If you had no debt except for a $60,000 mortage and you had the option of either

A:keeping the debt and having $70,000 to invest or

B: pay off the debt, live debt free, and have $10,000 to your name; What would you do?.

Let's say the mortgage is a fixed rate 15 year at 7 percent interest and that your planning on getting it paid for in about 7 years even if you don't pay it off now.

That's a no brainer, dude. Pay that mortgage.

Your mortgage costs you say 6.5% interest (amortized, compounded). Your savings account may get you 2% and a CD may top out at 4%. You WILL NOT make enough in interest off of savings to offset the cost of interest on your mortgage.

Think of it this way, say your mortgage payment is $1000 a month...you pay $60,000 now and you get paid $1,000 a month for the rest of your life. $1,000 a month that you can use any damn way you please.

PAY OFF THAT MORTGAGE!!

LIVE DEBT FREE!!!

AA

I agree with everything you said. I'm just wondering if I would have the will power to save up that much again or would I spend it every month on guns, ammo, and long term storage food.

Of course hell, that may be the better option these days anyway.

The flip side is that the loan interest on a primary or secondary residence is tax deductable. Although you would be going with a 15 year note which has less interest, I would consider the tax savings you could potentitally get from having a mortgage.

At that point it comes to the point of contributing to which is the lesser evil.

With a home note, you are borrowing at typically a low rate. Often a percentage which is unavailable for any other type of loan. The question being, could you find an investment for your funds which gives a higher annual return than the interest loss on the mortgage? PLUS have the interest payments deductedfrom your taxes. I am willing to bet you can.


Living debt free is a smart way to live. Don't get me wrong. However there are some financial debts like property mortgages which are not that bad. Assuming you go fixed rate and buy well below your means.


Without knowing more financial details, its tough to make your call ToxicA..... If I was in that place, I would leave my existing mortgage which would be gone in 7 years. Chances are I would probably use $50k of the 70k for a 50+% down payment on more real estate. Trying to get in while interest rates are still low. Have two notes as a primary and secondary residence, both interest tax deducatable.

Maybe perhaps use the one of the properties as rental income later on down the road.

With 50k and a 20 k reserve just think... you could probably start your own trailer slum

I'd pay it off in an instant. It's about more than living debt-free. It's about owning your land without a financial institution having claim to it. Think about it. If our economy tanks next year or the year after and all that money you have in the bank suddenly is worth about $0, you will be shit out of luck.

Do not rely on money in the bank. It's only a "promise" of stability. And it can disappear overnight, literally. By paying off your note, you will have hard capital. Something that cannot be taken away by the whims of the market. If you need money again, you can always borrow against your land later. But that will be your decision to make if/when you need it.

As for the tax thing, I see that as a losing proposition. Think about it. The government offers you a tax break on the interest you pay for your mortgage. What good does that do you? All it does is negate the interest. If you're not paying interest in the first place, and not getting the tax deduction for it, you're in the same boat as you were before. It equals out. There is no monetary advantage to the tax deduction if you're having to fork that money over to your lender anyway. Sure, it might drop you into a lower tax bracket or something, which could save you a few bucks through the miracles of the tax system. But without specifics, it's impossible to say. I just look at it like this: that money is either going to go to the government or your lender. If you're paying it to the lender, the government doesn't make you pay it to them. If you pay off your mortgage, then the government takes it. It's almost a wash. It's certainly no reason to keep yourself in debt.

From a stability standpoint and preparing for the inevitable economic problems we're about to face in this country, it is vital for you to pay off that mortgage. If I had the ability to pay off my mortgage right now, I'd do it without a second thought. Because it's the one thing that can absolutely DESTROY my life if the economy takes a shit.

If I lose my job or we hit a depression and I can no longer make my mortgage payment, I will be kicked off my land. All my plans for the future will be gone, destroyed. Because all my plans for the future involve being on my homestead. So it's my Achille's Heel. The bank owns my land and until I make that final payment it's not mine. You have the ability right now to remedy that situation and ensure your ownership. Can you really say that nothing bad will happen in this country in the next 7 years that might cause you to lose the ability to pay your monthly mortgage payment?

My counter to this would be not to get a mortgage which is at your current level of means. Live below your means.

One of the advantages of getting a fixed mortgage in times of economic collapse is as a counter to inflation. Inflation will go up, but your payment is locked in. You just need to be wise enough to only borrow money which you can cover in a huge range of economic outcomes... including loss of your job.

No better advise has ever been given.

I can see both situations clearly as one is the way I want to live and the other is the way I live now.

If I had the chance to be debt-free, I would do so in an instant. To only have to pay the utilities. To only pay for things as you use them. Man...what freedom!!



But, if your property is paid off, there's no need to worry about inflation with regards to property, it becomes moot. Inflation of all other products/services is also a moot point as it would affect you whether you own your house or not. And, if you own land, you have the ability to reduce the bite of inflation by growing/raising your own food.

Personnally, as I have already said, I would pay it off.

AA

But you are ignoring that the "pay off funds" would be used for something which generates income. Versus sticking in into a static hole like paying off a primary residence. Not to mention you would be diversifying your assets so everything was not tied up in your primary residence.

Still, I cannot discourage someone who wants to minimize their debt. Thats always a smart thing to do. However I do not see that paying off mortgages always being the best allocation of capital. That is my core point.

I think that much of the difference being spoken here is because too many people get approved for alot of mortage funds... then use them to buy a house which is just at their means. With the hope that cost of living raises will help them in time start getting more free money again. I do not agree with that at all... but thats what most Americans do.

I personally live in a Rat-hole in a good part of town Tobus, Chris, Animator, and others have been here. I live in house built buy the lowest bidder by Mexican labor wearing polyester bell bottoms in the early 1970's. With the least acceptable standard materials. This house was later turned into a rent house so it was beten to hell. Then the termites moved in.

The advantage of this place (which I have a note on) is its inexpensive. Way below our household's means. We could have got a much fancier place. And paid alot more for it too.

When my wife was pregnant with our first child, we were both layed off. That sucked. But in my mind was a great economic collapse simulator. We were able to manage through it, and learned from the experience. Now we could handle something much more severe. The one theme remains: Living below our means.

So in paying off a house, I can see why someone would want to do that. But there are so many alternatives which could help diversify ones economic base... it would seem to be a shame not to develop them.

I guess my question would be...like what?

Seriously, what is a better investment than owning your home and land (that can also be productive).

AA

This is a thread based on having $70k liquid.

If you are already living below your means, this influx of capital can be used to create a different or diverse income source. Whether a static investment of buying more land (rental?), or a dynamic one like a business.

If you are living with a mortgage near your capacity.. paying it off makes sense.

From the responses I am seeing here, I am willing to bet cash that most for paying off their mortgages have big ones See, thats the real issue. Personally when I see someone on a 15 year note with 7 left... I see that person already has a plan. ride it out.

Diversifcation would pay off far more. Hell sinking it into SKS carbines or ammo would probably yeild a better financial return as opposed to paying off the note in the same remaining 8 years.

I adhere to the same philosophy as Theduardo about living below my means. My 15 year mortgage was brand new in february. I said 7 years because that's how fast I can afford to pay it off if I want. That is my plan if I don't pay it off sooner.

I got a pretty sweet deal on a HUD foreclosure the first week in February. I wasn't really actively looking for a new home, I just always keep my eye out and couldn't pass this deal up. Most HUD foreclosures are all to hell and need major work but this one was in very good shape and just needed/needs some cosmetic stuff mostly. We are still in the process of working on it.

It's a 1500 square foot ranch with a 24X24 detached garage on about a half acre lot in a pretty decent, quiet, subdivision. It was built in 1966 and is a good quality build. I know the old guy that built it in '66. It has over 800 square feet of hardwood flooring in it that I just got done refinishing about 6-8 weeks ago. I got it for a $78,000 bid. The county tax apprasel on it is for $90,000 and around my parts homes usually sell for around 20 percent over the county apprasel. By the time I get finished sprucing the place up I'm gonna have about $84,000 in it counting the closing costs.

The reason I said that this is a hypothetical question is because I don't have the 70k at this moment. I have part of that and a small doublewide mobile home and lot that are paid for. I've pretty much made up my mind to put the doublewide on the market as soon as I can find some time to do a bit of sprucing it up. I have decided that even if I were to invest in rental property, I don't really want to keep this home for that purpose. It is in a flood plain, and don't feel that the construction is of good enough quality to hold up well as a rental. I'm afraid that the place could get trashed so easily that I'd lose any profit I made refurbing the place after every renter moved out. Thats why I have decided to sell it. I just haven't decided whether to use the funds from the sale to help pay off my current home or to invest it in some way.

After reading this, I may change my mind. Is the HUD home you are living in to be a permanent residence? or are you trying to flip it?

AA

I'm not sure how this is relevant. My "means" is my job. If I lose my job, and my means goes away, that's where the problems are.

Are you suggesting that people should only take a mortgage on property that they could already pay for in cash anyway? If not, then the underlying principle I'm talking about still applies. If you take a mortgage on your homestead and cannot buy it outright, then you are reliant on your income to make that payment. And if your income goes away, you're going to be in a hard spot. That's not living above one's means. Only the uber-wealthy (or folks who have worked for several decades) can afford to just pay cash for a home. The rest of us poor schmucks have to get a mortgage and work for a living to pay for it.

So I'm not sure what you mean by "live below your means". Your comment makes no sense to me in relation to my previous statements (which is what you were referring to).

Sure, I have a "pad" in my bank account. If I lost my job, I could survive long enough and make my mortgage payment for a few months until I found another job. But that's not what I'm talking about. I'm talking about total financial collapse. Depression. Rapid devaluation of the dollar. In an event like that, it doesn't matter how much you have in the bank. It's worthless. And the instantaneous inflation that goes along with it will ensure that no matter what you have in the bank, you cannot make your next payment to the bank. A brief look at our Great Depression in the 1920s shows this to be the case, and there is no reason to believe it can't happen again. Signs point that direction, in fact.

Which is why I'm suggesting paying it off entirely so the bank is out of the picture. He would be the sole owner of the property, with no liens against it. Even in the event of financial collapse in this country, his property would be relatively safe. But by keeping all that cash in the bank, he risks it suddenly becoming absolutely worthless if said collapse does happen.

Perhaps you could define your version of "living below one's means" for me. I'm curious what you mean by that. Is relying on my career to make my house payment considered living above my means?

My personal idea of living below my means goes something like this:

If either me or my wife lost our job today, we could still pay our mortage and pay for the basic necessities of life.

I also kinda define it in my simple mind as if I lost my job today I could at least pay my mortage by re-opening a weekend flea market business that I used to have. Of course this definition depends on a fairly stable economy and me being able to do as well as I used to. I'm obviously not talking an exact science here. I'm not talking an economic collapse situation. All bets would be off in a situation like that.

I guess I also define it as if my wife and I wanted to live really really tight, we could save 50% of our net income if we wanted to.

For how long, though? Indefinitely?

We call that "being retired". It takes a lifetime to get to that point.

To me, living below your means should simply mean that you have a surplus of income every month that goes to savings. Literally, it is defined as earning more than you spend. But that is wholly irrelevant to the idea of still being able to make one's mortgage payment if one loses their job.

I'm not planning on flipping it. I'm also not planning on living in it forever. I would say that if the economy stays stable enough, I would want to live in it 5-10 years then buy a good size piece of land to live on. Of course if an economic collapse happens before that time, I guess this would end up being my home for the rest of my life.

It's not a HUD home anymore. I liberated it from the feds. It's on a regular loan now. I don't want any of my libertarian brethren thinking I've got anything to do with HUD.

I guess I do mean indefinately as far as just being able to get by with the true necessities of life. I'm not talking living high on the hog here at all. I'm also meaning this to be in the context of a fairly stable economy. I am in no way talking about a shtf or economic collapse situation here.

I'm talking about just being able to keep the house, keep the lights on and eat a lot of beans and rice. I'm not talking about losing half of one's income and life doesn't change at all. I'm saying no more disposable income, no more cable TV, no more guns or ammo for God's sake! I'm not talking about being rich, just being able to survive indefinately on 50% of one's income if one absolutely had to.

The "means" is relative to the person/household doing the earning. So I'll try to answer that from my perspective. For us, our goal is to keep total expenses where they are less than a third of what we bring home. So a mortgage(s) that fit within this is manageable provided that the remaining funds are not blown, and are used as well wisely. Specifically on things which are not flushing funds down the toilet and can give some return down the road.

Much of this in my mind is rejecting materialism in relationship to "keeping up with the Jones'es". One does not need a new car ever two years. One does not need a $50k SUV.

When you describe your "means" being your job... and without it your are screwed, is partially the point in which I would want to reinforce the idea of Toxic using the theoretical $70k as an alternative income source. That way, he has options, and his eggs are not in one basket.

Thats the thing about paying off a homestead. Now I can respect someone wanting to be debt free. Thats awesome. But not diversifying income sources or investments can be equally as fatal as trying to come up with a way to counter economic collapse. The thing is, we cannot predict the future and setting your economic and investment strategy based soley on a Depression, which may not come, is foolish.

However having diversification would help in an Depression, as well as in other financial times.



Nowhere did I suggest that..... keeping it all in the bank would be foolish. Keeping some liquid would make sense, but the bulk of which would be best served in my opinion to diversify Toxic's income sources preferable. Either use it to buy something to rent or sell again first. Secondary, using it to reduce all ready sustainable monthly expenses.




I've been trying. But I guess its too subjective on the individual to be specific.

I know you are an Engineer, but do you have a plan "B" if that field goes bust? Or do you feel confident that you will always have employment in that field?

From my view it breaks down into two areas and questions:

What would be a secondary job field you could move into, and could you sustain your current expense level with that field? In this case having cash now in research and develop these options make sense.

or

Have you set aside enough to cover the debt balance until your primary career starts hiring again? If this is the case, paying off your mortgage makes sense.


See I see living within your means having these questions already in consideration. You may have noticed it.. but I always hammer away at diversification. I see it as critical. Although you may miss out on big gains in one area, you won't loose big either. For me personally, my strategy is to keep expenses so low that my essentials are met without much work. Therefore I can do a variety of jobs to fulfill them. Thats my personal style.

Mortgages are tools, and can work well if you are smart about them. The issue being, what you are spending the borrowed money on.

In hindsight under this very thought, I wish that years ago instead of renting an apartment for so long, I bit the bullet and bought a trailer somewhere on a 1/6 acre lot. I would have been much better off. But the reason I did not do it at the time is because I had some dumb preconceived mental notion that trailer living was a lowering of my social class (which as time showed... I have none. I'm like school in the summertime... No Class ). I would have been that much farther ahead had I done that.

So I am not saying that paying off the mortgage is bad. I am just saying there may be better uses off the funds which can give a higher return.

If I had the doublewide sold and had roughly 70k liquid, I wish I could put back 20 and buy a nice piece of land with the other 50. The only problem is 50k won't touch a nice piece of acreage in my area. I'd like to have at least 10-15 acres, but 50 k won't touch that in my area. I'd be lucky to get 5-6 good acres in my area for that.

Yikes! You must make a shitload of money! Even if I were to pare down my expenses as much as possible, eat nothing but Ramen noodles, get rid of my horses, and live on a postage stamp lot in a tent, I don't think I could reach that point. And I make a pretty good living compared to many. To me, that seems a little excessive. It would require years upon years of living like a hobo.

But then again, my wife doesn't really earn a paycheck, so it's hard to compare. Most households these days have two working adults, which makes a huge difference. I am the sole supporter of our household. My wife does work, but it's usually in trade for other stuff, or simply as an "apprentice" in the leather tooling business. Perhaps if she were college educated and working in a corporate job like many women, your figure would be more realistic.


See, that's the thing that gets me. I don't do any of that. I've never bought a vehicle that cost more than $18k. We don't give a crap about "image" like most folks. And even though we spent a lot (to us, anyway) on our homestead, it's still less than most folks pay for a regular house on a 1/4 acre lot. The only debt we carry is the house note and a vehicle, and we drive our vehicles until they die. But being able to get our expenses below 1/3 of my take-home pay would just be out of the realm of possibility.


Short of a total economic collapse, I am confident I could find gainful employement. Maybe not on the same level I currently make, but enough to cover my monthly expenses.


And see, I would view that decision as a mistake. Buying a trailer is a losing investment. They depreciate like hell. And a small lot isn't going to appreciate very much as an investment. Sure, it would be great to live cheaply like that and sock away money. But you're losing money in the process.

The "classic" notion of investment is to buy as much house as you can comfortably afford. This is precisely because land and houses appreciate. If you have to spend money to live somewhere, why not make that an investment instead of something that simply loses money?

I admit my mortgage payment is at a level that requires me to earn a decent paycheck to afford. But every month when I write that check, I'm building equity and the land is gaining in value. That same wouldn't be true of a trailer on a 1/6 acre lot.

For example, my first house that I bought was on 2 acres. At the time it was about as much as I could afford. I paid $148,000 for it. I sold it three years later for $174,000. That was a $26,000 profit over three years. And I took that profit and rolled it over into my new property. I also bought my current property below market value from a friend who was moving away and needed to sell quickly. I am confident that I could sell this place right now for at least $50,000 more than I paid for it three years ago.

But the thing that chips away at that profit margin is interest. Every month when I write a check to the lender, I'm building equity, but I'm also reducing my profit. If I could pay the mortgage off today and save myself all that interest, it would increase my profit margin if I decided to sell. Which leads me to the next point.


That "higher return" would FIRST have to overcome the loss in interest that he's paying on the house. So if his current interest rate for his mortgage is 7 percent, he would have to find an investment that yields more than 7 percent profit before he even starts seeing any profit. And I can't think of any safe investments with a yield that high. Except firearms.

How long have you been working at that goal? My wife and I have been doing it now for about 6 years now and we are doing better. I'd also note that the combined cost of my house and acreage is slightly less than the cost of your first house.

Low expense living does not happen overnight. And when it does... its not fun. What gave my wife and I the wake up call was the double layoff and her being pregnant. Fortunately we bought a cheap fixer-upper.

Right now your expense are what they are from decisions you have made. Did you buy your current home with the idea of low cost living? Or was it a place reasonably close to work... but not that close, where you could enjoy the things you like?

After some review of some household math... I'm gonna change the "answer" of ideal below means from 33% to 40%. That range is about right. I would also add a rider stating that this is for bare bones expenses as well. Without luxuries. We have alot less overhead than many people. We do spend more on luxuries, but recognize them for what they are.

My wife has always been supportive of my gun collecting. Because she understands the investment aspect of them. Without going into to much detail.. you know I have a decent financial reserve there. But still, its important to diversify. Its one of the reasons she was supportive and agrees with reasonably priced acreage. Its another diverse investment which can be turned into an even lower annual cost homestead.

What has been throwing us a curve ball lately is kids. As they grow older they seem to get more expensive. We will see how that pans out.

I'm not sure how much you make. Quite frankly I do not need to know. What I am willing to bet is that you could shave off some luxuries and see real benefits with 1-2 years. For example, How much would you save quitting smoking?

You also have probably stopped eating so much grocery store meat. Now are eating more of what you hunt. Care to imagine what annual percentage impacts these two items would have on your annual budget? Removing cigarettes and grocery/restaurant meat? These two simple items are pretty huge. 3%? 5% of annual budgets of post income tax dollars? Maybe more?


As to the trailer on 1/6 of an acre... because they do not hold value well you can buy them cheap. One can fix up a rat hole on a shoestring budget. And actually make money doing it.

So I hold your comments on the trailer on land not being of value suspect. Specifically because it is coming from the bias of being good and then run down. When its possible, and quite common actually, to find one in less than great shape and fix up... or replace with a repo'ed trailer. All at reasonable prices affordable to one who does not have alot of money... just ingenuity.

The thing is, if one was to follow that route, the first year or so would be rough making the rat hole livable. As a single guy it could have been worth it. Now with kids... forget it.


The last thing to mention about the 7 pervent handicap on investment. Remember the interest rates on real estate residences are tax deducatable. So, im many case spending a bit more in interest when you are two income household may mean a HUGE deal when it comes down to tax time every year. Enough to shift a whole income bracket giving you savings which nearly exceed the annual cost of the note. Just something to research.

Just thought I would update this. Considering the economic instability going on, the value of existing housing on the market going down and the interests rates on CD's going down, I have decided to keep the doublewide on the lot and rent it out.

We have a couple interested in renting it that we think will be good renters. We have already agreed to rental terms and they are supposed to move in right after the holidays. By going this route, we are gonna be making about an 8% profit on the investment annually. That's after paying the property taxes and homeowners insurance on the place. I hope it works out well. I'm gonna give it a whirl and see.