Washington Post financial columnist Michelle Singletary being tarred and feathered after disclosing her decision. Most liked comment to the article takes her to task for not understanding math.
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I made a similarly controversial decision when I bought my current home in 2012. Mortgage rates were about 3%. The purchase price of the home was about 2.5% of my net worth at the time. And I had a 90% stock asset allocation with 10% in fixed income earning about 2%.
I reasoned that it was kind of crazy to take out a mortgage for 3% when I had sufficient assets sitting in fixed income at a 2% return to fund the purchase. I could just pay cash and my unspent dividend income over the next 2 to 3 years would be sufficient to replenish the fixed income portion of my portfolio back up to a 90/10 allocation. Plus that reduced the closing costs on the home from about 4% down to 0.50% (i.e., all I had in closing costs were 1/2 the escow fee, $75 to record the deed and a $100 charge to change the tumblers in the locks.)
If I was currently sitting in a home with a 2.75% mortgage, and already had incurred the closing costs to acquire the mortgage, I’d likely keep it.
We did this about a year ago, and with zero regrets. But our loan was only about 20% the value of the house (bought 6 years ago on a large down payment, coupled with a value surge of 75% in a short period of time). And we had no problems paying it off and still have sufficient emergency funds. We filed standard deduction before, so it’s not like we lost a tax break either.
Not every money decision is “correct” by the math, and doesn’t need to be to be the right decision either.
Michelle Singletary has been an outstanding personal finance columnist over the decades, but she is completely wrong on this point. She had a a 15-year mortgage at 2.5%.
Hypothetically, if she bought a $500,000 house with $50,000 down payment, a mere 3% increase in the value of the house would mean $15,000. After five years, that means she would have gained $75,000 on her $50K investment. That’s a CAGR of 8.45%. Why would you give that up to save 2.5%? Math doesn’t work.
We have a 10 year mortgage with a similar rate… and I plan to pay it off this year.
Why?
Because we recently had a BIG portfolio loss, endangering our financial situation and we thought selling our home might have to be on the table. Since then, we recovered financially… and plan to erase our mortgage and our motorhome loan to avoid that cash flow crunch in the future “just in case”. Just for peace of mind. There’s something to be said for that.
Rob
He is no fool who gives what he cannot keep to gain what he cannot lose.
Not only completely wrong, but uses a ton of double-speak.
To wit:
We had been making extra principal payments and finally decided to take money from two retirement accounts I had from a previous employer to finally get that debt off our books.
…
We also can build up our cash reserves…[could have done that with the money in the two retirement accounts]
…
Ability to delay claiming Social Security…[could have done that with the money from the two retirement accounts]
…
No rush to tap retirement funds… [you ALREADY tapped retirement funds!?!]