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Most People Will Never Own Their Home Free and Clear

September 10, 2014

house$Fewer seniors are heading into their golden years mortgage free.  In 2012, less than a 1/3  of seniors owned their homes free and clear, according to “Housing America’s Older Adults: Meeting the needs of an Aging Population,” a new report from the Harvard Joint Center for Housing Studies and AARP Foundation.  By 2030 numbers show that 132 million seniors will be in the same position. About 40% of their income goes towards housing.  Seniors have had to cut back on food and health care expenses to cover high housing costs.  And this is greatly affecting lower income households.

Sadly in the end, a growing number of us will die with mortgage debt. What’s interesting about personal finance is that we all have different levels of risk tolerance. Some people aren’t comfortable with any debt, hence they don’t borrow anything. Other people let lifestyle inflation get the best of them and take out massive debt that is not comfortably supported by their income. Obtaining credit is still so easy in America.

The current maximum mortgage indebtedness is $1 million + $100,000 for a Home Equity Line Of Credit (HELOC), which is not recommend for anybody, because the interest rate is higher and it will give you more temptation to spend. With mortgage rates under 3% for a 5/1 ARM and under 4.5% for a 30-year fixed, you’re paying $30,000 – $45,000 a year at most in mortgage interest.  It’s a good rule of thumb to spend no more than 30% of your gross income on all housing expenses, an income level of around $200,000 +/- $50,000 is optimal. As of 2014, mortgage interest phaseout begins with incomes of $254,200 or more for individuals and $305,050 for married couples filing jointly.

Some things to consider:

1) With rates so low, there’s really no hurry to paying off your mortgage quickly due to alternative investments that can easilyprovide at least a 2% risk-free return. The real decision has to come from analyzing your current and upcoming expenses. Money is most expensive to borrow when you need it most. Therefore, it’s always good to have some type of liquidity cushion. Theminimum I recommend is three months of living expenses and one year of future large expenses covered e.g. next year’s tuition. Let’s say a family of three has $8,000 a month in after tax expenses and college tuition is $20,000 a year. I would shoot for having $45,000 liquid. All other money can be used to pay down mortgage principle at a rate based on your comfort level.2) Paying down principle is a good thing, unlike getting into credit card debt. So one should feel great paying down a mortgage. But it’s always good to know the alternatives just in case you lose your job or have much larger expenses than anticipated. Do you have your insurance coverage needs updated? Do you know what your house could realistically sell for after paying commission fees? Do you have the ability to earn other income streams? What other assets can you sell and what are the penalties for selling early, if any? The more alternatives you have, the more comfortable you should feeling paying down your mortgage.

3) Nobody knows the future with certainty, therefore, it’s a good idea to diversify your money by paying down debt and investing at the same time. While interest rates are still  low, I would use a 20% debt / 80% invest ratio. In fact, a good guideline to have is using your mortgage rate as the percentage allocation for paying down debt vs. investing.

4) It’s a good idea to pay off all debt by the time you reach retirement age. Most people in retirement will not earn as much as they did during their working years. Let’s say you’ve been allocating 30% of your after-tax income to home ownership, saving 30% of your after-tax income for retirement, and spending 40% of your after-tax income on everything else. Once you’re in retirement, you no longer need to save 30% of your after-tax income. And once you’ve paid off your home, all you need to do is replicate 40% of your after tax income to live the exact same lifestyle.

5) With values back up it is a good time to refinance and remove any PMI off if you are about 80% Loan To Value.  You can check to get an idea on the current value of your home.  We can even request comps for your home.  Even if you are just shy of the 80% it would make sense to bring money to the table to get to 80%.  For many it could be a few hundred dollars in savings especially if you are in a high balance FHA loan.

Every ones goal is to be mortgage free and debt free into retirement.  You should start today.  Apply Online

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