We all want the truth when it comes to financing our home, right? What is truth? This is part three of a series on housing and mortgages. The last two posts covered some common beliefs about home ownership:
- September 8, 2010: We looked at the history of “The American Dream” and the groups that profit from home ownership
- September 12, 2010: I debunked the idea that your primary residence is an investment in real estate. We clearly demonstrated that it is consumption of shelter
Over the next several posts we’ll look at some common beliefs about mortgages.
Common Mortgage Belief #1: I’ll be more financially secure the sooner I pay off my mortgage.
Uncommon Sense: Most people have a limited supply of fresh dollars coming from wages, savings, investments and other sources. Retirees have even more limited income. Think of your cash as soldiers in your financial army. Each soldier-dollar deployed to repay your mortgage is not available to fight other battles including investments that pay a positive real return and reducing higher interest debt.
We clearly showed in an earlier post that your primary residence is not an investment and it’s a losing strategy to borrow money to make a real estate “investment” play on your home. Since every soldier-dollar spent on your primary residence will lose money it is the last place to put extra cash.
If you invested all of your free cash into reducing your mortgage, eventually you’d own your house free and clear. However, with no money in investment and bank accounts that recruit new dollars, you’d have to borrow money in retirement from a home equity loan or reverse mortgage to pay for basic living expenses.
You can’t eat a roof tile and there’s not a liquid market to sell parts and pieces of your home. You can only sell the whole and then you’d be making mortgage payments or rent payments on a home again. What have you gained?
There is a strong argument that paying off a home mortgage has a positive psychological impact on the borrower. However, that argument can’t be effectively cloaked in the disguise of investment returns. The feelings of the borrower have no place in sound financial decision making.
Have you sent your soldier-dollars into the mortgage reduction battle? What objective do you hope to achieve?
- Should You Be a Lifetime Renter? (mint.com)
- The Mortgage Industry Secret that Prevents You from Getting a Loan (prweb.com)