Our clients often ask and tell us some variation of:
- Should we pay cash for our new home or should we assume a mortgage?
- If we assume a new mortgage, or re-finance, should we commit to 15 or 30 years?
- Should we pay down our mortgage more quickly vs. paying for 15 or 30 years?
- We have the cash to buy our home and we highly value becoming debt-free.
As you can imagine, there is no one-size-fits-all to this most important decision. The goal to become debt-free is admirable and can provide personal peace, but is it the right decision for your family? Many of our clients follow Dave Ramsey’s magnificent program, in which he strongly recommends that people become debt-free. We are not dogmatic about being debt-free because sometimes clients are better off assuming mortgages.
I spoke with a client family recently who had just re-financed their home over 15 years at 2.5%. They are planning to make extra payments each month so they can pay it off in 10 years. We counseled against making the extra payments because of the historically low rate of 2.5%. There is good debt and bad debt. Bad debt is credit card interest at 15-20%. Good debt is home mortgage debt at 2.5%.
Another client family is in the process of selling their home and buying a new one. They have no mortgage on their existing home and they plan to pay cash for their new home. We counseled them to consider assuming a mortgage of perhaps $200,000 on their new $500,000 home because a) the mortgage rates are so low, and b) it will probably enhance their ability to build wealth and receive a higher income stream over the years.
Let me be clear: If you have a strong value to become debt-free and by doing so you will be able to enjoy a multi-decade retirement filled with dignity, security and independence, you have our blessing.
On a personal note, Janet and I have a 30-year mortgage on our home. We can easily afford to pay it off, but we decided to use the bank’s money at 4% to enhance our wealth. We view 4% money as smart debt. If you prefer a gambling metaphor, we think today’s low mortgage rates are a great bet!
Please know that we are here to help you with your home mortgage decisions, and any other financial decision you face.
Take care and remain strong! The lockdown will hopefully end soon so we can return to something like normal. This too shall pass.