When I first read an article about how owning your home outright may be a bad idea, I was skeptical as to the reasons why. I have been a home owner most of my adult life, and have been a mortgage slave chasing the American dream of being a homeowner. My personal opinion is that paying rent was a waste of money and that homeownership was a better alternative. But with the current mortgage mess, the American dream of owning your own home has come under attack lately. Now it seems that paying off your mortgage is also being attacked.
In a recent article it stated that:
- Tax Deductions: One of the most popular reasons for maintaining mortgage debt is the tax advantages that you enjoy on interest payments. It doesn’t necessarily make sense on its own because owing money just to save money on interest defeats any economic purpose. It does, however, effectively reduce the cost of that debt.
- Greater Financial Flexibility: Instead of having no cash in the bank and a mortgage paid in full, it may be a good idea to tap into that equity just to ensure that you have some access to cash if an emergency arises. If you pour every dollar into paying down your mortgage and don’t have anything left over for home repairs or one-off incidents, you could be positioning yourself in a tough spot to handle any costs of unforeseen events.
- Cheaper Debt: If you can get a good mortgage rate, chances are it’s multiple times less than your credit card, personal loan or auto loan interest rate. Consolidating your debts with a HELOC or home loan refinance can provide you some debt relief and help you save money on interest payments. Plus, mortgage interest payments are tax-deductible, unlike credit cards or other personal loans.
- Property Value: Since your property value isn’t affected by your mortgage balance, you can put your equity to better use than just having it sit around idly by, waiting for you to sell your house. You may want to consider taking out a loan against your home for value-added investments like remodeling your home or adding another bedroom that will increase its market value.
- Return On Investments: By the same token, you can probably do better with your home equity than having it sit around earning a zero percent return. Depending on your risk tolerance and the potential return on investment, you may be able to outpace a low fixed mortgage rate. Granted, no investment is guaranteed and you’d be hard pressed to find a CD rate that trumps your mortgage rate. So for practical purposes, putting your home equity at risk to pursue any investment may not be a shrewd idea.
I believe that this type of logic is flawed for several reasons. We all need a roof over our head. There are basically two ways to obtain that roof. You can buy it or rent it. Buying has many of the advantages listed above, including being able to deduct your interest payments on your income tax, thus reducing your tax obligations. But paying out money to save money I believe is ludicrous. If you gave me $1,000 every month and I gave you back $200 of that amount, who do you think is going to be happiest? You or me?
I believe we here in America have lost sight on why we buy a home. It seems that because home prices were steadily rising year after year, many of us chose to use view our homes as piggy banks. Need a new car? Take it from your home equity. Need new furniture, HDTV’s or other toys? Buy it using your home as collateral. I look at my home as a shelter from the elements. A place where I can retire to in the evenings and feel safe.
My home is paid for. I pay about $200 a month on property taxes and insurance. Maybe another $100 a month on maintenance. For conversation sake I’ll make a guess that I may pay an extra $200 a month on my income taxes, for a total of about $500 a month. Where I live this same home would rent for about $1,500 a month. In theory I am $1,000 a month ahead of the game.
This is the way I see it.
What do you think?