Here’s some “good” advice.
Every study I’ve looked at indicates that, over the long run, investing in a low management index fund that tracks the S & P 500 index outperforms appreciation in residential real estate. It’s really difficult to justify buying a home as an investment.
There are other disadvantages to home ownership. Costs include the down payment, closing costs, mortgage interest, maintenance and property taxes. Renters incur none of these costs.
It’s even more difficult to justify buying versus renting if you live in an area where home prices are high. As a general rule, the higher the ratio of the purchase price to the annual rent, the more it makes sense to rent. If the price of a home is $300,000 and the annual rent on a similar home is $18,000, the ratio is 16.67.
Many experts believe when the ratio is above 20, you should strongly consider renting.
If you decide to buy a home, you will hear a lot about the benefits of not paying off your mortgage. These include losing out on the mortgage interest deduction, limiting your liquidity, and losing the potential to secure an income stream via dividends, interest payments and capital gains.
Here’s some “bad” advice (but it could be “good”).
Most people would end up with more money if they bought a house they could afford, and paid off the mortgage as quickly as possible.
We know for certain you and your family will always need shelter. Owning a home fixes a good portion of this cost. We don’t know how the stock market will perform in the future.
Paying a mortgage every month is forced savings. You will slowly build up equity. You can save a staggering amount of interest charges by paying off your mortgage early. I understand the counter-argument. You would likely do better investing this money. But many people won’t do that. Instead, they’ll spend it.
In addition to the peace of mind that comes from owning your own home, there are other benefits. Your monthly expenses will be significantly reduced. You will be in a better position to plan for retirement, without the burden of mortgage debt. Owning your own home can afford you asset protection in most states.
But here’s the big one. I admit it’s entirely anecdotal. I’ve never met anyone who owned a home and paid off a mortgage who regretted it.
Sometimes “bad” advice about home ownership can be “good.”
Resource of the week
I recommend this article in FinancialMentor which discusses the pros and cons of paying off a mortgage early.