On the weekends I often make it a habit to do some kind of bingeing. Perhaps, my bingeing will consist of watching a couple of episodes of a television program I haven’t kept up with. Sometimes that bingeing will consist of reading articles that I think are important for the upcoming week of research. Sometimes, I will binge on blogs or other writings on the internet. And other times I will binge on archives of radio programs that I like to listen too.
Yesterday, while I had some quiet time after I had taken our dog for his early morning jaunt I was listening to an archive taping of the Ric Edelman show. Ric Edelman is a financial planner who has written a number of books about savings and investing and I admit I have bought a book or two of his, along with others. I actually learn a lot from listening to his show. However, one of the things he brought up and others in the personal finance blogosphere have also said this is that you shouldn’t pay off your house anytime soon.
In fact, if you can, you should refinance your home to a 30 year fixed mortgage, get a great low-interest rate and take whatever equity you have in the home and whatever money you save and invest it for the long-term.
Now I have heard this advice before. And logically it makes sense to me. The idea is that with interest rates so low you should be able to get a mortgage, if you have decent credit and a good history of paying your mortgage, at a very low interest rate (perhaps around 3-4% if not lower). You then take that money and if the market just performs on average (which it is most likely to do over the course of your loan) your rate of return will be double or even triple (depending on your investments) what you would get by putting that money to your mortgage.
Intellectually, that makes total sense to me. I get it and I think when it comes to investing I tend to be a very rational person. The question for me was when we were buying a home why did we decide to go with a 15 year fixed rate mortgage at a really low interest rate?
Maybe I should’ve taken Ric’s advice and went with a lower payment and used that money to invest and/or pay off the debt. Intellectually, again, it makes sense.
But there are some factors here, for me at least, that I think Ric and others who advocate a similar strategy don’t take into account.
- I hate debt. I absolutely hate the debt that I have. I am firmly convinced that debt is a burden not a blessing. Yes, there are some out there who can leverage themselves and buy multiple properties or handle having debt with very low-interest rates. Maybe it is because I have had my student loans around so much or have made bad decisions with other debt in the past, but I LOATHE debt, which is the reason I want to pay off my mortgage really early anyway (another post for another time).
- Discipline, discipline, discipline. In order for Ric’s strategy to work you need to consistently take those extra monies and invest them in some kind of retirement account or put them toward other debts. Again, I think I have pretty good discipline when it comes to retirement savings. I put in about 20% of my income (I would like to get to 50-60% sometime soon, but extra dinero goes toward paying off debt and emergency fund) into retirement savings. Now I know that it isn’t great compared with others who put a lot more in, but it isn’t bad for now. However, I could also see myself taking part of those extra monies and not using it for savings, but for travel, gifts, etc. Living life high on the hog. And while I want to do all of those things what is more important for me at the moment is reducing debt and not letting it become more of a burden.
- By having a shorter-term for my mortgage, making extra payments, and paying off my debt faster, I will have less risk that my house would be in danger if I were to lose my job or lose some of my income. I totally grant that my cash flow is much less with this strategy and it would be much easier to tap savings in times of an emergency. I also totally grant that a home is an illiquid asset and cannot be truly converted to quick cash for emergencies or something of that nature. But for me, at least, paying off my home first and saving at the same time, instead of just savings totally has become more important.
I mean I get that by paying off this debt I am getting a lower rate of return than I could have in the marketplace, but the security of homeownership, getting rid of debt, and possibly even using this as income by renting out my house still makes me want to pay off my house quicker instead of extending the mortgage.
- True financial independence. Like many in the personal finance blogosphere I strive for financial independence. What that means to me is accumulating enough assets so that I can live on my own terms. If I want to reduce the classes I teach, change professions, start a business, or quit that particular job then that is something I can do. For me, true financial independence is being totally debt free and having enough assets for you to continue in the lifestyle you want. The first part of that is the most important at the moment because I HATE debt. To me there is no such thing as good debt. DEBT is DEBT. As long as I owe money I am beholden to somebody else and I just don’t like that.
The second part of that equation regarding having enough assets to continue your lifestyle is a question I haven’t figured out yet because I am still trying to figure out what my yearly expenses are and what specific number I would need to potentially retire. A work in progress, but it is fun for me to figure it out.
Maybe sometime in the future I will change my mind. I mean we have enough equity in our home, even though we only bought it two months ago, that I could refinance to a longer fixed rate mortgage. I am certainly open to it. But the idea of having my house paid off before the end of this decade and being totally debt free to live on my own terms, at the moment, is more compelling than using Ric Edelman’s strategy. Not that it is a bad one, but it just doesn’t feel right for me at the moment.