3-5yrs – at the moment we have $150k left on the mortgage and the house is worth around $550k. We pay every two weeks (26 pmts/yr rather than 24 on a bimonthly plan) which knocked several years off, we also have our regular payment rounded up to the next even $100, and every year we try to make a minimum of $12k in extra payments. The maximum extra we are allowed to pay each year is about $30k. We’ve yet to hit that, but no harm in trying.
When we built this place we fully intended it to be our forever house. Now my priorities have changed and I just see the growing equity and how it would mean a massively earlier retirement. Even without the mortgage our taxes and utilities come to almost $1k/month. Then there is insurance, maintenance etc etc. and with just two of us here the place will seem way too big. I’d far rather take that $1k/mth and rent a nice appartment (utilities incl) and turn that massive pile of equity into our retire early and travel budget. We have already saved enough to fund our retirement from 65 onward, so now it’s all about how much earlier we can get out. My DH is still committed to living here forever regardless of the tradeoffs, so there I still have work to do!

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30 J. Money January 16, 2012 at 10:27 am

Haha, but damn – that sure is a good plan though! I wonder why you can only pay off $30k maximum on the place each year? It’s a mortgage stipulation? Never seen that before… if you lived closer, I’d come over and start feeding your DH some beers ;) That usually helps loosen us guys up, haha… Keep us updated!

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31 Leigh January 28, 2012 at 2:11 pm

Awesome!!! What do you think that you will do with that extra cash flow each month? You’ll still have property taxes to pay and I would still have HOA dues to pay. I’m sure by the time I actually would have my condo paid off, $1,100 per month would seem like piddly-squat, but it would still be pretty awesome to have that extra cash flow back each month!

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32 J. Money January 28, 2012 at 9:25 pm

It sure would! I’d probably just save my a$$ off for the next year or two right after paying it off (can you imagine how much faster it would add up?) and then right after “retire” ;) I’d still physically do stuff, of course, since I’d only be like 40 by that time, but I wouldn’t work as much or as fast and I’d concentrate on just the projects that truly matter to me. Whether they made much money or not. That would be total financial freedom in my eyes – working as much, or as little, as I’d want with no serious repercussions either way. Only 9 more years to go! :)

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