"Letting it Ride", A Cautionary Tale
I don't know if anyone here is old enough to remember higher mortgage interest rates, but my last home carried a 30 year mortgage at 5.25% and on the financial advice I had been given at the time, I "let it ride" because it was "good debt". (There was a home equity loan in there too, but that's a story for another day...). We didn't expect to carry the loan to term as we thought we would "upgrade" within five years.
The five year upgrade didn't happen and we were in the house 18 years into a 30 year loan. We got a little appreciation, but I was shocked at how small of a dent we made in the principal: even though the house appreciated, we walked away with only a net profit on the sale of $10k after paying realtor, legal fees and various costs the seller pays. That was a really, really hard lesson to learn and it seemed to make perfect sense until we sold, when we then saw the insanity of it.
I did refinance at one point. (That's how we got to 5.25% - the original loan was higher) In fact, the credit union was glad to "help me save some money" and push the interest rate down a point. Problem is, I didn't shop around - other people were getting better rates and I didn't know you could do such a thing as shop the mortgage. Plus, I got no breaks on the refi and paid the full suite of fees just to do so.
Now, to my credit, I did ask about and check into a 15 year loan. But I followed the advice that I could "turn a 30 into a 15 by paying ahead, and if you needed the cash, you could just stop the double payments".
See the evil here? Prepayments pay both principal and interest, when you should only be paying against the principal. And there wasn't a soul in the world, and certainly not at the credit union, who was gonna tell me that little information gem!
That damned 30 year credit union loan is the biggest reason we got such a late start on our savings toward FI. It made me physically sick to look at the amortization tables when we were done. Of course, that's when I learned the importance of the amortization table in truly understanding a mortgage loan.
Now: You could argue that I shouldn't have bought the house at all and should have rented. Nice try, but wrong. We live in a moderate-to-high COL area and our payments on that house were less than a 3 bedroom apartment. In other words, yes, the loan was an inflation hedge and we DID get back some money after the sale of the house. But it still kept us "house poor" for no good reason other than to pay interest to the credit union.
Now, I don't mean to come across like a complainypants whineybaby. That house was the best we could afford in the best neighborhood we could afford. Our boys spent all their growing up years in a safe and positive and fun environment. We got tremendous benefit out of that house and it did a great job for the time we needed it.
But calling a mortgage "good debt" and saying you should let it go to term is, like most financial lies, mostly based in truth. But it gets down to what your personal situation and goals are, how old you are, and how much income you have and how stable that income is. True, there is a good argument for investing instead of paydown, but if you are in the house already and you don't have a 30 year time window to let your investments grow, then you're on the track of paying the banker his interest and there's no point in that.
If I Had A Do-Over: what would I do differently?
1) I'd shop mortgages and after 5 years, refi into a 15 or 10 year mortgage.
2) Drive a far more fuel efficient vehicle.
3) Cut costs of things like television, cellphone and utilities.
4) Pump everything I've got into 401k to cut tax burden.
5) Pump all the rest into the mortgage as hard as I could go until payoff.
That's exactly what I'm doing today with the second home.
