Thursday, December 26, 2013

Regarding Mortgage Debt

Almost all my life I have heard people talk of the benefits of having a mortgage; especially a 30 year mortgage.  The rationale goes like this:  If you have a mortgage you can claim the interest as a deduction on your taxes each year.  If you pay cash for your home, or pay your mortgage off early, you lose the tax deduction.


Not so fast.

That’s like saying you should spend a dollar so that you can save 10 cents on that same dollar.  Said another way, you still lose 90 cents.

Sure, it’s smart to take the deduction if you are carrying a mortgage.  In fact, it would be foolish not to.  But as a financial strategy – to deliberately keep yourself in debt for 30 years – never made much sense to me.


Anyone who has ever looked at an amortization schedule knows that with a 30 year mortgage, you end of paying approximately triple the purchase price of the home.  For a $250,000 home, one not only pays back the $250,000 borrowed, but an additional $500,000 in interest!  That’s assuming you take the full 30 years to pay it off, which most people do.

So the question becomes:  Do you get $500,000 worth of deductions in your taxes?  The answer is a big, fat NO.  You actually lose almost all of that $500,000!

What would you rather do with $500,000?  Give it to the mortgage company (so that you can claim pennies on the dollar as a deduction on your taxes)?  Or have it sitting in your own savings account?

The truth is, if you’re going to be paying out that much money over a 30 year period, it just makes more sense to have as much of that money as possible going to your bank account rather than to the mortgage company.  Keep in mind that $500,000 is a small fortune.

By the way, if you will make one additional payment each year (a 13th payment), you can pay off a 30 year mortgage in 19 years!  The extra payment is applied to the principle, which represents an enormous long-term savings in interest.

There’s an odd logic (in the mind of many people) about debt.  Debt is considered normal.  It’s even considered desirable.  But who does it really benefit?  The lender, not the borrower.

I’ve never purchased a home that was anywhere close to $250,000, simply because it was out of our reach.  Plus, the ministry is too unreliable to count on.  I simply use these numbers as an example to make the point.

We have purchased only two homes during our marriage.  After we sold the first home (we bought as newlyweds) we used all the money from that sale as a down payment on our second home (on Timberland Drive).  This lowered how much we had to finance considerably, and combined with a lot of self-discipline (and doing without extras) I was able to pay off the second home in 12 years.  It was a life-changing event for me.  Suddenly I was liberated, and I felt empowered.

I confess that debt is a source of insecurity and high stress for me.  Debt gives other people the right to my money and over my life.  With a mortgage, our home did not truly belong to us, and neither did my income.  In the end, it meant other people would have the right to take my home without any regard to my circumstances, or the situation it might leave me in.

It just makes sense to take control of your life, rather than allowing others to have that kind of control over you.

No comments: