Monday, January 25, 2016

I May Have Commitment Issues (or What's the Deal with 30 Year Mortgages)?

So maybe I have commitment issues (anyone else out there?!) but....30 years is a lot of time. It's a lot of time to think about being in the same place for instance. Having lived in my current home now for 3 years, I can honestly say it's the longest I have lived in one place since childhood. College dorm life leaves you feeling a bit nomadic- moving in and out every year, followed by a series of apartments after college and into graduate school. Having finally taken the plunge and purchased our current abode I am finding myself a huge convert to home ownership at a time when renting single family homes is on the rise. Those who are renting cite the flexibility of being able to move neighborhoods and cities with an ease that is not typical of homeowners.

I get the not-buying movement. Not only do you avoid the commitment, but there is also the benefit of not having 6 figure debts to pay down. Let's be real- buying a home is one of the biggest financial decisions a person will make during their lifetime. It's a huge purchase. While banks and mortgage lenders want you to have 20% down, most folks don't have that initially. If you don't have that up front you can end up paying a high amount of mortgage insurance just to get your rates down (PMI, it's called). It can be a LOT to take in and it's not a surprise that more people are shying away from it. Also who wants to be paying on the same gosh-darn mortgage bill for the next 30 years anyway??!
The Argument for Holding Off on Paying Off Your Home

There is advice out there indicating that it's bad financial planning to pay off your home early. Not to sound like a conspiracy theorist, but many of the articles I saw were completed by financial advisory companies, banks and mortgage securities firms- people who benefit directly from long mortgages to increase their profits. There were however, some good arguments from sites/advisors that I trust, to hold on to your mortgage. The common wisdom held is that if you are paying all of your extra funds into your mortgage, you are not saving adequately for retirement.  I recently met a couple in their 40's with no retirement savings. Their home was almost paid off, but with no 401K or Roth accounts, they were missing out not only on tax breaks, but on all that compounding interest and revenue generation over time. If you funnel all of your money to pay off your home, chances are you will be spending the later years of your working life, trying to catch up on your retirement contributions and than because TIME is a major factor on the growth of your investments you will be out of luck as far as reaching the retirement number you need.

The other argument is that your money, IF invested wisely, and IF the economy remains good and the stock market continues to rise, you could make more money overtime on returns from your investments in stocks than you could on your home. 2 reasonable points- that I am willing to toss completely out the window of my Frugal Rock home.

Why I am Planning to Pay Off Our Home Early

1. We are on track for our retirement goals

If you are not currently saving for retirement or are not on track to meet your retirement goals, I would not recommend spending exclusively on debt, mortgage or otherwise. Even while you are paying off your student loans, you should still be making contributions to your retirement accounts- the earlier you start the easier it is! Frugal Rock is pretty lucky in that we had the ability to pay down our other debts in the past few years and since early 2015 have been car loan and student loan free. While luck has been part of it (finding good jobs, not having a lot of unexpected expenses), a solid plan to pay over and above the minimum also helped us pay those off early. It's felt so good, that we have no plans of taking out car loans in the future. As mentioned in an earlier post we are putting about 20% of our income towards retirement and are saving additionally on top of that- with an ultimate goal of early retirement (though hashing out that age is still uncertain).

2. Increased Financial Independence

I am a dream-big, kind of person. This has it's upside and it's downside. The upside is, that I often take on projects or goals that no one else wanted and feel a huge sense of accomplishment in making an idea, a reality. On the downside, I often have the grass is always greener mentality and romanticize the future, way more than is practical. That being said the idea of being completely debt free, seems to conjure up all sorts of ideas for me- like giving us a high level of freedom/flexibility. Idealistic? Maybe. But here's my thinking...currently our mortgage is a single, largest expense. With that taken care of, I imagine that we would be able to explore other options for our future- like working less, or if not working less, saving more towards the hope that we could retire early. The great thing about the future, is you never know what it's going to bring! With minimal debt, including our mortgage, I believe strongly that this will give us the ability to take advantage of opportunities, as they come our way!

3. What do those numbers look like anyway??

Currently, we owe a balance of $133,785.33 on our mortgage. Including taxes our monthly payments towards our mortgage are a relatively low $863 a month. This is about $150 lower than when we rented- again in large part due to purchasing a smaller home than we could have afforded and being willing to do cosmetic upgrades ourselves! We have set aside a fund reserved for paying off the house early and already have about $20,000 put away- mainly from additional income/savings from 2015. In order to pay off our home in the next 5 years, we would need to save an additional $18,600 towards our mortgage each year ($1,550 a month). To pay it off in the next 7 years, we would need to save an additional $13,286 a year ($1,107 a month). Our current goal is to pay it off in 5 years, which is a major 'reach' goal. While we have cut some of our expenses to save more- there goes gym memberships and massages...we haven't cut out travel completely (though are being more frugal about it) and haven't given up other amenities (Netflix and Spotify subscription rank the highest on our list of extras, followed by Symphony Tickets...). When debt is over 6 figures though, it can be tough to get moving on it. How many of us looked at those student loan payments and thought- yep, that'll never get paid off... 
With a large debt amount, the main thing is to stay motivated on tackling the amount. Don't let yourself be discouraged by the numbers in front of you...even taking down a little bit of that debt over time makes a big difference. Give yourself little goals to stay motivated- I can't wait until my mortgage hits 5 figures. And more important, chipping away at it feels way more doable than the whole amount. What are your secrets to staying on track when your debt seems too high?? How do you stay focused and positive? Are you going strong?

No comments:

Post a Comment