Home Ownership: Really Worth It?

[TripleB]

My biggest complaint of home ownership is that when I read other financial forums of people describing how "good" they feel when they pay down their mortgage, because know they "own the house free and clear" I challenge the validity behind that.

I'm not arguing against home ownership or for renting. I am not arguing against government. My argument that follows is against the statement "own the home free and clear."

Once you pay down the mortgage, the idea is you own the house, no one can take it from you because you lost your job and can't pay the mortgage. Except you still have to pay property taxes. If you don't pay property taxes, the government will come and seize the home and auction it off for back taxes.

You don't have to, but you should continue to pay homeowners insurance. If you don't and someone slips on your sidewalk, they will sue you and take your house (depending on the state). Or a fire could destroy the home.

The "Benefit" of not paying a mortgage seems moot when you are still going to pay property tax and insurance in perpetuity. I definitely see the advantage of prepaid stuff. I have lifetime TiVo and lifetime Satellite radio subs because I hate getting bills, and I'd rather pre-pay for a lifetime service, or a few years in advance, to avoid making regular payments on things. It's one less stressor in my life.

If you're making the tax/insurance payments anyway, then why not maintain the mortgage? Why not pay at little as you need to, on the longest time frame mortgage, since you never really own the house anyway? It's NEVER free and clear yours. If you get a 30 year mortgage and pay it off, start a new mortgage, or a reverse mortgage. Remove as much equity as you can because it doesn't really matter.

Theoretically the ROI of home ownership barely tracks inflation in the long run. Why not put the money into the PP and have as little equity in your home as possible? You will NEVER own the home free and clear anyway.

The one instance where I would argue for full home ownership is FL and TX because they provide nearly full creditor protection for your home, so saving money in your home makes sense. Better to have $200k in home equity, than $200k in a brokerage account that can be seized by a creditor.

[Wonk]

I feel the same way, although it's certainly not a popular view in the mainstream.  I recently built a house and when the time came to refi the construction loan, I pulled all 80% out on a 5-yr ARM.  Costs were roughly 72% of appraisal.  With 5 year money priced at 100bps less than inflation, it was no brainer.  I almost put on an I/O loan, but went with the ARM instead probably due more to tradition than any other reason.

The way I see it, renting a house is equivalent to buying a house on an I/O loan + liability of the asset.  I see housing as a consumption item, not an investment--unless you are speculating that local real estate will be more desirable relative to other areas.  Traditional mortgages are forced savings plans and a leveraged bet on long term inflation raising the underlying nominal value of the asset.  To your point, paying down a mortgage isn't always the best move from a strictly financial standpoint.  I don't like the idea of most of my net worth tied up in something that is not portable or highly liquid and has a long term real yield of 0%.  In addition to your other points, modern ghost towns are a reminder that real estate poses at least some risk of complete loss:

http://listosaur.com/history/8-modern-ghost-towns.html

I do think paying off a primary residence near retirement can make sense if it is 10% or less of your net worth and the remaining assets are well diversified, such as a PP.  Otherwise, I haven't personally found the emotional relief to be worth the opportunity cost in most instances.

[MediumTex]

The one instance where I would argue for full home ownership is FL and TX because they provide nearly full creditor protection for your home, so saving money in your home makes sense. Better to have $200k in home equity, than $200k in a brokerage account that can be seized by a creditor.

In Texas, though, you have especially high property taxes to deal with, which makes you feel less like you own your home "free and clear" in Texas than in a lot of other places.

I live in an average house.  It's nice, but nothing extravagant (appraised value of about $250,000).

I just got my property tax bills for the year, and they are about $5,000.  That means I am paying about $417 a month to the state for the privilege of living in my home, whether or not I have a mortgage.

Texas does, however, provide a bit of a tax arbitrage opportunity in that you can live in a house that is a little smaller than you might otherwise be able to afford and thereby pay less overall in taxes.  Under a state income tax system, this opportunity would not exist.  Unfortunately, I see a lot of people who do just the opposite--they buy more house than they can afford and thereby pay more in taxes (through the higher property taxes on the more valuable home) than they might under a state income tax system.

[Coffee]

I've thought about this quite a bit.  Here are some random thoughts:

- The problem with "portable or highly liquid" is that it can be more easily taken or confiscated.

- You're right in that paying off your mortgage does not free you of ANY housing expenses, but it does dramatically lower your monthly cost of living. Not counting opportunity cost.

- By buying a house, you're somewhat paying for the security of not getting booted out of the property on the whim of your landlord.  You're also likely paying to be in a good school district for your kids. 

- If you're married, good luck trying to argue the dollars and sense of not buying a house to your wife, her hormones and her nesting instinct.

- The house makes a good hedge if things get really crazy with the economy.  I'd rather have some of my net worth parked in something that is tangible-- that I can tough -- than in an ETF or a stock.  Gold is nice... I like gold.  But it's a lot more difficult for someone to steal a house. 

- When you own the house and you've paid off your mortgage... I'm pretty sure it's not so easy for the State or Government to take your house from you.  It can be dragged out for years.  Whereas when you rent, they can get you out of the house in a month or two.

It's really one of those issues that doesn't have a "right" answer, but rather just a right answer for you.

[Coffee]

I just realized that I may have misread your original post, thinking it was more rent vs. own?

[TripleB]

I just realized that I may have misread your original post, thinking it was more rent vs. own?

The topic is more buy and prepay mortgage as fast as possible versus buy and put as little equity into the house as possible and remove equity whenever possible.

[WildAboutHarry]

One advantage of having no mortgage and/or not renting is the need to NOT earn the monthly payment.  If you are renting you need to come up with the monthly rent forever, if you have a mortgage payment you need to make that for the term of the loan, and you need to earn wages (or clip coupons, or whatever) to make that mortgage or rent payment.  And in the process presumably pay taxes on the income used to pay the rent/mortgage payment.

An owned home "generates" imputed income (shelter value) that is not taxed.  A huge benefit.

Of course there are advantages to holding a dirt-cheap mortgage in the face of rising interest rates or high inflation too, but the imputed income argument is hard to beat.

[MarySB]

Hmmmmm...

Reverse mortgage, anyone?

[Storm]

Personally I think home ownership is worth it in certain economic climates, but not worth it in others.  Right now we seem to be right in the middle of a decade where home ownership is not worth it, and renting is a superior financial choice.

The NY Times has a great rent/buy calculator.  Be sure to go into Advanced and change the rate of return on your investments to 9.3% (PP average).  It actually calculates for you whether you are better off renting and investing or buying.  In a lot of cases you are better off renting and investing the money, rather than buying.

http://www.nytimes.com/interactive/busi ... lator.html

[TripleB]

One advantage of having no mortgage and/or not renting is the need to NOT earn the monthly payment.  If you are renting you need to come up with the monthly rent forever, if you have a mortgage payment you need to make that for the term of the loan, and you need to earn wages (or clip coupons, or whatever) to make that mortgage or rent payment.  And in the process presumably pay taxes on the income used to pay the rent/mortgage payment.

My point is that you STILL need to earn the monthly property tax/insurance payment even if you have the mortgage paid off.

You could argue that one could live off modest investment income from passive savings (such as the PP) to pay off the taxes/insurance, which is small compared to the mortgage.

However if that's true, then why prepay the mortgage at all, and instead have a bigger PP, and thus a bigger passive investment income, and just use that towards rent/mortgage each month.

[Jan Van]

In Texas, though, you have especially high property taxes to deal with, which makes you feel less like you own your home "free and clear" in Texas than in a lot of other places.

I live in an average house.  It's nice, but nothing extravagant (appraised value of about $250,000).

I just got my property tax bills for the year, and they are about $5,000.  That means I am paying about $417 a month to the state for the privilege of living in my home, whether or not I have a mortgage.

Then also add the $1000+ or so for insurance and (in my case) the $1000+ for flood insurance. And how much do you spend on maintenance each year? All in all that brings you closer to maybe $650/month. As you say, doesn't feel like "free and clear"...

[TripleB]

Then also add the $1000+ or so for insurance and (in my case) the $1000+ for flood insurance. And how much do you spend on maintenance each year? All in all that brings you closer to maybe $650/month. As you say, doesn't feel like "free and clear"...

You can rent a really nice 1 bedroom apartment in many areas of the country for around $650 per month or slightly more.

And you don't have $150k tied up in equity.

And you can break your lease, pay a few bucks and move on one days notice.

I didn't mention this earlier because I didn't wind to sidetrack into politics, but another benefit of renting is the ability to say "F You" to local politicians and vote with your feet. Install red-light cameras that issue tickets without due process, and shorten the yellow light to raise the number of violators while reducing public safety? F You! Move out of that city.

If you own a home it's much harder to say F You and move, because now you are incurring thousands of dollars of closing costs and time to sell the home. With an apartment, it's still a pain in the ass to move, but it's substantially simpler.

[WildAboutHarry]

My point is that you STILL need to earn the monthly property tax/insurance payment even if you have the mortgage paid off.

You could argue that one could live off modest investment income from passive savings (such as the PP) to pay off the taxes/insurance, which is small compared to the mortgage.

However if that's true, then why prepay the mortgage at all, and instead have a bigger PP, and thus a bigger passive investment income, and just use that towards rent/mortgage each month.

Property taxes, insurance, etc. are a wash when comparing mortgage versus no-mortgage scenarios.  And they are included in rent payments so they wash out there as well.

Imagine you are retired and your income is derived from an IRA.  If you have a mortgage payment you must withdraw sufficient funds each month to pay the mortgage and pay the taxes on that withdrawal.  Basically your mortgage payment is forcing you to have a higher taxable income than you otherwise would.

So it is really a no-brainer to payoff the mortgage prior to retirement, if possible.

For other situations it is a more difficult analysis, especially at today's long-term mortgage rates.  If we do get a replay of 1970s-style inflation, for example, you'll be glad you have 4% for 30 years.

[TripleB]

Property taxes, insurance, etc. are a wash when comparing mortgage versus no-mortgage scenarios.  And they are included in rent payments so they wash out there as well.

I agree they are included in rent to a certain degree, but my point is you still have a "monthly" payment due whether the mortgage is paid off or not, so you can't really just "stop" and say "look at me I'm in the clear!"

Imagine you are retired and your income is derived from an IRA.  If you have a mortgage payment you must withdraw sufficient funds each month to pay the mortgage and pay the taxes on that withdrawal.  Basically your mortgage payment is forcing you to have a higher taxable income than you otherwise would.

So it is really a no-brainer to payoff the mortgage prior to retirement, if possible.

I wouldn't call it a no-brainer. Sure, having a mortgage payment will force you to withdraw more from the IRA, and thus paying more taxes on that IRA withdrawal. However consider:

1) The mortgage interest will be tax deductible, and thus bring taxes down.

2) In your comparison, the money is either being contributed to an IRA or contributed to pre-paying a mortgage. (because if you compared contributing money to a post-taxable savings versus mortgage, then you wouldn't have the tax consequence of using the post-taxable savings in retirement for mortgage); thus, by pre-paying mortgage, you must have given up the opportunity to earn money in the IRA in a tax-deferred basis. So while you might be paying more taxes in retirement to withdraw the mortgage payment, this is offset by the tax-benefits you got by using the IRA instead of prepaying the mortgage during the accumulation period.

3) Having the money in the IRA provides liquidity. If the housing market drops 50%, your equity is gone. The money in the IRA would be in the PP and thus not subject to the whims of the housing market. This liquidity has a calculatable option value, that might be small depending on your conditions, but it exists, and offsets the additional tax burden of withdrawing extra from the IRA.

4) Most people have a mix of IRA/401k and post-taxable savings so you can withdraw only enough from the IRA to meet required RMDs, or to hit your "free tax" threshold (After std deduction/personal exemption). It's unlikely one would be forced to withdraw from an IRA to pay mortgage payments in retirement, since it's unlikely 100% of their savings will be in the IRA/401k due to annual contribution limits compared to the actual needs of a retiree.

For other situations it is a more difficult analysis, especially at today's long-term mortgage rates.  If we do get a replay of 1970s-style inflation, for example, you'll be glad you have 4% for 30 years.

This I completely agree with.

[WildAboutHarry]

Obviously the decision whether to keep or pay off a mortgage is a fairly complex analysis.

1) The tax deductibility only applies to mortagage interest.  In "young" mortgages that is obviously a large portion of the payment, but in "old" mortgages the proportion of principal rises and the deduction value falls.  Further, the mortgage interest plus other deductible items have to significantly exceed the threshold of the standard deduction ($11,600 for a married couple) for the deduction to really have any worth.  An $11,600 annual mortgage interest payment does not equal the standard deduction (i.e. why would you pay for something with mortgage interest payments that you get for free?).

2) With current IRA contribution amounts and income thresholds (and of course "unlimited contributions" to mortgage payoff) I'm not sure that this is really an issue.  Of course one could contribute to retirement accounts and prepay the mortgage.

3) IRAs can provide liquidity but at a cost.  You cannot touch the money prior to 59.5 and you pay taxes on withdrawals.  And any asset (including PP assets) is subject to market drops.  Regardless of the value of your home, you still have to live somewhere. 

4) I don't know if this is true for most people (although I would hope so).  Also, those non-retirement dollars would be after tax, just like pre-paid mortgage dollars.  And by not retiring the mortgage before retiring yourself, you are going to be paying mortgage interest with those dollars.  That seems counter productive.

But I'm glad we do agree on the last point

[jackely]

This debate seems to me just like the whole rationale of the PP.

I sold a house I lived in for 15 years and made many upgrades to it for a profit of $15k (not even counting the cost of some of the upgrades).  I bought a house several years later and the previous owner walked away with a check for $70k after living there for only two years.

To my thinking it was all a matter of timing. The previous owner got lucky (After sealing the deal we discovered we both had similar histories concerning the Navy and Filipino wives and became friends). He freely admits he was very lucky. I was not, at least so far, but no hard feelings.

As for paying off the mortgage, not a chance. I'll take the money in the bank/PP any day. As long as I have more money in the PP than it would take to pay off the mortgage on my house then my house IS paid for to my way of thinking, if not the bank's (which I could care less about).

[smurff]

You can rent a really nice 1 bedroom apartment in many areas of the country for around $650 per month or slightly more.

And you don't have $150k tied up in equity.

And you can break your lease, pay a few bucks and move on one days notice.

I didn't mention this earlier because I didn't wind to sidetrack into politics, but another benefit of renting is the ability to say "F You" to local politicians and vote with your feet. Install red-light cameras that issue tickets without due process, and shorten the yellow light to raise the number of violators while reducing public safety? F You! Move out of that city.

If you own a home it's much harder to say F You and move, because now you are incurring thousands of dollars of closing costs and time to sell the home. With an apartment, it's still a pain in the ass to move, but it's substantially simpler.

This works both ways.  While you can break your lease, so can the landlord, and both acts can have damaging consequences that follow either party.  The tenant is in a weaker position; breaking a lease without squaring it with the landlord can ruin your credit and make it impossible to rent another apartment again.  The landlord might have to pay treble damages in court, but it might be worth it to get rid of you--and good landlords know they can pay bad tenants to move before the lease is up; great landlords know how not to get such bad tenants in the first place. 

If you've violated the terms of the lease, the landlord can evict you; while this takes time, the effort involves more overall worry, time, and general hassle from the tenant than the landlord.  An eviction can mean even worse things for the tenant's credit. 

The landlord can also raise the rent, or change other terms at the expiration of the lease (add a non-refundable deposit and monthly fee for pets, for example), making continued living in an apartment you like no longer possible.  And if your apartment is really great, the landlords might want to live there themselves, and boot you out at the first opportunity.

Homeowners can vote with their feet, too.  They can leave and rent out their houses. 

Another reason it's harder to say F-you and move if you are a homeowner:  Homeownership gives you the luxury of time to cool off and think about  changes.  The realization may be that the change is of no consequence to daily life, OR (using the example of traffic changes) it is one of those frog-in-the-teapot encroachments that needs to be stopped before it leads to a place Americans do not want to be.

As a homeowner, you get to think about the negative consequences of fleeing situations like this.  If everyone ran away, no one would be left to put an end to this sort of thing--and the thing can stay behind as an infection and cause a lot of harm--including the kind of harm that follows the persons who ran away at the first opportunity.

So if  the timing of the yellow lights in the town has been altered or there's a new traffic light camera, the homeowners can ask themselves why these changes took place.  They can call the news media, march on City Hall with a horde of fellow protesters, call up AAA to complain and get them  involved, dig up dirt on the traffic camera company, find out what government official authorized the change and what they get out of it, set up a website for online complaints, present their research on whether traffic cameras bring in revenue as intended or whether lawsuits over accidents following yellow light timing means larger payouts and steeper insurance that more than use up any increases in revenues.  (Renters can do all these things too, BTW.)  Savings in either case:  Thousands of dollars, hundreds of hours, scores of headaches and heartaches.