Mortgage and Savings Question

[vetoer]

Hey guys!

I'm a pretty new reader, and also a financial novice trying to get my bearings around here. I'm a college student and am really persuaded by MMM's arguments and am doing all the reading I can to start living it out.

I have a couple (probably pretty basic) questions about mortgages that I haven't understood yet: When MMM does a budget overview, he only counts the interest paid on a mortgage and the property taxes. He doesn't include payments toward the principal siting that that's a form of savings. In what way is it savings? It doesn't seem that you would have access to that equity unless you sold the house - or am I missing something? A follow up question would be, should the equity on your house count toward your 'stash (as in, the money you'll be using to provide your income)?

Thanks in advance for the help!

[seattlecyclone]

Home equity payments are savings in the same way that any debt repayment is: instead of spending the money on consumer goods, you're using it to increase your net worth by reducing the value of the liabilities on your balance sheet.

That said, I don't count home equity as part of my "stash." Even when you pay off your home completely, it's not an income-producing asset. At best, I consider it part of my "margin of safety," as I live in a high-cost area. If we retire and economic conditions cause the 4% rule to fail for us, selling the house and moving to a cheaper area is one of many possible ways to make up the difference.

[Tjat]

To echo SeattleCyclone, MMM (and typical expense accounting) is only evaluating negative changes to net worth as expenses. With the principle portion of a mortgage, you are simply moving money from your payment account and into the equity account corresponding to your property. At the end of the transaction, you're net worth is left unchanged.

What you may be interested in doing is tracking both your net income (income - expenses) and what I typically just call cash flow (income - expenses - minimum debt obligations - additional debt payments). This would give you an idea of what you have left over for savings.

[MDM]

should the equity on your house count toward your 'stash (as in, the money you'll be using to provide your income)?

One can answer that question for oneself: either treat the house as an appreciating investment, eventually to be sold to finance other living expenses, vs. treat the house as a place in which to live.  For most it will be the latter, but YMMV.

[hdatontodo]

I don't factor my house's paid off value into my Can I Retire calculation.

The lack of monthly payment results in a smaller total of all my monthly expenses (which is in my calculation.)

[vetoer]

That said, I don't count home equity as part of my "stash." Even when you pay off your home completely, it's not an income-producing asset. At best, I consider it part of my "margin of safety," as I live in a high-cost area. If we retire and economic conditions cause the 4% rule to fail for us, selling the house and moving to a cheaper area is one of many possible ways to make up the difference.

Ah okay, I appreciate the clarification. That was my guess, but I just needed to someone to verbalize it for it make sense, haha!

Appreciate everyone's help!