When Should I Pay it Off?

Scott Phippen — Thu, 13 May 2010 21:11:41 +0000

I am often asked when a homeowner should put the focus of paying off their mortgage. Although the answer to this question is specific to each homeowner, my general recommendation lies within a 4-step plan that I use to advise each of my clients.

Each step is numbered based upon the priority. In other words, step one should be on track before moving on to step two, and so on. The problem is that many homeowners jump ahead before the prior step are mastered. This typically leads to living paycheck to paycheck, getting stuck in the consumer debt rut, or reaching retirement to find that you are equity rich and cash poor. By following the steps below, you can help ensure you reach retirement having achieved the long-term goals you desire.

Step 1 – Develop a Cash Reserve

The most important step is to have a reserve fund to cover short-term unplanned expenses. Without having cash reserve, shortages typically result in having consumer debt. Once consumer debt is established, it can lead to destructive long-term habits that are difficult to break. If you have a cash reserve, you should never have a need for unsecured debt.

Step 2 – Pay off ALL Consumer Debts

This is the step where you become consumer debt free, with the exception of your mortgage. Revolving and unsecured debts should be paid off first, with car loans and other secured loans being paid off second. Remember that cars are depreciating assets, and you will always have car expenses. If you are able to pay off your car, you can begin to save money to pay cash for your next car.

Step 3 – Create Significant Liquidity

One of the greatest gifts we have is the gift of compounding interest. This is the quadrant that grows and compounds. Even if you are not secure in steps 1 & 2, if possible, you need to develop the habit of putting cash into long-term investment accounts. Once you are secure in steps 1 & 2, make this quadrant your primary focus and watch your net worth rise over time.

Step 4 – Focus on Home Equity – Paying off your Mortgage

Once you have developed a cash reserve, have paid off all consumer debts, and are on track to meet or exceed your retirement goals, then you can put a focus on paying off your home loan.

Personal finance is most often a reflection of habits. If you develop good financial habits, and exercise them over-time, long-term you will likely do well. Not only can you use the four step plan to help you allocate cash flow in the budget, but you should also use the plan to help you to allocate cash and home equity net worth.

If you have specific questions regarding your personal situation, please call or send me an e-mail. Also, if you have a friend or family member in need of advice, I would be honored to help them as well. Having professional advisors to help you manage your investments, mortgage, taxes, and estate is the best way to protect your long-term results.

Homeownership: Still the American Dream

Scott Phippen — Tue, 09 Mar 2010 21:02:50 +0000

Recently, I heard a quote by Warren Buffet that said, “Be greedy when others are fearful, and be fearful when others are greedy.” This made me realize the great opportunity there is in Real Estate right now. If you’ve been contemplating that first home, or making a possible move, now is the time. We’d love to have the opportunity to assist you, a friend or family member in getting them into the home of their dreams. I came across the following article that helps us all realize what a great investment a home really is. It was written by Steve Harney, mortgage and real estate advisor. We hope you enjoy the read.

“There seems to be a long held American belief currently under attack. For over two hundred years, homeownership in this country was a desire of almost every American family. Recently however, more and more people have been pontificating on the fact that owning your own home should never have been held in such high regard.

I don’t want to overstate my concern as I know that the majority of Americans still hold homeownership sacred. Trulia just did a survey showing seventy seven percent of those questioned still believe that owning a home is a part of the American dream. Yet, it does concern me that, while people are being forced from their home due to economic difficulties, some are claiming that homeownership never should have been the goal anyway.

Let me spend a few moments looking at the financial benefits of owning a home.

You may ask why I would make this argument today knowing that housing is in the midst of one of its worst times ever. Well, quite frankly, the last ten years have not treated the homeowner that badly. Obviously, people who purchased a home in 2006 and 2007 have seen their value depreciate over the last two or three years. But, real estate was never seen as a good short-term investment.

If we look at housing values over the last 10 years, we find that even through these tough times real estate has averaged over fifty percent return as an investment.

The chart below compares real estate to other investments over those ten years.

Then why this challenge today? Well, in the middle of the last decade, when prices were appreciating in some areas by as much as 20% annually, many got caught up in the belief that housing values should double every few years for the rest of time. That belief created all sorts of reckless behavior.

Many purchased homes well-beyond their financial means. Others decided that they would gamble on future values and interest rates by taking exotic mortgages to allow them to purchase a McMansion and worry about the cost at some later date. And others used their house as an ATM, withdrawing their equity in the form of a home equity loan, in some cases, on an annual basis.

Previous to this, homeowners realized that a house was a home first and then a pretty good long-term investment. They might have borrowed against the house to put a child through college, finance a wedding, or pay for medical bills.

In the last few years however, people regularly refinanced to buy “new toys” (a new car, a boat, matching ATVs, etc.). Or, if it was for a medical procedure, it would just as likely be voluntary cosmetic surgery as a life saving operation.

I realize that there were some people who were caught in difficult situations and others who got terrible advice from people they trusted. Their current situation is no fault of their own. My heart goes out to those people.

My hope is that, in these difficult times, the same people make sure they get good counsel. For example, I hope people think long and hard before they willfully default on their mortgages. They should try a modification first and, if that is unsuccessful, they should look for assistance in doing a short sale. A short sale will allow them to rebuild their credit more quickly, and enable them to purchase a home again in half the time it would take if they go through foreclosure.

For over 200 years, Americans were eager to purchase property because they knew that on a long-term basis it would create wealth. That concept is alive and well in this country even today. For those who don’t believe this, save this blog post and we’ll revisit it in ten years.”