Does anyone pursue actual home ownership anymore?

I’m hoping the readers of Seattle Bubble can help me out with something.

First, a little background on my perspective. My parents bought their first house in 1987, when they were about 30 years old. They paid $45,000 for the modest 1,288 square foot, 3-bedroom, 1.75-bath house pictured below.

The Tim's childhood home

They refinanced once in the ’90s to get their ~10% rate down to around 7%, payed extra on the mortgage whenever they could, and paid the house off entirely in 2007. They would still live there today if Clark County hadn’t bought them out in 2008 to re-route the neighboring high school’s driveway and put in a retention pond. With the money the county paid them for their house they found another house that they could pay cash for.

By their early 50s, my parents were completely mortgage free. Their only housing expenses are property taxes, utilities, and maintenance. In my mind, this is one of the biggest benefits of buying a home—the ability to eventually pay off the mortgage and dramatically reduce your cost of living.

However, today it seems that everyone I know or hear about has little to no intention of ever actually paying off their mortgage. The typical home buyer’s process seems to look something like this:

  1. Buy a home.
  2. Live there for 3-10 years.
  3. Get the urge to move up the “equity ladder” to something bigger.
  4. Go to step 1 (and get a whole new 30-year mortgage in the process).

By the time someone has finally “settled down” and stopped moving to a new home and starting a new 30-year mortgage every few years, they’re probably as old as my parents were when they paid off their mortgage.

If you’re stuck in this loop, can that really even be called home ownership? Aren’t you just perpetually renting money from the bank and paying 6% to the real estate industry every few years to support your nomadic lifestyle? How is constantly resetting to a new 30-year mortgage any less “throwing away money” than renting (especially when, during the first five years, nearly 80% of your mortgage payments are applied to interest, not principal)?

Does anyone pursue actual home ownership anymore, or are most people just interested in home buying and perpetual debt? I’m genuinely curious. Do you or the people you know think of home ownership in terms of buying a home and eventually paying it off, or are you more focused on climbing the equity ladder until you retire?


About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

85 comments:

  1. 1
    homeowner says:

    Yes, we plan on actually owning our home and staying there for many, many years. We are making bi-weekly payments as well as an extra full payment a year in order to reduce our 30-year loan. We look forward to retiring and owning the home we have been living in!

  2. 2
    Jeremy says:

    I’m in my early 30’s and we refinanced to a 15-year loan over a year ago with an eye toward paying off the house and giving the bank as little interest (rent) as possible. We fully intend to have the house paid off by the time our kids go to college. If we can do that then it will be pretty easy to help our kids with college expenses just with the additional cash flow from not having a mortgage payment.

  3. 3
    Scot B. says:

    Most of my friends don’t understand that they don’t ‘own’ their houses until they’re paid off. I tell them they are just renting from the bank instead of a landlord but they don’t think of it that way.

    There’s a powerful cultural talisman in the idea that a home or a car is ‘mine’, even if a home loan or car loan is still active. And that mere renters don’t enjoy that privilege.

    That’s the real mortgage fraud.

  4. 4
    alex says:

    Me, me, me!!!!

    I paid our old house in Woodinville completely off, and stayed mortgage free for a year!

    Background: I grew up in a country that has super-high interest rates, so everyone there aims to actually pay off their houses. It is common to buy land (cash, or in a short loan), then build the absolute minimum you can live in (one bedroom, one bathroom, one kitchen, living room optional), and then expand that small hut into a nice house while you’re living in it – mortgage-free the whole time.

    But I’m already somewhat “americanized” from that reality… I paid my house off not for the reason Tim’s parents did. I wanted a larger house. I paid the smaller house off because it was damn hard to sell at the time, and I wanted to be free of monthly payments so I could maybe rent that house and comfortably make payments on the larger house I wanted.

    In the end I eventually sold the house – dirt cheap. Then I bough the larger house I wanted – dirt cheap too. So now I have a mortgage again, but it is only for the difference between the two houses. It’s a 30-year loan that I pay extra each month, enough to get it over with in 4 years. And I’ll be younger than 45 then.

    So Tim, you’re not alone :)

  5. 5
    D. in Ballard says:

    Yes I want to pay off a house in my fifties. That’s probably why I’ve been looking for over two years for a house. I want this house to be perfect so I don’t have to trade-up in the future.

  6. 6
    Ravenna Or Bust says:

    I’m with Tim on this one (suprise suprise). This is one of the big draws I see to buying a home, it’s a big sense of security. I’m 27 right now and if I buy this house and stick with it, it will be owned outright before I’m 60. If I make pre-payments, which I have every intention of doing, it couldnt be payed off while I’m still in my 40’s. How cool would that be? … to be half way through your life and not need to worry about paying rent.

    I’ve got a cousin and an aunt who are older now, never bought a place, and will likely be renting for the rest of their life. I know the perks to renting mean you don’t pay taxes on it, you don’t worry about depreciation, and you don’t have to worry about paying to fix something that breaks, but they will always be on the hook for a rent check, every month.

    I see a great, practical advantage in home ownership… so long as you can afford it :P

  7. 7
    Laird Nelson says:

    Devil’s advocate here–please, I do not subscribe to this view; I’m just trying to see what people have to say about it.

    Some say that parking your money in your house is a bad investment strategy, and that you’re better off–to use the terms defined in this post–renting some money from the bank at a low rate (mortgage rates are low) and investing it in something with a higher return than a house.

    So, for example, it’s better to borrow money at 5% locked in for 30 years and to invest it in, say, the stock market, and get a 7% rate of return.

    At least I’ve heard this argument (in various forms).

    Myself, I’d rather ultimately pay off my house and be done with it; less uncertainty that way.

    But strictly mathematically: is there anything to the above devil’s advocate argument?

    Here is an entirely arbitrarily selected article saying something similar: http://articles.moneycentral.msn.com/Banking/HomeFinancing/DontRushToPayOffThatMortgage.aspx

  8. 8
    deejayoh says:

    By Laird Nelson @ 7:

    Devil’s advocate here–please, I do not subscribe to this view; I’m just trying to see what people have to say about it.

    Some say that parking your money in your house is a bad investment strategy, and that you’re better off–to use the terms defined in this post–renting some money from the bank at a low rate (mortgage rates are low) and investing it in something with a higher return than a house.

    So, for example, it’s better to borrow money at 5% locked in for 30 years and to invest it in, say, the stock market, and get a 7% rate of return.

    At least I’ve heard this argument (in various forms).

    Myself, I’d rather ultimately pay off my house and be done with it; less uncertainty that way.

    But strictly mathematically: is there anything to the above devil’s advocate argument?

    Here is an entirely arbitrarily selected article saying something similar: http://articles.moneycentral.msn.com/Banking/HomeFinancing/DontRushToPayOffThatMortgage.aspx

    In a rising market, there is much to the devll’s advocate argument. Getting somewhere between 5x and infinite leverage on your investment, with tax-free profits and tax-deductible interest on what is essentially your “margin loan” is a powerful incentive that the government has created. Those policies encourage the home as “investment vehicle” behavior and discourage outright ownership.

    I’m guilty of it. Made more money off of owning homes during the boom than I did from working. I think I’d have been naive not to. The upside was too obvious. I was probably more lucky than smart that I got out when I did.

  9. 9
    Patrick says:

    The answer to this question is perhaps the same as the question ‘Does anyone stay in one place for 30 years anymore?’ If you don’t stay in one place for at least 20 years, you can’t buy a home and live in it till the day you own it. Sure, some people these days still manage to live in one place for very long periods, but it seems much less common than it used to be. With average tenure at a single company being much shorter than it used to be, it’s hard to stay in one town for 20+ years. And then when people move they give in to the temptation to upgrade to more house. If you don’t upgrade, then it’s still possible the own a home in a reasonable time and not have a perpetually extending mortgage. A lot of people didn’t do that though, probably because the real estate industry over the last 10 years has promoted upgrading / buying more house than you need.

  10. 10
    hoary says:

    People would like to find an adequate house on the first try, but mostly likely they just can’t afford to, so they get a starter. After a few kids and have to start over again on the 30 year. No it’s not ideal.

    In this market my advice would be to rent in a cool hood until you have little ones and forego the starter house.

  11. 11
    Markor says:

    RE: Laird Nelson @ 7

    Like for deejayoh, you have to be more lucky than smart to come out ahead that way. Think of it like this: you’re borrowing money at 4% (5% less interest tax deduction) to roll the dice, hoping for a 7% return, i.e. hoping for a net 3% return. Now go look at what the stock market has actually returned, over the full run and over the last decade. (Hint: both are less than 7%.) Ask youself if it makes sense to roll the dice alongside giant pension funds that are plowing money into the stock market now because they need an 8% return to fulfill their promises to baby boomers who will be retiring and withdrawing funds en masse over the next 20 years.

  12. 12
    Lake Hills Renter says:

    I plan to own a house outright some day, but I’m getting a very late start. That said, I plan to pay my mortgage payment like my car payment — overpay from day one and own it outright much earlier than the note term. Numerous unforeseen circumstances can obviously affect this, but my plan is to eventually not have a mortgage payment and own outright. I’d imagine most readers of this blog are the same, considering the regular audience.

  13. 13
    Markor says:

    Count me in for wanting to own a house outright. It just seems financially prudent. Friends in Chicago are on their last year of payments on their 15-year loan. Other friends have stepped up to McMansions and new 30-year loans. To me, a so-called starter home around here is adequate for a family of 4.

  14. 14
    Tim McB says:

    I am consistently surprised by many friends who’s intention it is to buy and hold for 5-7 years, sell and then trade up. Out of maybe a dozen or so young couples my wife and I know of only one other couple besides ourselves has that wants to own outright. Part of the current problem I think currently is that the market got so overheated people purchsed homes nowhere near where they ultimately wanted to live or homes that were not nearly big enough as their family grows; so of course they are hoping to ride the escalator up. The problem with this is that you never build any equity buying at 5 or even 10 years. The bank’s amortization schedule makes sure of that. At year 5 of a $400,000 loan at 5% interest you’ve accumulated $32,685 in equity (paid against prinicipal) and paid nearly triple that $96,152 towards interest. Even 10 years isn’t that great, $183,043 in interest, $74,632 in principal. Factor in 8-10% selling costs and most of that gets wiped out in a hurry. The only other way to get equity is appreciation which we all know isn’t going to happen anytime soon. I don’t get it. Paying off the loan is the way to go. That said I think more people will realize this insight over the next decade provided we don’t have significant inflation.

  15. 15
    patient says:

    I’m in the owning corner as well. I’m planning to go 50% or more down and the rest in a 15-year mortgage.

  16. 16
    Markor says:

    RE: Tim McB @ 14

    And, for those who stay put, extra house payments earn 4% (after interest tax deduction) for up to 30 years, paperwork- and tax-free. That’s a lot better return, considering the near-zero risk, than just about any other investment out there.

  17. 17
    PhinneyDawg says:

    Tim – Just curious, what % of your parent’s combined net income went to their base mortgage payment when they first bought the house in 1987?

  18. 18
    BillE says:

    My parents paid their mortgage off early and that’s been my plan all along…… that is, once I find a house that’s reasonably priced. At current prices I’m looking at paying 40-50% down. It would be nice to get something soon but if I grow my down payment awhile longer as prices drop more that’s fine with me.
    I know a lot of people who refinanced to “pay off” debts on things like cars, credit cards, boats, etc. They’d all talk about how those depts were “paid off” even though the debt was just moved to a 30 year loan. A lot of them are under water now. Maybe it wasn’t such a great plan after all.

  19. 19
    deejayoh says:

    I think mobility in society is so much different now than it used to be, and that’s another big contributing factor. I think I have moved on average once every 2 years since getting out of college. Longest I’ve lived in one place was 6 years.

  20. 20
    Beth says:

    Yep — I have not had a mortgage in 5? years. I might take one out & pay it off as quickly as possible (for a remodel), or I might not. This no debt life is very nice. :-)

  21. 21
    Markor says:

    RE: deejayoh @ 19

    True. One way to think of that is that it costs ~10% to move, but one can still pay off the current house.

  22. 22
    The Tim says:

    RE: PhinneyDawg @ 17 – Good question. I’m not sure, but I’ll ask them if they remember how much they were making in 1987 next time I talk to them.

  23. 23
    Jag says:

    Yes, we plan on paying off our home. I’m home with kids now, and we’re home shopping. (Respectfully w/ down payment, thank you) A home that will fit us for thirty years, but that we can pay off in 15 when I go back to work. Yes WE DO PLAN to pay it off. Otherwise, what’s the d*&^ point? That said, we did make some money on a house we bought in 05 and sold in 08. MOre luck than sense IMO.

  24. 24
    mike says:

    By Laird Nelson @ 7:

    So, for example, it’s better to borrow money at 5% locked in for 30 years and to invest it in, say, the stock market, and get a 7% rate of return.

    But strictly mathematically: is there anything to the above devil’s advocate argument?

    worst advice ever.

    1. most investors suck. they can’t get close to matching market returns.
    trade too much, pay too much in taxes , commissions, fees. buy high, sell low.
    for these reasons, the average amateur investor will return less than 7%
    (in a market that returns 7%).

    2. even if you’re a good investor and have discipline, you’re at the mercy of the market.
    if you bought and held an s&p index fund exactly 10 years ago,
    you’d have a return of -25%. you’d have lost a quarter of your investment.
    if you are an average investor you would have traded way too much
    and be down even more.

    if you’re one of these “genius” investors that borrowed money at 5% to return 7%, well
    now you’re negative 25% based on your returns but down another 5% every
    year you borrowed.

    basically borrowing 5% to return 7% is the same as borrowing on margin.
    if you want to do that, then just open a margin account at your brokerage.
    you’ll probably pay lower interest rates on your margin account than borrowing at 5%.
    if you’re not comfortable trading on margin, why would you listen to this advice
    (i know you specific wouldn’t but other people would) borrow money at 5% to return 7%?

    3. the oldest rule in the book is: past performance is no guarantee of future results.
    with the new global economy and competition from china, india and other developing
    nations the s&p 500(collection of american companies) will not return anywhere
    close to it’s past results. good luck if you think you’ll make 7% return after deducting
    taxes, commissions,fees and inflation.

    4. let’s take a hypothetical.

    would you be better off, worse off or even if you borrowed 5% to return 5%?
    the answer is, there’s insufficient information to draw a conclusion.

    5% interest is much different than a 5% return on stocks/funds.
    they are not “interchangeable”.

    5% is a guaranteed interest rate year after year.
    5% average return on investment has much volatility; you could actually average
    a 5% return over 10 years, but at the end of 10 years have
    made no profit or even be negative.

    for example, you lose 50% first year, than return 50% next year.
    that’s an average return of 0% ((-50% + 50%)/2= 0%).
    but you’re negative 25%.

    only the mathematical foolish says you’re better off borrowing money
    at a fixed 5% to return a variable 7%. you need to know the details of
    how that 7% return is derived to see if it makes sense.

    5. people are terrible investors. the conventional wisdom is often wrong.
    anything you hear should be approached with a skeptical mind.
    including the stuff i wrote.
    i don’t know sh-it. neither does 99% of the other people.
    in investing you have to think for yourself and make your own decisions.
    listen to people, analyze yourself and then -YOU- decide if it makes sense or not.

  25. 25
    PhinneyDawg says:

    By The Tim @ 22:

    RE: PhinneyDawg @ 17 – Good question. I’m not sure, but I’ll ask them if they remember how much they were making in 1987 next time I talk to them.

    Thanks Tim.

    I have about 27 years left on my 30 year loan at 5%. I’d like to be done about 7-10 years early, but currently we pay about 30% of our net income towards our mortgage each month, invest another 10-18% in retirement. I have no idea how I could put any more towards our mortgage and still have any savings, so paying off early might be a pipe-dream without massive inflation.

  26. 26

    By Scot B. @ 3:

    Most of my friends don’t understand that they don’t ‘own’ their houses until they’re paid off. I tell them they are just renting from the bank instead of a landlord but they don’t think of it that way..

    So in other words, your friends understand things in the bizarre and incorrect way that you do, and you think that is wrong?

  27. 27

    By Laird Nelson @ 7:

    Devil’s advocate here–please, I do not subscribe to this view; I’m just trying to see what people have to say about it.

    Some say that parking your money in your house is a bad investment strategy, and that you’re better off–to use the terms defined in this post–renting some money from the bank at a low rate (mortgage rates are low) and investing it in something with a higher return than a house.

    I know people who won’t touch their house to borrow against for investment purposes, and some will. How that works out for the ones that do obviously depends on what they did when.

    I would argue that if your other investment is rental houses, you should encumber your house before the rental houses. You’ll get a better interest rate, and if things go in the toilet, your house will be better protected by the homestead exemption.

  28. 28
    Ned says:

    There’s no such thing as “mortage-free” in the US. You still have to pay property tax after you have paid off your mortgage. We are the only country in the world that does this. if you don’t pay your property tax, you lose your home.

    Keeping up with the Jones’s is mind programming by the TV. If you are white, middle class, own a car, and make more than $10K per year you are ahead of 98% of the world’s population. That you would have to have more than this to be happy is programming. Undo your own programming and set yourself free. Keep the programming and remain imprisoned according to someone’s else’s rules.

    It’s your choice and always has been.

  29. 29

    By Markor @ 16:

    And, for those who stay put, extra house payments earn 4% (after interest tax deduction) for up to 30 years, paperwork- and tax-free. That’s a lot better return, considering the near-zero risk, than just about any other investment out there.

    I’m not sure if this is what you’re getting at, but a long time ago I did an alternative rent/buy calculation where the buy was based on paying cash. I seem to recall having missed something in the calculations which show up in the comments, but I don’t recall what that was.

    Here’s the link–I still haven’t read it to see what the omission was: http://blog.seattlepi.com/realestate/archives/156248.asp

  30. 30

    By Ned @ 28:

    There’s no such thing as “mortage-free” in the US. You still have to pay property tax after you have paid off your mortgage. We are the only country in the world that does this. if you don’t pay your property tax, you lose your home..

    I find that claim very hard to believe. There are only so many types of taxes, property, income and excise are the major ones. It would be hard for 100+ governments to avoid having a property tax, and a property tax on realty is much more likely than one on personalty.

  31. 31
    Ned says:

    By Laird Nelson @ 7:

    Devil’s advocate here–please, I do not subscribe to this view; I’m just trying to see what people have to say about it.

    Some say that parking your money in your house is a bad investment strategy, and that you’re better off–to use the terms defined in this post–renting some money from the bank at a low rate (mortgage rates are low) and investing it in something with a higher return than a house.

    So, for example, it’s better to borrow money at 5% locked in for 30 years and to invest it in, say, the stock market, and get a 7% rate of return.

    At least I’ve heard this argument (in various forms).

    Myself, I’d rather ultimately pay off my house and be done with it; less uncertainty that way.

    But strictly mathematically: is there anything to the above devil’s advocate argument?

    Here is an entirely arbitrarily selected article saying something similar: http://articles.moneycentral.msn.com/Banking/HomeFinancing/DontRushToPayOffThatMortgage.aspx

    Being emotionally tied to an investment does not make that investment any more secure than another. Financial security in today’s world is accomplished through the reduction of risk through liquidity, predictiveness and stop losses. Times have changed and if you are unable to adapt to this new model, you will likely not retire very nicely. Darwin at work.

  32. 32
    Magnolia44 says:

    Would not have pulled the trigger on this purchase during the time period if I didn’t think we were staying for the long haul. That is the plan but the current economic environment and fact I think the US is headed for collapse makes me question our purchase at times.

    I need to start attacking our second loan more since the rate is pretty high and it moves at a snails pace amortization wise, but then there is the collapse thought and me wanting to have a war chest of cash for the just in case.

    Time will tell folks.

  33. 33
    CCG says:

    No one owns property in this country. I was just reading a rant yesterday from some guy whose property taxes have just been jacked up to where he re-pays the original price for his property every 9 years. In other words he has to “buy” it from the government again and again, in perpetuity.

    Given that gov’t cutting spending is about as likely as teen abstinence, I’m sure there’s plenty more of this to look forward to. The host is dying and the parasite has to gnaw faster and faster just to survive.

  34. 34
    Ned says:

    By Kary L. Krismer @ 30:

    By Ned @ 28:

    There’s no such thing as “mortage-free” in the US. You still have to pay property tax after you have paid off your mortgage. We are the only country in the world that does this. if you don’t pay your property tax, you lose your home..

    I find that claim very hard to believe. There are only so many types of taxes, property, income and excise are the major ones. It would be hard for 100+ governments to avoid having a property tax, and a property tax on realty is much more likely than one on personalty.

    Believing and certainty are two different things. Let’s talk certainty, since we can.

  35. 35
    Liam says:

    I come at this from a dual Aussie and US perspective and yes my wife and I pursue home ownership because her parents believed in it, ‘rent money is dead money’ they would say. They now have a home to live in that no one can take away. My parents didn’t share that belief and rent places subject to their income, rent rates and many other variables that would cause us sleep deprivation.

    What I found was that having a mortgage is at least a form of forced savings for many people. Few people will rent and save/invest the difference into an asset.

    I also find it easier to get a bank loan with our home as collateral. Note, I use the loan for purchasing assets only.

    Also, I like improving where I live and if it’s my property I don’t mind making that investment. Not so on a rental.

    Side note, in Australia the capital gain realized on the sale of your family home is taken tax free. But interest payments on the mortgage are not tax deductible.

    blah blah blah, thanks for the blog

  36. 36

    By Ned @ 34:

    By Kary L. Krismer @ 30:

    By Ned @ 28:

    There’s no such thing as “mortage-free” in the US. You still have to pay property tax after you have paid off your mortgage. We are the only country in the world that does this. if you don’t pay your property tax, you lose your home..

    I find that claim very hard to believe. There are only so many types of taxes, property, income and excise are the major ones. It would be hard for 100+ governments to avoid having a property tax, and a property tax on realty is much more likely than one on personalty.

    Believing and certainty are two different things. Let’s talk certainty, since we can.

    How about this. The person who makes the very difficult to believe claim actually find some sort of credible citation for that claim? ;-)

  37. 37
    The Tim says:

    By Ned @ 28:

    We are the only country in the world that does this. if you don’t pay your property tax, you lose your home.

    That’s just incorrect. You’re referring to the difference between fee simple ownership and allodial title.

    Most countries are under the fee simple system. i.e. – the government can demand that you pay property taxes or they confiscate your property.

  38. 38
    Ned says:

    By Magnolia44 @ 32:

    Would not have pulled the trigger on this purchase during the time period if I didn’t think we were staying for the long haul. That is the plan but the current economic environment and fact I think the US is headed for collapse makes me question our purchase at times.

    I need to start attacking our second loan more since the rate is pretty high and it moves at a snails pace amortization wise, but then there is the collapse thought and me wanting to have a war chest of cash for the just in case.

    Time will tell folks.

    If the collapse happens, your debt will be much easier to pay off. That is, if you move a portion of your wealth into assets that will retain value or rise in value should such a collapse occur. The only known assets worth entertaining from this perspective are other currencies (yuan, AU dollar, etc.) and precious metals. Better to allocate a portion to this type of diversification rather than try to pay off the debt entirely. Cleared land for growing food also becomes an asset when food costs hyperinflate.

  39. 39

    My wife and I downsized about 12 years ago , moving into a smaller house in a less hip area, and as a result, we were able to pay cash for the house we currently live in, so we don’t have a mortgage.
    The kids are out of the house, the car is old and paid for. This allows me to be in a position where I’m not forced to aggressively seek out clients, allows me to be myself.
    I don’t attribute this to smarts and skill. We’d been talking about finding a place with more garden space, and then got an unsolicited offer for our house. We took the money and ran.
    I’ve always hated debt of any kind.

  40. 40
    hoary says:

    By Ira Sacharoff @ 39:

    got an unsolicited offer for our house. We took the money and ran.

    That’s awesome. Good for you. We should all be so lucky!

  41. 41
    calvis says:

    I have been wanting to pay off my house for years, but my accountant keeps telling not to because I have such a good interest rate. So we just keep the money in CD drawing lousy interest.

  42. 42
    Markor says:

    RE: PhinneyDawg @ 25

    Consider that the 10-18% you’re investing for retirement is effectively money borrowed at 4% (5% less mortgage interest tax deduction). Since no investment returns better than 4% nowadays without significant risk, odds are good you’d end up better off by applying that 10-18% to the mortgage instead.

  43. 43
    Markor says:

    RE: calvis @ 41

    A lot of people would be out of a job if financial advice looked like this: “Step 1. Pay off all non-house debts. Step 2. Pay off the house. …”

  44. 44

    By Markor @ 43:

    A lot of people would be out of a job if financial advice looked like this: “Step 1. Pay off all non-house debts. Step 2. Pay off the house. …”

    And it’s downright un-American! ;-)

  45. 45
    Ross Jordan says:

    By Ned @ 28:

    There’s no such thing as “mortage-free” in the US. You still have to pay property tax after you have paid off your mortgage. We are the only country in the world that does this. if you don’t pay your property tax, you lose your home.

    Keeping up with the Jones’s is mind programming by the TV. If you are white, middle class, own a car, and make more than $10K per year you are ahead of 98% of the world’s population. That you would have to have more than this to be happy is programming. Undo your own programming and set yourself free. Keep the programming and remain imprisoned according to someone’s else’s rules.

    It’s your choice and always has been.

    There is various special cases of land where there’s no or very low property taxes. Homestead exemption or indian reserves are 2 I can think of off the top of my head.

  46. 46
    ray pepper says:

    Personally, for the next 30 years I do NOT ever see myself paying off a MTG. I get the tax break and at 5% why would I? With having to pay property taxes, insurance, upkeep, water, sewer, garbage, electric, cable, internet, landscaping, …uggh it goes on and on…having 1 extra bill and paying it off is meaningless to me.

    I’d much rather hang onto all the extra cash and have the ability to place it elsewhere. now , more so , then ever with rates under 5%. This is why I strongly discourage 15 year loans. Why strap yourself? Pay more if you desire but rates are so low..Take the 30 year

    We must not over look mobility. I like moving ALOT but my wife does not…I will NOT pull the kids out of their schools. However, if I can find a GEM in the same Zip Code then maybe I can make everyone happy and slideeeeeeeeeeeee us on over.

    I have always had the belief you never truly own your home anyway because there are so many costs associated with homeownership and its JUST another bill. Or as they said in the movie “UP”..Its just a house.

  47. 47
    wreckingbull says:

    RE: Ira Sacharoff @ 39 – Thanks for sharing your scenario, Ira, we should all be inspired by your post. I am getting close, but am not quite there yet. Nothing improves quality of life like shedding all debt. I too downsized, and have never looked back. Allows you to focus on the more important things in life.

  48. 48
    Meg says:

    Yup, we bought a 1953 house in ’98 during the craftsman craze and paid it off by the end of 2009, by doing extra payments whenever we could, falling for absolutely no refinancing schemes, and budgeting like crazy. 1500 sq. feet, 3 bedroom, 1 bath (however, we added a 2nd bath because it was feasible). Feels good in this economic time, to have the thing paid off. I like my small 50s box, that lacks pizzazz and a killer view. It’s level, and good solid construction. Other than that 2nd bath and getting rid of the old furnace, we’ve put minimum $ into fixing anything.

  49. 49
    joe user says:

    Yes, would love to own (really own, not pay the bank). But we bought our first house (2br, 1.5 bth) in 2005 and went for more location and less house – we’re still quite a ways from being underwater, though if the GS prediction comes true the house would be worth less than we paid and we’d be just treading water. Some regret on the smaller house, since there’s now 2 kids, not 1. We have a buffer as they can and will share a room for several years, but we’ll need another bedroom at some point and adding a second story is prohibitively expensive (~$150k since my skills don’t include being handy with construction) and a pain with 2 young kids in terms of moving to a rental, schooling, etc. That and when I last looked into it, it’d be easier to secure financing for a new home than to add onto the existing.

    So… at some point we’ll end up moving to a 2nd house and hopefully keeping that one for at least a decade or two if the location is decent enough. We are more financially conservative than not, and are carrying a mortgage on my brain (grad school student loan) and the biggie on the current house, and that’s it for debt. We’d LOVE to actually own and not make monthly payments to a bank. I’d love to enter retirement without having to make a mortgage payment.

  50. 50
    JJG says:

    Wouldn’t everyone love to own outright? It comes down to income and the kind of lifestyle you want to live. Nothing wrong with suffering to pay off the full mortgage in 15 yrs if you choose. Many people would rather have the freedom to vacation or move during that time.

    Its analogous to choosing a career: Would you suffer through a high-paying job that you hate if you could retire at 50, or would you rather have a job you love and work until you drop? (obviously not always mutually exclusive)

  51. 51
    David Losh says:

    Any financial planner will tell you to pay off the family home. It’s the only sound financial advice most of these hucksters will tell you.

    Owning an asset free, and clear opens a lot of doors. The family home is by far the most impressive asset to own.

    The only way you should buy a family home is with the intention of paying it off. It’s not a gamble, or leverage for anything. Second house, rental property, OK, but the family home should be free and clear.

    Did I say that enough times?

  52. 52
    Jonness says:

    By Kary L. Krismer @ 26:

    So in other words, your friends understand things in the bizarre and incorrect way that you do, and you think that is wrong?

    Let’s say you bought a $500,000 house in Seattle in 2007 using 20% down (I.E. $100,000 down). Because the bubble popped, the house is currently worth $375,000. You initially financed $400,000 and have paid an average of 5.5% interest for three years (we’ll skip refinancing costs to get a lower interest rate). You have paid $66,423 in interest and currently owe $382,390 on the mortgage. You’ve been frugal, lived within your means, done the right thing and put 20% down.

    You have paid $66,423 in interest and owe $7,390 more on the house than you borrowed from the bank. Adding in the $100,000 cash that you put into the house up front, you’ve paid $166,423 to live there for three years. (We’ll be generous and skip tax and maintenance costs and call it the mortgage deduction.) You can cash out anytime and walk away without damaging your credit if you come up with 10% to sell it plus the additional $7,390 you owe out of pocket. So after paying $166,423, you only need to come up with another $44,890 to be able to move. After 3 years of so-called owning the home, and deciding to move, you’ve paid $211,313, or $70,438 for each year you’ve lived there, or $5870 per month.

    Which of the following are bizarre beliefs?

    1) You made an excellent short-term investment on the home and got a great return on your money.
    2) A house is a place to live and should not be viewed as an investment.
    3) Listening to your real estate agent, who claimed “now is a great time to buy,” turned out to be a great decision.
    4) Purchasing a house via credit has nothing in common with dealing in highly leveraged and speculative investments.
    5) You didn’t lose your rear end by living there 3 years and then moving.
    6) If you live in the home for the 7 year average that most people live in their home before selling, you will make a huge profit on your investment.
    7) If you live in the home for 10 years, you are guaranteed not to be underwater when you move.
    8) When your real estate agent claimed “you have the same probability of judging the future direction of house prices as you do flipping a coin” he/she made a factual statement.
    9) You own the home?
    10) The bank owns the home, and you are currently paying 2 to 3 times the cost to rent the home from the bank as you would from a regular landlord?

    In my opinion, the only non-bizarre belief is 10).

  53. 53
    Jonness says:

    By Magnolia44 @ 32:

    I need to start attacking our second loan more since the rate is pretty high and it moves at a snails pace amortization wise, but then there is the collapse thought and me wanting to have a war chest of cash for the just in case.
    Time will tell folks.

    That’s a tough call. Stopping all payments and putting 100% of the house costs into the war chest until you are forced to move would be high on my list of potential next moves. If it were me, I would probably not make the additional payment toward the second until we have just a little more time to see how the government’s pullback on support for the housing market affects Seattle. This will allow you to keep your options open in the meantime as you continue with your normal payment routine and stash away the extra.

    I would want to see the outcome of the Feds pulling out of the unemployment benefits business as well. There are a lot of Washingtonians who will lose their homes if the current end to the 53 week EUC extension holds. Fortunately, WA is one of 15 states that offer extended benefits of their own, but that is only an additional 20 weeks (if it has not already been claimed). If the two year unemployment ride is truly over throughout the U.S., all heck could break loose. I suspect the Republicans will eventually compromise with the Dems and allow the extension as long as it is paid for with money from the original bailout package. I just can’t see them going to term with this one and throwing millions of people out on the street over the next month or so. Then again, I wouldn’t completely rule out the possibility. It could be in their best interest to pull as much money from the economy as possible so that things are as bad as possible come the next elections.

    As you say, time will tell.

  54. 54
    corncob says:

    RE: calvis @ 41 – Are you being serious? If the CD interest is less than the rate you are paying, then your accountant is a complete moron and you should fire him.

  55. 55
    Jonness says:

    By Ned @ 28:

    Keeping up with the Jones’s is mind programming by the TV. If you are white, middle class, own a car, and make more than $10K per year you are ahead of 98% of the world’s population. That you would have to have more than this to be happy is programming. Undo your own programming and set yourself free. Keep the programming and remain imprisoned according to someone’s else’s rules.

    It’s your choice and always has been.

    I agree up to a point, as it costs more to live in this country than in many other areas of the world. That being said, I’ve lived quite well in the recent past on $10K/year.

  56. 56
    Chris says:

    RE: corncob @ 54

    I agree – I’m definitely in the “pay off your mortgage” camp. I view it as similar to a bond investment. I think it’s Vangard founder John Bogle that recommends investors have (100 – their age)% in bonds. It seems to me that prepaying one’s mortgage satisfies that more conservative approach with increasing age – so i’d be more inclined to keep my 401k and other accounts heavier in stocks if I’m aggressively paying down my mortgage. The difference of course is greater equity and a reduced monthly housing expense as opposed to a more liquid investment in bonds. But the flip side could lead to a scenario where you have a mortgage backed by Ginny Mae, and a bond fund invested in Ginny Mae, only to benefit the money managers and brokerages collecting the fees and expenses for you to essentially loan money to yourself.

  57. 57
    S-Crow says:

    Tim, I think a lot of people choose to pay off the home. We do live in a mobile society, but when people find somewhat of a stable career/job, have a family and are fairly close to extended family, the anchor takes hold and people may live in a community for years.

    Visited my old next door neighbor on Capitol Hill this Spring and they’ve been there for 45+ years.

    On the other hand, a large group of people in real estate business including those in the mortgage business tend to lean in the ‘leverage the most you can’ camp. The downside of this is being experienced by large numbers people these days. With a lot of people getting wiped out financially, the test for them is whether or not they will take what they’ve learned, grow from it and prosper in the future. Sometimes it takes getting the **it kicked out of you to learn.

    Deejayoh @ 8 and Mike @ 24 makes some very good points.

  58. 58
    Hugh Dominic says:

    Can a 55-year-old qualify for a 30 year mortgage? That defies logic, they’re not going to work until they’re 90 to pay it off. The point of bringing all your pay stubs to the mortgage broker is sort of a sham if you’re only proving that you can make the payments for a few years into the term of the loan.

    I will not take on a mortgage with a longer term than my remaining working lifespan. IMO banks should make this a general policy.

  59. 59
    Hugh Dominic says:

    RE: mike @ 24 – in summary, investors need to account for the risk factor in their investment choices. Getting a 5% return on a zero-risk investment (paying off your loan) is an unbeatable deal right now. The risk premium on stocks is higher than an extra 2% would justify.

    Ask me again in 2015 if inflation ramps up and banks start paying 10% returns for CD’s. In that case… let the loan ride and put your extra money into the CD.

    For smart investors, buying money today at 4.5% and putting it all into CDs at 2.5% is not irrational. It amounts to paying for an “option” that would pay off if interest rates rise and near zero-risk instruments like treasuries and CDs start paying > you loan.

  60. 60
    Hugh Dominic says:

    RE: Kary L. Krismer @ 27 – isn’t the homestead exemption something anemic like $150,000? If so, unless you plan on living in a trailer in Enumclaw I wouldn’t think it’d be much of a consideration.

  61. 61
    Blurtman says:

    Here is a different perspective for these bizarre times, posted in the fog of late night surfing.

    In deflationary times. it may be more prudent to have the big mortgage. If you buy a house for $400,000 with cash, during times of asset depreciation, you have $400,000 downside risk. Of course no one expects the home to go to zero, but homes have lost 50% from peak values in certain regions of the USA.

    If you plunk down 20%, you have $80,000 downside risk. Better yet if you put 0 down, you have no downside risk. Jingle mail and you cut your losses. Not so of you own it outright.

    It seems undeniable that we are in a deflationary spiral. Most unusual times.

  62. 62
    ray pepper says:

    RE: Blurtman @ 61

    agree 100% then and 100% now!!

  63. 63

    RE: Jonness @ 52 – Notice that I didn’t attack The Tim’s similar comment in the OP above because it wasn’t as extreme. Buying a place and constantly refinancing is similar to renting (although not really the same because your landlord doesn’t periodically pay off your credit card debts).

    But to claim that just having a mortgage is the same as renting is absurd. That’s like saying buying a car with a secured loan is the same as leasing it. It’s not. And on the rental side, the tenant typically has little interest in whether the value of the underlying asset goes up or down, except to the extent that the value is based on the capitalized rent rates.

  64. 64

    By Hugh Dominic @ 60:

    RE: Kary L. Krismer @ 27 – isn’t the homestead exemption something anemic like $150,000? If so, unless you plan on living in a trailer in Enumclaw I wouldn’t think it’d be much of a consideration.

    The homestead is $125,000. Here’s what I was thinking. Let’s say you have two rental houses worth $250,000 each, and you live in a house worth $500,000. IMHO assuming you had $400,000 in secured real estate loans, you’d be better off having a $400,000 loan against your house rather than 2 $200,000 loans against the rentals. The interest rate would likely be less, and with only $100,000 in equity the house would be completely protected by the homestead. Assuming disaster (say a $2,000,000 judgment against you), you’d lose the two rental houses, but be able to keep your house as long as you could make the payments). But I would agree it would be a close call in that if the debt were against the rentals you’d possibly be able to keep those, lose your house, but get the $125,000 homestead. It really comes down to how much you don’t want to be involuntarily thrown out of your house.

    BTW, in bankruptcy the $125,000 homestead typically is really $125,000 plus 9% costs of sale, plus 5 or 10k. That’s because the trustee typically won’t sell the house unless they can clear 5 or 10k. What that means is that people in expensive houses get a much higher homestead exemption than the rest of us. In a $400,000 house you could have about $161,000 of equity before the trustee would consider selling your house. In a $2,000,000 house you could have $310,000 of equity before the trustee would typically consider selling the house. Keep in mind though other things can affect that.

  65. 65
    Blurtman says:

    Let’s take two extremes –

    a.) you can hold $400,000 in cash, or,
    b.) you can pay off your house with $400,000 cash.

    During asset inflation, b.) is the better choice. Your home goes up in value, and your dollars go down. So you have converted your dollars into a vehicle that increases their value versus holding dollars that are losing value.

    During asset deflation, a.) is the better choice. Your home goes down, but the value of your cash goes up. Had you converted your dollars to the home asset, you would have lost wealth as the home price slid. Had you held the cash, perhaps that $400,000 can now buy an $800,000 house, or two homes previously worth $400,000.

    Being totally long in one direction and guessing wrong can be catastrophic. A hedging strategy might be to hold some cash and to own some assets.

  66. 66

    By Blurtman @ 65:

    Being totally long in one direction and guessing wrong can be catastrophic. A hedging strategy might be to hold some cash and to own some assets.

    I would agree with that, and also note that there are other reasons to do that. For example, having some savings to fall back on in an emergency is a good thing, so even ignoring the hedging you wouldn’t want to use all of your cash.

    Recently a poster here commented on my purchase of a more expensive home shortly after the peak. In their world I would have been better off going all cash at a point in time when the world was about to head into possible economic collapse. I would consider that to be totally foolish, and I would have been a lot more concerned at the end of 2008. My goal was to be a bit more balanced, and that did require selling the old house because I didn’t want to be too heavy into real estate.

    Note that by being prepared for the possibility of economic collapse I didn’t have to predict it. That’s the benefit of being balanced.

  67. 67
    wreckingbull says:

    RE: Blurtman @ 65 – I have never known anyone to spend every last penny they have on an cash purchase of a home. In my experience, someone who has the financial smarts and discipline to own a home outright also knows the value of diversification.

    With today’s low rates on a 15-year fixed, I do think there is an argument for financing part of the purchase in what otherwise would have been a full-cash transaction.

  68. 68
    EEK! says:

    I write from the perspective of a renter looking to buy. I’ve been pondering this for myself lately as I’ve been thinking about getting my first home of my own due to the down market. Ideally I’d like to get into the situation you describe as mortgage-free, but realistically can’t afford much in the way of a home even at todays rates and prices so once I had equity I probably would indeed be trying to sell that home and moving up the “equity ladder”. Been renting all my life and I’m nearing 40 so the dream of “mortgage free” is appealing. But realistically the 1 bedroom condos I can afford now are probably not where I would be in 10-years let alone 30. Do I wait until I can afford that final home (and am settled enough to see it as such)? Or do I bite the bullet and get into ownership mode now even if it isn’t ideal?

  69. 69

    RE: wreckingbull @ 67 – You may not have known anyone, but it happens. Even going back three years there were transactions where the default occurred very early, within a couple of months, and while some of those transactions were outright bank fraud, not all of them were.

  70. 70
    Blurtman says:

    RE: wreckingbull @ 67

    Spending everry last penny of cash on a home would be one example of going totally long on assets.

    I have stated that while I beleive deflation is likely to continue for some time. hedging one’s bets by holding cash and assets is one way to go. Your cash increases in value during deflation, your assets (home) lose value. During inflation, the opposite occurs. Being totally long in either direction can be catastrophic if you guess wrong or mis-time things.

    In deflationary times, why would one rush to pay off an asset that is losing value with cash that is gaining value?

  71. 71
    wreckingbull says:

    RE: Kary L. Krismer @ 68 – I don’t understand. How does one default on a home they own outright? I am not talking about leverages purchases. That happens every day. I am talking about cash purchases and this notion of spending your entire savings on said purchase. I just don’t think that happens much.

  72. 72

    RE: wreckingbull @ 70 – I wasn’t focusing on the down part. I was talking about buying a house where you put all of your liquid assets into the transaction. That number invested could be $1,000,000 or it could be $0, but the end result in both cases would be the lack of any liquid assets.

  73. 73
    ARDELL says:

    Tim,

    Most people are not that attached to the decision to live in THAT home for 30 years, at time of purchase. More often at time of making an offer on the house, they are not 100% vested in the idea that they will actually be getting the house.

    They are still hanging on to the idea that they may not be getting it at all, until it closes escrow. Not sure why that is, but most buyers are protecting themselves from getting too attached until they actually own it on closing day, for fear something will happen that will prevent that purchase from becoming a reality. Often, even the most qualified buyers still think the lender might say no and they won’t get the house. Many “don’t want to get their hopes up” until it closes. Just had clients who put 35% down and were way over qualified for the mortgage with stellar credit scores buying a very modestly priced home. Still…they were on pins and needles until the loan funded and it closed as if it might not have closed.

    A year later some people love that house enough to start seeing the possibility of living there for a very long time, but not on or before the day of closing in most cases.

    In many ways it is about commitment and fear of commitment. The other day a client of mine said “I’m not ready for that kind of commitment” when choosing between a neutral color choice of tile the other day. She said “I really like that other color, but I’m not ready for that kind of commitment.” They are ready to decide to build and buy a house for more than a half a million dollars, but not ready to put a couple dozen 1″ colored glass tiles in the 1/2 bath behind the sink.

    If someone is going to say “until death do us part” to a house and even think about paying off the entire mortgage and staying there forever, that will likely happen after they have lived in the home for quite some time. Not on the day they decide to buy it. Today more than ever I encourage people to only buy a home they CAN stay in for a very long time, but that doesn’t mean at time of purchase they are deciding that they WILL stay in it for a very long time. Most are thinking about getting through the process and closing and not about actually living in the house at all. They don’t want to get that vested in the outcome at that point.

    Perhaps it was the same for your parents. Perhaps the day they decided to make an offer on the home, they did not fully envision what actually took place over the 27 years after they bought it. Maybe in year 5 they decided to stay 5 more years. Maybe in year 10 they decided to accelerate their payments.

    The cold hard reality is that most people aren’t vested in being with each other for 30 years when they buy a house, let alone being with the house for 30 years. “til death do us part” ain’t what it used to be.

  74. 74
    wsuengineer says:

    My wife and I are in the first time home buyer bracket. We bought a beautiful home in Sammamish. We have a sizeable mortgage, but we have a budget that makes sense. Our goal has always been true home ownership, but we have talked about moving up to a newer home when it makes sense to. There’s also the uncertainty that we’ll be living in the Seattle area for the next 30 years, so it’s hard to look at our current home as the home that our kid is going to graduate high school from and we’ll retire in.
    Our background is we have parents that were tremendously successful in real estate during the california housing bubble. They bought, upgraded, and sold home every several years. They sold their last home at the peak and made away like bandits. They ended up renting for about 3 years before buying their retirement homes with cash and are now living retirement free and clear. On the other hand I have family in San Diego that rode the housing bubble into a $2M mansion, and now they’re stuck in it, which is turning out to be a money pit with taxes, mello roos, and mortgage payments.
    I think most people can’t think of investing their entire lives in a single home. Instead, they want to buy and sell homes in hopes of gaining enough residual equity so they can just sell and buy their final retirement home with cash. The question remains if that will even be possible in real estate during our lifetime?

  75. 75

    RE: The Tim @ 37 – property taxes are one of the few liens (next to a mechanics lien) which can take priority over recorded liens (such as your mortgage).

  76. 76

    RE: Rhonda Porter @ 75 – Also, property taxes are one of the few taxes that no one actually owes. It’s strictly a lien right when it comes to collection.

  77. 77
    Jason Shutt says:

    We’re in our early 30’s and are patiently awaiting for the right time to secure that spot to raise a family.

    We have never owned because the hype just never seemed rational. But, we know the time to buy is on the horizon. Our pursuit has us thinking about a place that can justify a 20 year commitment to get the kid(s) through school. Then who knows where we’ll want to live, right?

    We hope to be mortgage-free in a modest home in our early 60’s so we can use our money to live our life.

  78. 78
    Evan says:

    About 15 years ago, while living in Seattle, I read the book “Your Money or Your Life”. At that moment, my wife and I set paying off our mortgage as our top financial priority. We lived on one income and used the other one to pay off all our debt. Any bonuses and “extra” money went to that as well. We have moved several times since then, but at no point did we allow our mortgage to expand in a move. At age 46, we have no mortgage and no debt. It’s the best way to live and provides a tremendous amount of lifestyle flexibility. Unfortunately, I suspect we are a small minority.

  79. 79

    For the vast majority, homes are a liability, not an investment. Ignore the Jones, keeping up with them will sink you. I bought relatively late compared to most first time buyers and can see myself staying where I am for a long time until I fall down the stairs when I’m 89. Having said that, if I do hit the jackpot, its 34th Ave in Ballard overlooking the Puget Sound for me baby!

    My parents (in Ireland) bought their home in for $30,000 in ’59 and sold it for $2M in 2006. Now that’s equity!!

  80. 80
    Joel says:

    I’m interested in buying a house and then staying there and paying it off as quickly as possible.

  81. 81
    MacroInvestor says:

    2 points:

    1. Property taxes are extremely loathsome to me. It’s as if the gov never gives up title to land. Given enough time, every property will fall on hard times and it will revert back to the state. To me this detracts significantly from home buying. You can never live free. You work for the gov until dead.

    2. The US debt is so high and increasing faster than revenues, I think they know there is no chance it will ever be paid off. Eventually it will reach a point were they have to default or devalue the currency. I would argue that what they are doing now, and will continue to do, is slowly devalue by printing money.

    This means the value of the dollar will continue falling. And this means debt will become easier to pay. Under this scenario you want to borrow as much as you can afford at fixed rates. The debt will be paid off with inflated dollars, and your assets should rise in value. That will only work, of course, after the housing bubble is worked off and prices start rising again.

  82. 82
    The Tim says:

    By PhinneyDawg @ 17:

    Tim – Just curious, what % of your parent’s combined net income went to their base mortgage payment when they first bought the house in 1987?

    Sorry for the delay. I kept forgetting to ask them when I talked with them. Their original principal + interest payment on the house was approximately 15% of their gross income. Very sane level of affordability, despite the 10%+ interest rates.

  83. 83

    […] I’d particularly enjoy doing again any time soon. Fortunately our hunt was focused on attaining actual home ownership rather than some sort of first step on the mytical “equity ladder,” so I don’t […]

  84. 84

    […] if you’re the kind of person that is pursuing actual home ownership instead of serial debtorship, the situation gets dramatically better for you once you finally pay […]

  85. 85

    […] that even if home values don’t appreciate at all and I only stay in my home for 10 years (I plan to own it for good) I’d need to pay no more than $1,128 a month in rent to make renting the better financial […]

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