Monday, February 13, 2012

Should You Own Your Home Free And Clear?

A home is something you should eventually own, not perpetually pay for.  Many folks today think just the opposite.

The monthly payment mentality is strong in America.  We own nothing and make payments on everything, it seems.

And you read a lot of stories these days about people in their 60's taking out 30-year mortgages, in their retirement.  What is up with that?

Some are just broke - they have no money to buy a home, but might have a defined benefit pension and get a monthly stipend.  Their only choice is to rent an apartment or buy a home.  If they had been astute, they would have paid off a 30-year mortgage by now, however, and be living high on the hog.  As it is, they have to hope their pension doesn't go bust before they die.

Others are conned into this "opportunity cost" argument by investment counselors.   They argue that they should invest their money and then get a mortgage, and make the mortgage payments using the income from their investments.  It is a horrible idea for an older person, because if the market tanks, you have no income to pay the mortgage and end up in foreclosure at age 70.

Which is sad, because only a few years earlier they had enough money to OWN their own home, free and clear, and they decided to gamble it on stocks.  At retirement age, you should be out of the gambling business.

This idea of being in perpetual debt, particularly in retirement, is a new one.  Not too many years ago, people worked hard, saved their money and paid off their mortgages.  A "mortgage burning party" was something everyone had at one time in their lives, at least.

When you retired, you knew you could retire on less, as your home was paid for.  And since it was paid for, it was also an asset that could be sold when you wanted to go into assisted living or downsize to an apartment.  It was a solid asset that was risk-free and you could liquidate to live on.

And paying off your mortgage is still a good idea and a good plan - over time.  Heck, you have 30 years, right?  Why not do it?

Well, the reason people don't is they want it all now.  They want to refinance their home over and over again to pay off other debts - car loans, credit cards, etc.   One lawyer cheerfully told me the other day that she is a "serial refinancer" - having refinanced their mini-mansion five times now.    In addition to the constant resetting of the 30-year term, AND the added principle added on to pay off car loans and credit cards, she is adding $5000 or more in closing costs each time - or about $25,000 so far.  Ouch!

Or, people keep buying and selling homes - often in the same town - so that they never get ahead of the game.  They want to "upgrade" to a larger home, so they sell a home that has 10 years remaining on its note (when the principle amounts really start to become a larger and larger part of the payments) and starts over with a new 30-year note on a larger home.  Higher mortgage payments, more debt, more time to pay off, it never ends.

Serial refinancing or serial buying also means that you are paying the most interest, over time.  The first  five years of a mortgage are almost all interest payments.  So if you refinance (or buy a new home) six times, every five years, you pay nothing but interest and have little or no equity.  The fellow who stays put, owns his home outright - and he can retire if he wants to.

Get out of the idea that "I'll always have debt" or "I'll work until I'm 70!" or whatever, as these are really bad ideas.

And we are seeing the fallout from this trend already, and it will get much worse, over time.  Seniors who are working well into their 70's, not for the joy of it, but to survive.  And children having to probate their parent's estate, only to realize that it has a negative net worth - and they are left to clean up the messes and deal with the creditors in an insolvent estate.  They might not have to pay off the debts, but they have to do all the paperwork, and for not even a cent.  Gee, thanks folks!

* * *

Note that I am not saying everyone should own a home.  There are many people out there who like to rent and there is nothing wrong with that - provided they have allocated money in retirement to pay this rent and have it invested in safe harbors.

And owning a home doesn't mean having no housing costs.  Between insurance, taxes, utilities, maintenance and other fees, I estimate it costs me $10,000 a year to own my home with no mortgage.  Ten grand ain't free.   And when you consider that I can rent a similar home for about $1500 a month (or a smaller one for $750) the touted advantages of home ownership don't seem all that great.  In fact, for the delta in pricing, one wonders why people buy at all....

If you are going to BUY rather then RENT, however, the touted advantages of home ownership evaporate pretty quickly if you never pay off or never pay down the mortgage.  And in fact, you may end up spending, over time, more than someone who rents, if your home is perpetually encumbered with a mortgage.

Edited 07/07/2012

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