2719: Why Choose To Live In The Poor House - Again? by Helene Massicotte of Free to Pursue on Should I Rent or Buy

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[00:01:16] from Optimal Living Daily. This is Optimal Finance Daily, episode 2719. Why choose to live

[00:01:24] in the poorhouse again? By Hélène Massacotte of freetopersue.com. And I'm your host and personal

[00:01:31] finance enthusiast, Diana Merriam. Let's get right to it as we optimize your life. Why choose

[00:01:41] to live in the poorhouse again? By Hélène Massacotte of freetopersue.com. My husband went to visit his

[00:01:49] brother this weekend, and he came back with a sad story that I just don't get. Friends of theirs

[00:01:55] sold a home in the city and built their dream home just outside city limits for a whopping $600,000.

[00:02:02] So what's the problem? They're in their 50s, and they have a huge mortgage. I have no idea how

[00:02:09] much equity they had in their previous home, but I do know they went into debt to build.

[00:02:14] Let's conservatively say their home was worth $300,000. We know the neighborhood,

[00:02:19] so it's a reasonable guess. Let's also assume their home was paid off, which I highly doubt.

[00:02:25] That leaves $300,000 as a mortgage. I doubt their home was paid off because once you've had a taste

[00:02:31] of what it feels like to have no mortgage, you just don't go back and sign up for the same

[00:02:36] experience all over again. Being mortgage-free, read debt-free, is just about the best feeling

[00:02:42] in the world, second only to being in love. Here's what the math looks like based on the

[00:02:48] best case scenario. Cost of home, $600,000. Down payment, $300,000. Interest rate, 2.5%

[00:02:57] on a five-year fixed rate over 25 years. Payment, $1,350 per month. Property taxes, $300 per month

[00:03:07] or $3,600 per year, which is a low estimate. Total monthly cost, $1,650. Of note, assuming

[00:03:17] these fine folks benefit from the same low rate and don't pay the mortgage off early, they'll pay

[00:03:22] over $34,000 in interest over the five-year term and over $103,000 in interest overall for their

[00:03:30] home, a 17% premium over the initial purchase price. Like many Canadians, they've chosen to

[00:03:37] have a mortgage well into retirement. In fact, we seem to think that having a mortgage for life

[00:03:43] is somehow acceptable with over half of Canadian homeowners expecting to have a mortgage well into

[00:03:48] retirement. Three reasons why a mortgage for life is not acceptable. Number one, you pay double for

[00:03:56] your housing when you count all the interest you pay over your lifetime. Yes, even with low interest

[00:04:01] rates, thanks to these behaviors. Extending the terms every time you refinance, moving up in

[00:04:08] house or to a costlier neighborhood and using your home's equity to renovate, buy a car or anything

[00:04:16] else your little heart desires. Number two, you sign up for significant payments even though your

[00:04:22] income will eventually decrease in retirement. If you have a mortgage for life, chances are you did

[00:04:28] not save a significant nest egg because you have a taste for credit as the lenders like to say.

[00:04:33] Your pension income will be less than the income you made during your working years

[00:04:38] and you may be downsized from work and have difficulty finding work that offers the same

[00:04:44] pay and benefits especially as you near or reach retirement age. And number three, your home will

[00:04:51] never be yours. It will always belong to the bank. But a home's a great investment, right? First of all,

[00:04:58] a home should be considered an asset you need and use every day. And if you don't maintain it

[00:05:03] properly, it can depreciate just like any other physical asset you own. Considering it an investment

[00:05:09] is not a good idea for a number of reasons. Number one, as long as you have a mortgage, the home's

[00:05:15] potential appreciation is often eaten up by your mortgage interest rate and inflation.

[00:05:21] Number two, you can't sell your home and live in it to free up the appreciation unless you become

[00:05:26] renters of your own home. Caution, reverse mortgages are very expensive. Number three, while your home

[00:05:33] is appreciating in value, it's unlikely your next one is doing the same. And number four, once you

[00:05:40] factor in taxes and maintenance, roofing, flooring, landscaping, windows, foundation work, etc.,

[00:05:47] any return you make on a home's appreciation is a wash. And bigger is not better. According to

[00:05:54] Elizabeth Dunn and Michael Norton, authors of Happy Money, spending on housing has little to no

[00:06:00] correlation with living a happy life either now or when you're retired. Food for thought.

[00:06:07] Three reasons to live mortgage-free. Number one, now that you've eliminated a significant fixed

[00:06:14] monthly payment, you have the opportunity to save and invest more and retire more comfortably

[00:06:20] and or earlier, spend more on what you love like traveling, learning, giving, and playing,

[00:06:27] and feel that you have more money than month and that almost anything is within reach.

[00:06:33] Number two, the bank has lost another hostage and you have one less person or entity to answer to.

[00:06:40] And number three, you feel different when you know that no matter what happens to you financially,

[00:06:45] you and your family don't have to worry about the roof over your head.

[00:06:49] Bonus point, do you know that your home insurance premiums can go down by 20% or more once you're

[00:06:55] mortgage-free? I hope I've convinced you that perpetual mortgage bondage isn't attractive

[00:07:01] or necessary. You just listened to the post titled, Why choose to live in the poorhouse again?

[00:07:11] By Olen Massacott of freetoperuse.com. And I'll be right back with my commentary.

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[00:09:06] I think the reason why people love having a paid off house, especially in retirement,

[00:09:11] is because housing is typically one's largest expense. The more you can control and reduce

[00:09:16] expenses, the easier it is to plan for a successful retirement. However, if you need

[00:09:22] to trade too much liquidity and investment in income-producing assets to pay off a home,

[00:09:28] it could lock up the money you need to live on in retirement. And for those lucky enough to secure

[00:09:34] a 2% or 3% interest rate on their mortgage, mathematically, it usually makes sense to keep

[00:09:39] the mortgage. What you'll save on interest by paying it off early pales in comparison to the

[00:09:44] interest earned through investing that money. What's often missing from the mortgage versus

[00:09:50] mortgage-free debate is how it relates to one's overall finances. A good rule of thumb is to not

[00:09:57] lock up more than 10% to 20% of your net worth in your house. That way, you're able to maintain

[00:10:03] liquidity while also enjoying home ownership. And that should do it for today. Have a happy

[00:10:09] rest of your day and I'll see you on the Friday show tomorrow where your optimal life awaits.