Author Topic: Do you consider mortgage payment 'saving' ?  (Read 18576 times)

Jellyfish

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Re: Do you consider mortgage payment 'saving' ?
« Reply #50 on: October 08, 2014, 09:15:36 AM »

If folks consider saving as just putting the money in the bank, all well and good, but it is not the metric most folks on this site use.   


I just can't see how it could be considered savings, even within the frame of MMM.  I guess we'll just have to disagree on it.  All a mortgage is in my mind is a big giant honking debt to the bank.  Instead of a car or boat or motorcycle as collateral, you have a house.  In my mind, savings is something that can be diverted to other uses if needed in an emergency.  If I normally invest $3k/mo (what I would consider a "savings rate") and some shit goes bad then I can stop investing and use that money for something else.  Savings is something that's not mandatory and is above-and-beyond existing financial obligations.  I could sell investments if I had a huge medical expense in order to cover the bill and my life would not be impacted other than having depleted my "savings". 

If I stop paying my mortgage to pay off those medical bills then I end up on the street - it's mandatory, it's a debt.  I can't just sell my house to pay those medical bills - maybe if I was lucky enough to have enough equity and could find a buyer quick and for the price I needed...but then I'd be homeless on the street and needing to buy into another living arrangement anway! 

Sorry, paying a mortgage off is just not the same as saving money.

Ok so "savings" is an inherently subjective term and it depends on what you mean by it and what your goals are, I guess.  I don't need to save for emergencies, I already have an emergency fund of liquid cash sufficient for my purposes. So tracking my savings rate based purely on what I could liquidate in an emergency would serve me no logical purpose.  My goal is to determine my progress towards FI.  So the most practical measurement of that is the % of my income that serves that purpose as opposed to being spent on expenses.  So...does paying mortgage principal help me achieve FI? 

I think an argument could be made for and against here.  In my case I am targeting FI at age 50, which is when my son will be 18 and be leaving home (presumably).  I plan to sell my house and subtantially downsize at that time.  So a big part of my home equity could end up being part of my FI nest egg.  I'm also going to relocate from Chicago (high COL) to a lower COL area, further reducing my housing costs.  I think the argument could be made that including my principal payments is relevant.  On the flip side I actually feel better being conservative and like calculating the number without

dragoncar

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Re: Do you consider mortgage payment 'saving' ?
« Reply #51 on: October 09, 2014, 01:54:42 PM »
You can do it either way, depending on when you realize your housing expense.

If you realize your home purchase as a one-time $XXXk expense, in year 1, then your principal payments in years 1-30 are savings.

If you don't include your home purchase as an expense in year 1, then your principal payments in years 1-30 are amortizing that $XXXk expense over 30 years.

Basically, it's cheating to say principal payments are savings AND at the same time ignore the purchase price of the house.

Davids

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Re: Do you consider mortgage payment 'saving' ?
« Reply #52 on: October 09, 2014, 07:57:15 PM »
I view any extra principal I pay per month as part of my savings rate. My minimum monthly mortgage payment (which includes whatever  principal it amounts to as part of that payment in addition to interest and escrow) I have as an expense.

aspiringnomad

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Re: Do you consider mortgage payment 'saving' ?
« Reply #53 on: October 12, 2014, 05:03:11 PM »
You guys are either over or under thinking this. Principal paydown on real estate should absolutely 100%, no questions asked count towards savings if you want to be accurate about it in an accounting sense. If you have goals other than accuracy, such as jedi mind tricking yourself into saving more by not counting it towards your savings rate, fine, that's up to you. But really, if it's not a form of savings then why would anyone ever make an extra principal payment? Why the voluntary expense? Expenses are everything else, including interest (aka rent on the money you've borrowed), taxes, HOA, repairs, etc. As others have pointed out, the ROI is irrelevant to this discussion.

auntie_betty

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Re: Do you consider mortgage payment 'saving' ?
« Reply #54 on: October 13, 2014, 08:02:43 AM »
Expenses are everything else, including interest (aka rent on the money you've borrowed), taxes, HOA, repairs, etc. As others have pointed out, the ROI is irrelevant to this discussion.

I see interest as 'rent'. The capital repayment I don't include in my savings rate as it is, for the moment, a necessary expense. The overpayments I make I count as 'savings' and overall the capital repayment and overpayments increase my assets and, more importantly, reduce my liabilities.

I don't subscribe fully to the 'your home is an asset' argument - FB's 'asset' would cost more to service than a smaller 'asset' so trying to add in a relevant liability to my asset hurts my brain too much, so I don't do it ;). However, in my case once the mortgage is paid off* I'll be FIRE. Notice handed in, house tenanted and off to the sunshine (where we have a home I don't count as an asset). So I do feel ok saying what is currently my 'home' is an asset.

*22,600 to go. 11 months. Not that I'm counting.........

NorCal

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Re: Do you consider mortgage payment 'saving' ?
« Reply #55 on: October 13, 2014, 10:27:07 AM »
I think of it like a business.  You have your Income Statement and your Balance Sheet.

Your Income Statement is monthly earnings minus monthly expenses.  Since 100% of your mortgage payment is required to be paid, I would count that as an expense.  If you are paying more than the minimum payment, you consider any additional money to be savings.

Your monthly change in Net Worth is a Balance Sheet calculation, and it does include principal repayments.

For me, both numbers are relevant.  I generally pay more attention to my monthly change in Net Worth, although this is also impacted by moves in the financial markets.


Bob W

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Re: Do you consider mortgage payment 'saving' ?
« Reply #56 on: October 14, 2014, 10:35:51 AM »
Yes - principal + increased home value added each month.   

By the way,  when you get serious about retirement.  You can take your 500K net from the home and retire nicely in my beautiful Ozark neighborhood.   

It always amazes met that homes cost 1 million for 1500 sq ft when our McMansion is 220K for 3,000 sq ft.   

By the way,  IMHO,  I would refi and take the cash and throw it in this highly overvalued stock market. 

dragoncar

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Re: Do you consider mortgage payment 'saving' ?
« Reply #57 on: October 14, 2014, 12:07:40 PM »
Yes - principal + increased home value added each month.   

By the way,  when you get serious about retirement.  You can take your 500K net from the home and retire nicely in my beautiful Ozark neighborhood.   

It always amazes met that homes cost 1 million for 1500 sq ft when our McMansion is 220K for 3,000 sq ft.   

By the way,  IMHO,  I would refi and take the cash and throw it in this highly overvalued stock market.

You would cash out to put money in an overvalued market?  Just checking

Cheddar Stacker

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Re: Do you consider mortgage payment 'saving' ?
« Reply #58 on: October 14, 2014, 01:47:25 PM »
I think of it like a business.  You have your Income Statement and your Balance Sheet.

Your Income Statement is monthly earnings minus monthly expenses.  Since 100% of your mortgage payment is required to be paid, I would count that as an expense.  If you are paying more than the minimum payment, you consider any additional money to be savings.

Your monthly change in Net Worth is a Balance Sheet calculation, and it does include principal repayments.

For me, both numbers are relevant.  I generally pay more attention to my monthly change in Net Worth, although this is also impacted by moves in the financial markets.

NorCal, you're thinking along the right lines, but this isn't accurate. It can't be both. It's either balance sheet, or income statement. You can (and really should) split up the payment into separate line items and include some on the balance sheet (Principal) and some on the income statement (Interest, Taxes, Insurance).

From an accounting standpoint, cash used for the purchase of a house and payments on the principal portion of the house should never be considered an expense. They are a transfer of capital, not an expense. The only time an expense would be recorded (other than repairs, interest, taxes, insurance, closing costs, etc.) would be if you tracked the market value of your home and it gained or lost value. If you adjust the fair value of your house on the balance sheet, you would record a gain or loss for that adjustment on the income statement.

NorCal

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Re: Do you consider mortgage payment 'saving' ?
« Reply #59 on: October 15, 2014, 10:31:46 PM »
I think of it like a business.  You have your Income Statement and your Balance Sheet.

Your Income Statement is monthly earnings minus monthly expenses.  Since 100% of your mortgage payment is required to be paid, I would count that as an expense.  If you are paying more than the minimum payment, you consider any additional money to be savings.

Your monthly change in Net Worth is a Balance Sheet calculation, and it does include principal repayments.

For me, both numbers are relevant.  I generally pay more attention to my monthly change in Net Worth, although this is also impacted by moves in the financial markets.

NorCal, you're thinking along the right lines, but this isn't accurate. It can't be both. It's either balance sheet, or income statement. You can (and really should) split up the payment into separate line items and include some on the balance sheet (Principal) and some on the income statement (Interest, Taxes, Insurance).

From an accounting standpoint, cash used for the purchase of a house and payments on the principal portion of the house should never be considered an expense. They are a transfer of capital, not an expense. The only time an expense would be recorded (other than repairs, interest, taxes, insurance, closing costs, etc.) would be if you tracked the market value of your home and it gained or lost value. If you adjust the fair value of your house on the balance sheet, you would record a gain or loss for that adjustment on the income statement.

Fair point.  That is the true accounting way of looking at it.  Just not how I think about it.

This is why I work in finance and not accounting.  In finance, you can make up your own reporting structures and analyze the business however you like.  In accounting, you have to follow all the (mostly) silly rules.

dragoncar

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Re: Do you consider mortgage payment 'saving' ?
« Reply #60 on: October 15, 2014, 11:13:06 PM »
I think of it like a business.  You have your Income Statement and your Balance Sheet.

Your Income Statement is monthly earnings minus monthly expenses.  Since 100% of your mortgage payment is required to be paid, I would count that as an expense.  If you are paying more than the minimum payment, you consider any additional money to be savings.

Your monthly change in Net Worth is a Balance Sheet calculation, and it does include principal repayments.

For me, both numbers are relevant.  I generally pay more attention to my monthly change in Net Worth, although this is also impacted by moves in the financial markets.

NorCal, you're thinking along the right lines, but this isn't accurate. It can't be both. It's either balance sheet, or income statement. You can (and really should) split up the payment into separate line items and include some on the balance sheet (Principal) and some on the income statement (Interest, Taxes, Insurance).

From an accounting standpoint, cash used for the purchase of a house and payments on the principal portion of the house should never be considered an expense. They are a transfer of capital, not an expense. The only time an expense would be recorded (other than repairs, interest, taxes, insurance, closing costs, etc.) would be if you tracked the market value of your home and it gained or lost value. If you adjust the fair value of your house on the balance sheet, you would record a gain or loss for that adjustment on the income statement.

Fair point.  That is the true accounting way of looking at it.  Just not how I think about it.

This is why I work in finance and not accounting.  In finance, you can make up your own reporting structures and analyze the business however you like.  In accounting, you have to follow all the (mostly) silly rules.

But wouldn't an accountant depreciate the structure?  That's an expense, right?

clifp

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Re: Do you consider mortgage payment 'saving' ?
« Reply #61 on: October 15, 2014, 11:51:21 PM »
For the people who don't think paying down principal counts as saving, I am curious how you would answer these questions.

Bill has 240K 5% interest mortgage, which he pays $1,000/month
Joe has 240 5% fully amortized 30 year mortgage which he pay $1288.37. He also has untapped 5% HELOC.

Every month Bill put $295 in his money market/emergency fund
At the end of the year Bill has $3,541 in the account and $240,000 mortgage balance.

Joe has no additional saving, but $236,459 loan balance and untapped HELOC.

Would you call Bill's $3,541 savings?
How is Bill financial situation any different than Joes?

Cheddar Stacker

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Re: Do you consider mortgage payment 'saving' ?
« Reply #62 on: October 16, 2014, 05:59:52 AM »
I think of it like a business.  You have your Income Statement and your Balance Sheet.

Your Income Statement is monthly earnings minus monthly expenses.  Since 100% of your mortgage payment is required to be paid, I would count that as an expense.  If you are paying more than the minimum payment, you consider any additional money to be savings.

Your monthly change in Net Worth is a Balance Sheet calculation, and it does include principal repayments.

For me, both numbers are relevant.  I generally pay more attention to my monthly change in Net Worth, although this is also impacted by moves in the financial markets.

NorCal, you're thinking along the right lines, but this isn't accurate. It can't be both. It's either balance sheet, or income statement. You can (and really should) split up the payment into separate line items and include some on the balance sheet (Principal) and some on the income statement (Interest, Taxes, Insurance).

From an accounting standpoint, cash used for the purchase of a house and payments on the principal portion of the house should never be considered an expense. They are a transfer of capital, not an expense. The only time an expense would be recorded (other than repairs, interest, taxes, insurance, closing costs, etc.) would be if you tracked the market value of your home and it gained or lost value. If you adjust the fair value of your house on the balance sheet, you would record a gain or loss for that adjustment on the income statement.

Fair point.  That is the true accounting way of looking at it.  Just not how I think about it.

This is why I work in finance and not accounting.  In finance, you can make up your own reporting structures and analyze the business however you like.  In accounting, you have to follow all the (mostly) silly rules.

But wouldn't an accountant depreciate the structure?  That's an expense, right?

Norcal, I like the sound of that. No rules, just do what you like. Sign me up.

Dragoncar, yes if it's a business use asset, no if it's not. So a personal residence is not really depreciable. Even in a business you wouldn't always depreciate a structure. I.E.-For a home builder houses are inventory and not depreciated, but it should be adjusted if the value decreases.

dragoncar

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Re: Do you consider mortgage payment 'saving' ?
« Reply #63 on: October 16, 2014, 09:24:50 AM »
Ok the accountants have convinced me again.  I'm leaning towards considering it an expense in the amount of the NPV of the loan+payments.  What interest rate do I use? 

Cheddar Stacker

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Re: Do you consider mortgage payment 'saving' ?
« Reply #64 on: October 16, 2014, 09:31:31 AM »
Ok the accountants have convinced me again.  I'm leaning towards considering it an expense in the amount of the NPV of the loan+payments.  What interest rate do I use?

I don't understand what this means. What are you considering as an expense?