If I were a customer of mine today I would be asking my mortgage broker, “Hey, Evan! What happened? Why the change? Should I pay off my mortgage or not!?” I would be asking for an answer. I wouldn’t let me off the hook.
If memory serves, it was just three years ago this past month that I held my last seminar, entitled “Equity Management”, where I taught that the safest and fastest way to ‘pay off’ a mortgage was in fact to…not pay it off.
I had done the research. My teachers were older and sage. My number crunching was sound. In fact, those who are still doing what I taught them to do are further along today financially than they would have been in an accelerated mortgage pay-off situation. This works. And I was convinced it was a better way for most people.
My essential argument was this:
You borrow money to GET a house because you don’t have the money to pay for it. That means you are okay with two major ideas: First, you are not against borrowing money; second, you are okay borrowing money if what you get for it exceeds the cost of borrowing.
Those who take out a mortgage to buy a home believe these two things. They believe that borrowing money is not wrong and that the benefit of having the home now rather than waiting to pay cash for it outweighs the cost of the borrowed money over time.
The next step in my argument was to ask a simple question: What else is greater than the cost of borrowed money?
Well, many things:
~ A hole in your roof that goes unrepaired is a greater negative than the negative of 6% tax deductible mortgage interest. Borrow money and fix the hole.
~ College-loan interest rates are often higher than tax-deductible mortgage debt. Put the cost of college on the mortgage and enjoy the tax deduction.
~ Credit Card interest rates are almost always higher than tax-deductible mortgage interest. Consolidate the debt into one low mortgage payment and invest more now.
~ The return on a conservative investment account over 5 or 10 year periods is higher than the tax-deductible interest of a home mortgage. Put less into the adjustable rate mortgage, more into the investment fund.
In addition to these benefits, we also find that folks who turn 55 and then 60 often see that their children move out and start claiming themselves on their own tax returns (if they’re lucky) while their incomes rise. They are now a full tax bracket higher and paying more in taxes than ever. Why would they ever want to add to their higher tax bill by paying off their mortgage? It’s a provocative question.
Let’s go even further and talk about fiscal safety for a minute. Which homeowner is in greater jeopardy of a bank desiring to foreclose in the event that they fall behind on their mortgage payments? Is it brother A who has a very little mortgage left because he’s paid extra on his loan every year and now has a lot of equity in the home? Or is it brother B who always saved the difference in a side fund. He has a very large mortgage but has enough investments to pay it off any time he pleases.
The bank lending the money in these situations, I argued, is in a better risk position with Brother A than with Brother B. Brother B has his money – he controls it and can access it without the bank’s permission. Brother A has given all of his money and the control of it back to the bank.
He would have to apply with the bank for a mortgage to get at his equity because with every spare dollar, he paid more on his mortgage loan. Isn’t brother B smart for having saved his money off to the side rather than having paid down his mortgage loan?
All the number crunching and scenario building we did said that having a mortgage is better than the alternatives. I was one who was convinced of this and promoted the idea of consolidating non-tax-advantaged debt, investing rather than paying off the mortgage and using mortgages that have extended pay-offs in order to make this more efficient and advantageous for the client’s balance sheet. I made these recommendations because I believed it was safer for my clients.
In fact, my own mortgage is an option ARM loan (currently under 3%). I not only taught this, but I also ate my own cooking. Today, I am appreciative of this low rate loan (albeit adjustable) as it has allowed me time to reorganize my financial life in the face of this great economic market shift.
Like most of my clients, I still live in my home. Other than the fact that my business is mortgages (which has been rough regardless of the kind of mortgage I have), life is okay. Furthermore, I’ve been meeting with many of my clients annually, and they too are for the most part okay.
My mortgage performance report card with banks to whom I sold loans is far better than the national averages. My clients are performing very well. Now, sure, a few have lost their jobs and thus their homes, but none pin this on the mortgage they chose; at least none that have let me know about it.
And yet, today, I will counsel clients to eliminate a mortgage rather than allow it to go on farther into the future. I’ve changed my thinking on this. Why?
Not because the numbers and research were wrong, but because these things don’t relate to the entire story. Because there are other things that cannot be measured on a projected balance sheet.
Remember when Coke came out with a “new coke”? Taste-test after taste-test was done, and folks picked Pepsi over Coke in these double-blind experiments nine times out of ten in every state of the union. This worried Coke. They read this research and analyzed the data and started to work again in the lab to correct the problem. Nothing wrong with that.
But what Coke did next was a huge error. Yes, they changed their formula. But the real error they made was that they paid ultimate attention to the data and they stopped listening to their customers.
They paid more attention to the data and the research and less attention to their customers and the desires expressed by them by their habits.
Coke learned their lesson, and so did I. I will never make that mistake again.
This is worth repeating: I will never make this mistake again.
If you have taken the time to read this far, do me a favor and watch at least three minutes of the video embedded here (hit the link and scroll down a half a page or so). This is a great backdrop for what I want to say next and a very cool blast from the past!
Here’s what I’ve learned these past few years: You told me, “Evan, stop showing me the research and data and give me what I want. I want a Coca Cola Classic. I want to pay off my mortgage.” In fact, you were saying the same thing five years ago.
When it comes to money, more of it is not necessarily better. Having peace of mind and contentment with it is much more to the point. I know this better today than ever before.
Having a mortgage, even if it means having more investments equals less peace of mind for most people; for almost all of us in fact. Myself included.
I became focused on the pathway that would lead to the highest possible net worth in the shortest period of time – on paper. What I failed to recognize is that the peace of mind that comes from having less debt outweighs the importance of having more money for most of my clients.
So, I’m sorry. I did not advocate for the wisest path for many of you and that was my mistake. Many of you told me you were uncomfortable with the idea of not paying off your loan and became convinced only after my data and research overwhelmed you. You trusted me that you would become comfortable in time, and many of you are not. You took my advice and I take that very seriously.
To be clear, I am confident that I did not lead anyone down a path toward financial ruin. That is not what happened, is happening, or will happen for those who follow my previous formula. In fact, for those of you who would still choose the long-term mortgage route, you are not making a wrong, unwise, or financially imprudent choice for yourself. In fact, you will make more money or have a higher net worth as a result (trust me I’ve run the numbers on it J). You know the parameters I taught, and if you stick with them you will be more than fine.
But therein is the key. There are many parameters to keep in mind. To name a few: You must continue investing while the market is down. You cannot panic if rates rise a little or if your investments decline for a while. You must have the discipline to not use your credit cards. And the list goes on and on. Many variables need to be kept in check.
Essentially, you need to stick with the plan regardless of how you feel, what happens to you financially or what happens in your life. And for many of us, that is not the most peaceful, contented road to travel.
To the contrary, paying your mortgage off is simpler and therefore better for most of us. If you decide on the accelerated mortgage payoff, here’s your new reality:
Soon, you have no mortgage.
You have no payments to make.
You have no risk associated with having to make payments.
Simple. Easier. Better for most of us.
What these recent market conditions did not do (surprising to me and others) is that it did not prove the number crunchers wrong based on their numbers.
It proved them wrong based on the human factor. Folks did not feel as comfortable sticking with that plan as often as they did eliminate their mortgage directly.
Dave Ramsey says this: “life happens”. This is a simple way to say that it is never a good idea to presume upon the future. The future is unknown to us and we cannot make guarantees about it. Only new and unknowable information changes the future, and for the most part, we ought to make our plans with as little to do with future variables as possible. This is the main reason that I have arrived at a different conclusion.
The second reason is more practical and measurable. We tend to spend less when we have to pay for it. This is true with everything. Health insurance (don’t get me started), cars, even McDonalds.
Remember when VISA came to McDonald’s? McDonald’s bucked this for the longest time, complaining that the cost per transaction was too high and that it would cut into their profits. VISA’s argument was simple and has proven true. They told McDonald’s to give it a try and predicted that they would see a marked (roughly 30%) increase in the purchase amount of those who used a credit card versus those who paid cash. It worked. Mickey Ds went VISA and will never go back. Their customers spend more when they use their cards.
This is the same with debt. If you have to put on a new roof, you will tend to work on the price far more if the cost is coming out of your savings account. If you are simply adding it to your mortgage balance, it’s easier to just “get it done” with the first reputable company that gives a bid. The average is still 30% higher for purchases like this one.
So, because it is unwise to presume upon the future, and because it is proven that on average we spend less on purchases and expenses when we pay with cash, I have changed my formula for mortgage elimination back to the simpler and more accountable way – just paying it off. I’m giving the human factor the weight it deserves.
Today, if you ask me, “Evan, should I pay off my mortgage faster or should I invest the money instead?” I will say something like this: “For most people, because the future is uncertain, it is important to handle a mortgage in the following way: First, eliminate all of your other debt. Then put away three to six months of your monthly expenses in an emergency fund of some kind and then eliminate your mortgage faster than minimum payments would achieve payoff.”
For most of us, the options created by being done with payments are far more valuable and far more likely to happen than those that may happen by having a higher net worth.
For those who have taken my advice in the past and want to keep things as they are, Great. I understand this way and can continue to coach you in it. You are not doing anything wrong. You are well educated with both the right information and now with the invaluable experience of wild market shifts, and you know exactly what is expected of you. And you know that everything is still okay.
Remember that my loan products were never subprime products as defined by the interest rate. The current amount my clients are paying over the LIBOR right now is on average 2.5%. That puts you at an interest rate of 2.75% now and over the past two years (better for many, a little worse for some).
Many of you are unwilling to refinance your mortgage at this point and for good reason – it’s a very inexpensive loan! Further, there are at least as many economists claiming low inflation for an extended period of time as there are fear mongers claiming hyper-inflation.
This is not to say that we know what will happen either way, but we can stick with the plan and make level-headed moves as circumstances may change. Remember, when rates rise, historically, so does the return on your investment account, your tax deduction, and in many markets your home’s value as well. Money is still relative.
Lastly, if you are interested in paying off your mortgage faster, and you are currently unable to refinance because of the mortgage you are in, I am promoting and coaching clients to take a level-headed approach as we navigate the next months.
Remember, your current mortgage owes you nothing. It’s the cheapest money you can find anywhere, and other than the fact that it’s not fixed, it’s been a VERY inexpensive loan so far, far less expensive than we projected.
Beat The Bank – Tips On Reducing Mortgage Payments
Houses are one of the purchases that most of us make that cannot be paid for out of pocket. Most of us need to obtain a mortgage. Obtaining a mortgage can be complicated and costly, but like most other things in life the more you know the easier it is.
Ensure Your Credit Rating is Good Enough
About a year or two before you are ready to start house shopping start taking steps to get your credit rating as high as you can, pay off everything you can and save as much money as possible.
This will help you be able to get the best mortgage rates possible, and if your credit is right on the border, a larger down payment can be the deciding factor as to whether or not the lender is willing to give you a mortgage at all. And of course, the more money you can put down the lower your monthly payments will be.
The lender has a considerable amount of money invested in you and your house and will take steps to make sure that their interests are protected.
Because your house can be seized by the government if you don’t pay your taxes, which is something that the lender definitely doesn’t want to have happened, they will often add a portion of your property taxes to your monthly payment which is held aside until the property taxes are due.
Insurance is Required
They will also require that you have insurance and they may limit how high your deductible can be. Their concern is that if your deductible is too high you won’t have the available cash to fix what could be a simple repair before it becomes a major issue and their collateral could become affected.
Another good reason to have as large a down payment as possible is PMI which is private mortgage insurance. PMI is another type of insurance that you may be required to purchase if you have less than 20% equity in your home.
Of course, equity means that portion of the property that you have already actually paid for. PMI can be quite expensive so it is best to avoid it if you can.
More and more people are choosing to shop for a mortgage before they shop for a house so they know exactly how much house they can afford. When you’ve approached a lender and they have told you that you are pre-qualified for a loan that is a different thing from being pre-approved.
Pre-approved means they have checked your credit report and they are ready to make the loan. Pre-qualified only means that they have looked at the documentation you have given them and they’ve given you an estimate of approximately how much you could afford to borrow.
5 Tips For Getting Your House Paid Off Early
There is nothing better than feeling the sense of freedom that comes with owning your own home. If you are looking from Florida to Utah, new homes are not hard to find. And there is no time like the present to start an expedited payment plan. Whether you are seeking to buy your first home or intending to upgrade, you can benefit from learning how to pay a house off early.
There are several ways to go about this. Choose the method that works best with your budget and financial situation.
Refinance for a Shorter Term
A popular way to reduce the amount of time on a mortgage is to refinance. A short-term mortgage can cut years off of your payment schedule. The average mortgage term is 30 years. By refinancing you can get a 15-year term or shorter period of time. Look at all of the options available and select a refinancing deal that gives you the lowest interest rate.
Many people hear the word refinance and think it is going to negatively affect their credit, but when you are refinancing to shorting the length of your mortgage it is a great thing for your credit.
Increase Payment Amount
There is no law that says you must stick with the same payment amount. Increase your monthly payments by adding on an additional sum that you can afford. Determine how much extra money you can pay on your mortgage. This should be an amount that you can come up with on a regular basis. Consider increasing your income just to increase your payments.
Speed Up Payments
Change your monthly mortgage payment schedule to a bi-weekly plan. You may have to adjust the total sum for each payment. This method can cut the mortgage term by up to 50 percent. And is a great option that is often forgotten about. By speeding up your payments you will not only pay off your mortgage sooner, but you will end up paying less in interest.
Pay in Lump Sums
Any extra money you receive in the form of gifts, bonuses or overtime pay can be turned into a periodic lump sum mortgage payment. This requires extreme discipline. It can be tempting to spend this money on other items. However, if you make a fast payment it will not be missed.
Make Extra Payments
Find money in your budget to make at least one extra mortgage payment during the year. It may not seem like much, but this method is a great way to trim several years from your term agreement.
The dream of many homeowners is to pay off their mortgage early and do away with monthly payments. With careful planning, this goal can be achieved. Choose a payment strategy that you can stay committed to over the long run. These techniques can speed you along the path to financial stability.
It may seem unnecessary, but by finding a method that you can stick to you will be able to enjoy financial freedom sooner and save money while doing it.
Read also: Good or Bad about PNC Mortgage?