Why Not A Low Interest Mortgage

houseRecently I saw a tweet on Twitter from @ChimayLad who asked @DaveRamsey – “If your mortgage rate is lower than what you can historically earn in the stock market (6 to 8%), why pay house off early?”

Dave’s reply pretty much said it all “Risk. We have done detailed research and 100% of the foreclosures occur on a home with a mortgage. Proverbs 22:7

The question posed was not unusual. I know many people who believe that holding a low interest mortgage is like using cheap money. They can keep their savings in tact while paying a low mortgage payment that really doesn’t cost them too much since their interest rate is sometimes just below 4%.

Those buying a home now have been very lucky for the last 10 years or so as interest rates have been very low. I remember when I bought my first home, my interest rate was around 7% and after four years I refinanced to a 5% rate which a the time I thought was fantastic. However, my goal was always to pay off the home as quickly as possible, which I did. When I purchased my second home, I did have a low interest rate, but I still paid the home off in full in two years.

Why? Because of Risk

Why did I pay it off when I had a very low interest rate? Because of risk. Sure my rate was low and it was a fixed rate. But I can’t predict the future, what if I would have lost my job?  I would much rather have a paid for home under my feet and not have the worry of a personal disaster causing me to miss a payment or two or more.

Some say they have the full amount of their mortgage in savings and they are just using the bank for cheap money. Well, is it really cheap? Let’s take a look at a $70,000 mortgage at 3.92% fixed interest rate for 30 years.

Cheap Money Isn’t Cheap

After year one you have paid $2,497 in interest. Humm, ok, doesn’t sound too bad.

After 30 years, you will have paid $49,150 in interest, let’s remember, the home purchase price was $70,000. So your $70,000 home really cost you $119,150.

So the money really isn’t cheap and the risk of getting in a position where you can’t pay the mortgage is high. Job loss is not uncommon in this economy and need to be planned for rather than hope it doesn’t happen to you.

Pay It Off

Make it a goal to pay off your home as fast as possible. This reduces the risk of losing it to foreclosure. As Dave Ramsey says, 100% of foreclosures occur on homes with a mortgage (or home equity line of credit).  Then all you have to worry about is making a small property tax payment on the property rather than a mortgage payment and a tax payment.

Think about it and make it happen, there is nothing better than living in a paid for home. It gives you a sense of freedom as well as reduced stress to know if you did lose your job, you won’t lose your home.

Recommendation

One book I always recommend to anyone who is dealing with debt of any kind that is “The Total Money Makeover“. This book will walk you though the steps to get out of debt. Don’t wait, start now.

 

Author: Kim ~ LifeandFinances.com

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