Pompeii, Profit, and Pay-off of a Mortgage
22 December, 2024
How a Home Mortgage Factors into Your Financial Planning
The number of articles out there proclaiming you should retire your mortgage as soon as humanly possible are almost too many to calculate. And while every one of them is written with conviction and (hopefully) good intentions, there really seem to be only two schools of thought on the issue.
- Pay off your mortgage as early as possible so that you can live and retire debt-free, OR
- Invest in the market to capture the gains which are expected to be higher than your mortgage rate
So, why are there only two prevailing philosophies on this subject? Even the shape of the earth has more theories than that, and yet somehow paying off your mortgage has been boiled down to just two.
Let’s explore this from a different angle – one that starts with a premise that might be hard to swallow. Your house, your home, the very place that you raised your family and hold near and dear is not an investment. In fact, until your home is paid off, it is nothing more than a liability. And if you’re thinking that your home is going to serve you as a retirement account – think again. Granted, it’s an asset, but it’s not going to serve as a way to bankroll you through retirement. Retirement planning should be separate from your home.
Home Ownership: Not the Investment You Think It Is
Let’s say the stars align, and you find that home that lets you keep both cars in the garage along with the riding mower and snowblower. The price of this little slice of nirvana is $350,000, which is what you have with savings and the sale of the old house.
Why would you pay interest on borrowed money when you can just pay cash? Sounds reasonable, right? This is especially true if you are outside of the limits of mortgage deduction. It’s like your money is earning 4 to 5 percent as the value of the home increases. Where else can you get that kind of action? This is why most people believe the real estate market to be completely safe.
However, anyone alive more than a decade ago – especially in the Las Vegas, Phoenix, and Florida regions – remembers the real estate collapse that made buying pre-AD 79 property in Pompeii seem like a viable financial decision. It’s sad but true.
You can, in fact, lose on real estate, which is why a home should never be viewed as a fool-proof investment. Foolish people have tried to bank big on their homes and lost big-time.
Home Ownership: A Liability Disguised as an Asset
Always be wary of the numbers. The inflation rate in the U.S. has been rather insane, hovering around 7 to 8 percent. The average annual rate of appreciation for real estate over the past five years is right around 7 percent. So, it appears you’re going to break even. Or perhaps not.
Let’s say that you mortgage a $350,000 home and put $70,000 down. On a 30-year note, your balance is $280,000 at 4.75 percent. At the end of the term, you will have paid roughly $600,000, but your resale value will be around $900,000 or more depending on the future market. It’s tough to forecast, but we’ll project a healthy gain of 33 percent in home value. Not bad, right?
However, there are numerous things being left out that many folks forget to account for. Realtor fees can be as much as 6 percent of the home’s final sale price. Property taxes clock in around 1.3 percent or more. Then there’s the HOA fees, insurance, and all the costs associated with maintenance and upkeep on the home.
When it’s all said and done, you’re looking at around $10,000 or more per year. Adjust for inflation and extrapolate that figure over the course of your 30-year note, and you’re going to end up paying around $500,000.
So, what’s the net rate of return on what’s considered “your biggest asset” when you finally decide to downsize?
Between mortgage repayment and all the expenses that come with homeownership, you’re going to shell out around $1.1 million. If you end up selling the home for $900,000, then that means you’re losing about $200,000. Even if your $350,000 home tripled in value, you’re still firmly in position to lose money on the deal.
Granted, there are a lot of variables at play here. What I want you to leave here knowing is that the mortgage isn’t the only thing you’re paying on when it comes to your home, so you can’t think about it in terms of what you paid in 2000 versus what you’ll sell it for in 2030. All those landscaping jobs, window replacements, roof repair, insurance payments, and HOA fees need to be factored in.
Some may get the clever idea to pay off the entirety of the house in cash and dodge all that interest, and I applaud you if you have that kind of money lying around for a home purchase. However, circumventing the interest doesn’t mean you’re exempt from taxes, maintenance fees, and all the other expenses that go with owning and eventually selling a home. I’ve done the math on this numerous ways and usually come up with an annual rate of return that’s less than 1 percent.
And what happens if real estate appreciation drops while inflation skyrockets? How much would you contribute to your 401(k) or IRA if they projected a long-term return of less than 1 percent? This is why I never tout real estate as any core aspect of financial planning or retirement planning. Rental properties are one thing, but the home you live in – even if it’s paid off – is still bleeding your bank account. You’re far better off investigating other avenues for your investment dollars.
Final Thoughts on Homes as an Asset
For some, the peace of mind of knowing they own their home is an emotional win that’s worth more than whatever gains can be made outside of the house. I get it. I really do. But if there are ways to maximize your hard-earned money and savings, wouldn’t you like to know about it?
We’ve sufficiently put those myths of home ownership and real estate as an asset to rest. Now it’s time to get some actionable investment advice by contacting us for a consultation.
Our team will be happy to sit down with you and discuss your financial goals in addition to areas of opportunity that we see regarding your portfolio. It’s never too early to think about financial planning for your future.
Foresight Financial Design offers a suite of services to put your money to work for you:
- Retirement planning
- Financial planning
- Financial management
- Private wealth management
- Small business finance management
- Estate preservation and transfer
- Protection planning services
- Infinite banking concept set-up
Contact the team at Foresight Financial Design today by calling (913) 346-3465, or email us at info@foresightfinancialdesign.com