Take Charge of Your Finances; Take Charge of Your Life.

Len Penzo recently posted about why it is advantageous to take a 30 year mortgage. Here is a summary of his argument:

1. Lower Payments

2. More budget friendly

3. Increased flexibility

4. More control

5. Reduced financial vulnerability

6. More opportunity for financial balance

7. Bigger tax deductions

8. Effective inflation hedge.

Take some time to read the comments at the bottom of the post, it’s a pretty even split between those who agree with his reasoning, and those who disagree.

I am in the camp that disagrees. Reasons 1-6 seem to be indicators that your eyes have gotten bigger than your stomach, you’ve chewed off more than you can handle, and as a result, risk being “house poor.” I recommend spending no more than 25% of your take home pay (after taxes) on a 15-year, fixed-rate loan. And all of that is after you have saved for a 20% downpayment.

But, Dan! That’s no fair, I’ll never be able to have the house I want!

Do you really want to risk your family’s well-being over your ideal amount of house? Saving a large downpayment takes financial discipline, and eliminates the need for Private Mortgage Insurance (PMI). Spending 25% or less of your income insures that you will be able to afford your house payment, while maintaining monthly expenses, and keeping additional funds liquid for other investments.

I am not in the position to pay for a $120,000 starter-home. On my single, young teacher’s salary, I will only be able to afford a condo that is approximately $65,000. But you know what? I am going to knock that mortgage right over. I’ll have saved $13,000, and be on track to make triple the amount of the monthly mortgage payment in order to pay it off within five years. Or I can save the extra cash to be liquid for other investments. But when people give financial advice to “free up income” for investments by taking a 30-year mortgage, they are also the type that have probably made the mistake of buying more house than they can afford.

But, what if I become unemployed?

That’s why you need to save up a fully-funded emergency fund before you think about buying a house.  According to Robert Kiyosaki, author of Rich Dad, Poor Dad,  a house is more of a liability than an asset. “An asset puts cash in your pocket, a liability takes cash out of your pocket.” By completing your emergency fund, you are hedged against unemployment for 3-6 months. And if you think about it, isn’t it at least twice as likely that you would find yourself unemployed in a 30 year period of time than in a 15-year period. If you’re unemployed, keeping paying the mortgage (it’s the roof over your family!) and start delivering pizzas- whatever you have to do to get right-side up again.

I could take a 30-year, and pay it off like a 15-year…

Yes, you could. But bankers are smart people. They know that most well-intentioned people who tell themselves that will make a couple extra payments at the start of the mortgage, and forget all about it. All of those little “life moments” seem to catch us off-guard.

Overall, few of the 15-ers will ever convince the 30-ers and vice versa that the other person is correct. But for those of you in the middle, consider the possibility of actually having paid off your house, and reaping the benefits of living securely in your (not the bank’s) home. And think of all of the interest you would have saved yourself in the process!

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