Paying off one’s home?
Chris or Adam,
In these uncertain days, and economy circling the drain, if one has the financial resources to pay off your home, should you do it? Just wondering if financial institutions will put a moratorium on large financial transactions when the economy finally collapses. Even though your account is insured by the FDIC, does that really mean anything if the government is insolvent. I would still anticipate a run on financial institutions. Your thoughts…
I do not know the US rules, but in Holland we have: if you have a debt (house loan or negative account) but also a positive savings account, all these are regarded as 1 position. meaning if you do not pay off the house loan but instead open a savings account with the same value you would have the best situation. if the bank collapses your total account would be zero, but also if at the end there is no problem for the system/bank you can take the savings back later for other use
My two cents: it depends.
For some, paying off the mortgage would leave them house poor, so it may make more sense to remain in cash in uncertain times. In the case of extended income loss, your savings would get you through. Remember you could still lose the house for failure to pay property taxes.
It might make a difference whether your state was recourse or non recourse, leaving open the possibility of walking away from an upside-down house money still in the bank.
Another way to look at this is your mortgage is about the lowest interest loan you could get, so (1) the interest on the loan is not likely to be a burden, and (2) you have cash available for investments when the opportunity arises.
My advice for whatever it is worth, and as a divorce attorney, is do not pay off your loan or any other debt, period. Better to play with other person’s (entity’s) monies. Those mortgage contracts cannot be increased by the lender. Let them assume the risk.
You need fresh powder for whatever is coming next, i.e., capital. Borrow instead on those 3% loans and just put the money aside for now – cheap insurance at 3pc.
The only reason to do it might be if you think that interest rates are going down. Unlikely, for consumers. More likely, deflation. If you believe that inflation is more likely, then your fixed obligation loans will cost you less in the future with future dollars that you earn.
We own outright or work to maximize ownership & rent at least part of it to pay for taxes/utilities/repairs/insurance. 20%+ NW in RE is a great way to build wealth in something tangible, generates cash, and something physical that you know intimately.
Use LP/LLC investment clubs (in the right state) to lock in a promissory note against the equity in said home(s) as good asset protection for homes. It’s very difficult to get otherwise outside of a trust.
Deflation and debt are terrifying things in this ZIRP era. We may see negative interest rates for decades, or even weirder stuff we haven’t even thought about. So we go with zero debt ourselves plus buying companies with very low debt that make cash today. As things get weirder and weirder on the economic front, it’s going to be hard to predict the consequences of debt. YMMV.
I’d pay off as much as I could without depleting yourself of a good solid emergency fund. My standard for the emergency fund would be 6 months salary.
The FDIC guarantees your money. What they don’t guarantee is when or how you will get your money.
The government is functionally insolvent now and has been for some time. What they haven’t lost yet is the confidence of the people. When that confidence is completely gone (and it seems to be gradually draining away but it’s still a slow trickle rather than a dam breach for the masses), that’s when it all collapses.
I think that’s far enough off though that I’d continue with the generally accepted financial management principle of paying off your debt as soon as you can when interest rates are lower than your mortgage rate.
I delayed paying off my mortgage thinking interest rates would have to go higher eventually. They never did. But paying off your mortgage does provide a peace of mind that you won’t have otherwise and that’s worth something.
Great answers by AO, Redneck, and TWA. I would emphasize the point that ‘it depends’. One one end of the spectrum if you have you have $500k laying around in cash and your loan payoff is $100k, stocks will continue to slide, metals will continue to rise, and interest on savings is 0% then the clear scenario would be to payoff the loan, hold 6 mo’s cash in savings, and invest the rest in metals. Knowing that you own your home outright feels great in these uncertain times and is very positive to your cash flow when other sources are at risk. On the other end of the spectrum, if you have only $100k available for the payoff of $100k and your other income streams are at risk, I’d lean towards TWA/Redneck’s answers and preserve your cash to insure your solvency for what lies ahead. Maybe invest some of it in PM’s for additional protection/insurance.
I love having my home paid off, it takes alot of worry away. Makes it so you can live on very low in coming money.
I am sure you would never need this, but a paid off home is not an “asset” for qualifying for state help with medical bills ( now the hospitals can sue and try to get payment out of it) If you were to find yourself out of work, low income, with copays you couldnt pay, for example, they would qualify you for medi-cal ( medicaid elsewhere) and pay it. If you had that money in the bank, you would need to use it to pay the medical bills and then maybe have nothing to pay the mortgage.
Not a reason to change what you do, just an interesting data point.
Also, as far as the house being protected from medical bills in bancruptcy, this varies ALOT by state ! This state, and most, they never upped the amount of home that is protected, thus forcing the sale of homes in bancruptcy ( I know this as I looked it up, someone told me about people losing homes, and I did not believe it as we have protections, but we never changed the amount protected so now it is laughable ( CA)) Other States, noteably Texas and Florida, and many midwest farm states, the home and property is well protected from this forced sale from medical bills
Make sure you can keep set aside one years property tax when you pay off the home. Then , add to that buffer of money as you can.
Thanks for all the great perspectives! I was hesitant to pay off the mortgage because it would leave me with only the 6 months salary, or emergency fund. My interest rate is only 4%, so not too bad, but it might go lower with the economic fallout–we’ll see. As for job loss, not much chance of that even given my 60+ age–I work in healthcare, and I have traveling companies offering me HUGE sign on bonuses, but I consider that a last resort. Owning a house as a single person doesn’t leave me with reliable help on the home front to attend to said property. So for now, I guess I’ll sit tight and see what happens. The government can only pump so much money into the stock market (QE) in addition to the so-called stimulus money, which we “little people” will be the last to see any of that money, or at all.
It really depends. For some people, it makes sense; for others, it may not.
The overwhelming reasons to do so to me would be (a) emotional security of knowing you have a place to live as low as possible expenses (e.g. property taxes) and (b) freeing up enough cash flow to make some sort of a difference in how you would live if you lost a job.
The overwhelming reasons not to do so to me would be (a) keeping cash on hand to protect against a sudden loss of income or (b) preserving money for some sort of investment opportunity if you had one in mind.
Keep in mind that, if you pay the mortgage, you could access some of that equity by taking out a new mortgage or a home equity loan.