By JLP | June 9, 2009
Check out this comment that was left the other day on one of my old mortgage posts:
Two years ago we stopped investing in our 401k and we began paying thousands against the principal on our home. We only have $1,500.00 left to pay and the property is ours and we didn’t lose our a$$et$ to the stock market. We don’t have to worry about losing our home to the bank.
Our money isn’t tied up in unstable companies that could fail in a second with no warning. We are debt free and will now be able to live comfortable lives without worry. There’s something to be said about that don’t you think? If all of your money is placed in the stock market, which most likely it is. You most likely are worried that you’ll never get back what you just lost in the latest crisis. I don’t have that worry and in 11 years, I will have saved approximately $500,000.00 that I probably would have sank into the stock market and lost. Now that is a $500,000.00 gain in 11 years.
Can you beat that?
I don’t think so…
Oh, and did I mention that God was in all of this? That is right! God. If we all would just obey the Lord and keep his word, “owe no man nothing” then we wouldn’t be in the situation that were in today.
Where do I start?
1. I NEVER said that going long on your mortgage and investing the difference was without risk. I do think that over the life of a 30-year mortgage, the risk is reduced.
2. Although you own your home you still have to pay property taxes. In some areas those taxes are small, but in other areas they can be quite high. Yes, not having a mortgage payment makes paying those taxes easier but you still have taxes to contend with.
3. Your money may not be tied up in “unstable companies” but it is tied up in your house and is quite illiquid. According to Jonathan Clements’ new book, The Little Book of Main Street Money, (review to follow soon) housing prices have increased an average of 4.7% over the last 30 years (through 2008). Inflation has averaged 3.8% per year during that same time period.
Chew on this…
EVEN WITH LAST YEAR’S -37% return for the S&P 500 Index, the index had a compound annual return over the last 30 years of 11%!
To put that in perspective, if you started 30 years ago with $100,000 invested in a house that appreciated 4.7% per year and $100,000 in the S&P 500 Index (minus 1% per year for fees), the house would be worth $396,644 at the end of 2008 and the S&P 500 Index account would be worth $1,744,940. And those numbers include some pretty dismal years for the S&P 500 Index. Even if you paid taxes at 28%, cutting your annual rate of return on the S&P 500 Index to 7.2% over the 30 years, you would have still had over $800,000 at the end of 2008—roughly TWICE what the house was worth.
4. I’m not sure where you’re getting the $500,000 in savings. Not including interest, you’re looking at having to save over $45,000 per year for the next 11 years to meet that goal. Surely I’m missing something here.
5. Lastly, you say:
“Oh, and did I mention that God was in all of this? That is right! God. If we all would just obey the Lord and keep his word, “owe no man nothing” then we wouldn’t be in the situation that were in today.”
If you truly believed that then why did you have a mortgage in the first place?
Seriously though, I think you are referring to Romans 13:8, which reads: “Owe no one anything except to love on another…” The notes in my Bible say that this is not a scripture against borrowing money, which the Bible does regulate and permit (Exodus 22:25; Leviticus 25:35-37; Deuteronomy 15:7-9; Nehemiah 5:7; Psalms 15:5, 37:21, 26; Ezekiel 22:12; Matthew 5:42; Luke 6:34). I think the virtue from the Bible that would have been more beneficial in preventing today’s circumstances would be not to love money (greed). Borrowing is both a tool and is necessary for an economy to function properly. It’s when the borrowing gets out of hand (usually due to greed) that we get into trouble.
Bottom line: you have to do what works for you. If the thought of owning your home is important to you, then by all means, own your home. But, that does not mean that it’s the best or most prudent decision for everyone else.
Also see: Flawed Thinking (Part 2)