The Wisdom of Mortgages

I am absolutely sold on the idea of debt-free living.  While I have been slowly turning my personal financial Titantic around, I realize more and more every week how most of us here in America have so insulated ourselves from the reality of money for “self gratification” that is based on entitlement thinking.  I guess another possible explanation is that we have been duped and bought into rotten ideas about money that keep us a slave to our finances.  While completing my tax returns recently, I had a revelation about this stuff.  I believe it is one of the biggest areas where we’ve been both duped and held captive by our huge spending appetites.  Its called a mortgage!  Let me explain.

Most of us have mortgages.  Our parents had mortgages and some of our grandparents did, but beyond that, generations prior were not as prone to have mortgages.  But our generation, the infamous Baby Boomers, grew up with the idea of a mortgage as a given line item in the budget…that is, if they have a budget.  The point is, most of us Baby Boomers have just accepted the idea of a mortgage and we’ve passed that notion on to our children.

Now, I want to challenge the wisdom of mortgages.  First of all, let us consider that 50 years ago most mortgage companies required at least 10% down in order to qualify for the loan.  This was not only for the protection of the lender, but also the borrower.  The 10% cushion served to absorb some of the loss should the market dip or completely tank.  The recent real estate market crash saw about a 20% to 30% decline in property values.  So, if you had a house that you bought for $200,000 in 2006 say, then when the market bottomed your property was worth $160,000.  If you did not have that 10% cushion then you lost $40,000 of value and are now in a “negative equity” situation, i.e., you owe a lot more on your house than it can now be sold for.  This is exactly what has happened in the last 4 years only most did not have the 10% cushion as they borrowed at 100%.  There was no 10% cushion and the response of many was to walk away from their homes and simply allow the property to go into foreclosure. This is a decision that has numerous long range implications for the homeowner and disastrous implications for the country’s economy.

What is amazing about this whole mortgage thing is how we have justified having one.  The most common comment you hear about mortgages concerns so-called tax benefits.  This is supposed to make the borrower feel good about being $200K in debt and paying about the same in interest across the life of the loan.  But here’s my revelation:  Let’s say you are in the 5^th year of a 30 year mortgage.  Roughly 75% of your monthly payment is interest.  So on that $200,000 loan, you’re paying about $1200 a month, of which $900 is interest.  Over the course of a year, that means you are paying about $10,000 of interest or a total of $14,400 in house payments. 

Now here’s those tax benefits:  You get to subtract that $10,000 of interest from your income.  So say you make $60,000 per year.  With the $10K deduction, you will now be taxed on $50K vs. the $60K this year.  Now, according to my CPA a general rule of thumb is that for every $1,000 of deductions, you will pay about $100 less in taxes.  So that means that you will pay about $1,000 less in tax this year.  Nice little tax break until you consider that you paid $14,000 on a mortgage!  What if you didn’t have a mortgage?  Well then you paid Uncle Sam and the IRS the $1,000.  Which would you rather pay…$14,000 or $1,000?!

This is kind of a no brainer, right?!  It doesn’t make any sense does it?  So if you have a choice do you want the mortgage or no?  And yet we’ve bought into the idea that a mortgage is such a tremendous tax break!  No it is not!  Yes, if we have a mortgage it is one of the few advantages, but let’s face it, compared to not having a mortgage it’s a pretty puny break!

So what would it take for us to get rid of our mortgages?  I think 3 things:

1. Firm commitment and belief that it is doable.  We cannot waffle on this issue.  We must be firmly persuaded that living life without a mortgage not only is a goal worthy of consideration, but that it becomes a priority to eliminate as a line item in the budget.  We cannot accept the flimsy reasons for which we go into debt, particularly on a house.  Most of us have a mortgage and when we think of getting rid of it the task seems impossible.  What’s funny is that when I look back I see plenty of missed opportunities to pay off my mortgage, only to engage in momentary life amenities instead.  “Where there’s a will there’s a way” the saying goes.  If we believe that we can eliminate our mortgage and commit ourselves to being debt free without it, life will have a way of bringing the opportunities to do so.
2. Fixate on being debt free.  Don’t accept anything but debt free in your thinking.  Pillar 2 (12 Pillars and a Prayer) says that as God’s people we will “borrow from no one and lend to many nations”.  What if we began to incorporate that into our thinking?  It is revolutionary and will absolutely change the way we live and make decisions.
3. A plan!  Sit down and list out all of your bills.  I agree with those who suggest to focus on paying off the smaller bills first.  It does 2 things: psychologically, it gives you energy and momentum to begin working on some of the other bills and its one less guy who is calling you at supper time!  The plan should include how much you will pay on each bill each month and when you expect to pay off each bill.  These are just quick suggestions and you may have a better idea.  But the point is, make a plan in writing and work it diligently!