Having a mortgage is a wonderful thing. In fact, I owe much of my work longevity to my mortgage. When I was 24, I came across a lot of cash due to a couple good stock picks. I was just lucky, because goodness knows I can’t pick stocks for doodoo. I never really told anybody how much I had, but it was enough to put 25% down on a median priced home in San Francisco and still have several years of mortgage payments left over.
By my mid 20s I began questioning the meaning of work. Perhaps I was simply suffering the lesser known “quarter life crisis.” Because I had arrived at what I considered to be too much money too quickly, working to make more money lost its appeal. It didn’t matter if I added another thousand or ten thousand to my savings, making money was so uninspiring. I was demotivated because of a couple chance trades that required very little skill, just a lot of balls. The great irony is that I don’t need much of anything to live a comfortable life. Give me some clean clothes and a place overlooking the beach with a hot tub off the bedroom balcony and everything will be OK!
RENTING JUST FEELS WRONG AFTER A CERTAIN POINT
I had already lived in a nice one bedroom with parking for $1,600 for a couple years and I was sick of throwing my money away. The next logical move up was to a two bedroom, two bathroom apartment, but those places regularly rent for $2,500-$3,500 a month in San Francisco. It was unbearable to pay more than $2,000 in rent to someone else even if I was getting shelter in return. $2,000 a month is $3,000 in pre-tax income one has to earn! Forget that.
Admittedly, there was also an irrational fear that I would be a 40 year old renter if I kept at my pace. There’s nothing wrong per say in being a 40 year old renter, just like there’s nothing wrong with being a 40 year old virgin. But, regardless, I didn’t feel like shelling out month after month of hard earned cash to help someone else pay off their mortgage. If you’re in the 25% Federal tax bracket or below, by all means rent. Renting is cheaper in the beginning for the most part and provides a lot of flexibility.
I soon found a cozy little two bedroom place, which after putting 25% down cost 20% less than what it would have cost to rent. I wasn’t hesitant to put that much money down at all. In fact, I was absolutely ecstatic to deploy my savings into something useful. Suddenly, I had much less savings, and a nice multiple six figure mortgage to keep me honest and motivated again. With the mortgage, I gained a renewed sense of purpose! Funny how things work.
I couldn’t just be a bum and not give it my best at work because if I got fired, I’d be at risk of eventually going broke. Yes, I still had savings left over, but everything is relative because I had an even heftier amount before the down payment! I developed a game plan to get to know people in my organization better. I worked harder at everything that was asked of me. It was do or die time, and boy did I do do!
LIQUIDITY IS STILL KING
Despite having a nice home to call my own, liquidity is still king. It’s been a decade since I purchased my condo, and now the payments seem incredibly low. It’s funny how time makes everything cheaper, especially if you have a fixed payment. The condo is now a rental, generating positive free cash flow because rents have crept up about 40% since while payments have actually gone down 25% due to a refinance. Inflation is a wonderful thing!
I have the cash to pay off the entire loan, but I don’t plan to simply because it’s important to stay liquid. You can dump all your cash into your property, but what if the house burns down? Sure, insurance will hopefully take care of at least 80% of the rebuilding cost, but for that instant when your house burns, you are going to be shitting bricks wondering whether you’ve lost all that money.
If you so happen to be in a higher federal tax bracket (33% / 35%), it behooves you to keep your mortgage as long as you work. The government is robbing you of your hard earned money and having that shield helps much more than if you are in the 25% or lower bracket. Yes, I understand that it’s not the greatest to pay interest to save on taxes. That said, it’s all about cash flow and tax minimization when you’re making money that Obama doesn’t approve of you to make. Focus on cash flow.
Mortgage rates are so low now. You can borrow at 2.25% for a 5/1 ARM as of 1/20/2015. That’s essentially lower than some long-term CD interest rates! Hence, the smart move is to stay liquid and not make extra payments on such a low rate. Remember, you can deduct interest on up to a $1,100,000 mortgage!
Cash is always king, and you want to have as much cash as possible to ensure your financial well being, as well as take advantage of investment opportunities when they arise. Please read more tips for mortgage refinancing in an article I wrote earlier this year.
When you can see yourself retiring in 5-10 years, start formalizing a payoff plan so that when you finally do retire, you will be mortgage free. The interest deductions all those years are just side benefits. It’s your ability to live in your home rent free for the rest of your life, which is your biggest benefit!
Use accounting to your advantage, not to the lender’s advantage. It’s all about matching cash flow so that you are always in a very healthy state. If you can match your mortgage pay down with when you will no longer have a steady income, that is likely the best scenario. Paying off your mortgage early is a very personal decision. You just have to make sure you know yourself!
Update 1/12/2016 – I ended up paying off one of my rental mortgages that is worth about $1.2 million because I bought a new single family home with a $1M mortgage in Spring 2016. Four mortgages were too much, so I maintained three.
RECOMMENDATIONS TO BUILD WEALTH
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Updated for 2016 and beyond.