I continue to be amazed at how our home values keep increasing in our neighborhood. Prices are going up so much, that it almost makes me wonder when they’ll come back down. At some point, with interest rates going up, and prices going up, there won’t be any buyers that can afford to buy these houses.
When I moved in to our house 3 years ago, it cost me $280k. Granted, that was a good price at the time because I bought it from someone that hadn’t listed it yet and had some leverage to get the price down. But, get this. A house just went up for sale in our neighborhood for $435K. This house is smaller and not as updated as our house. Even if it ends up selling for $400, that’s still a $40K per year appreciation. Surely this won’t last.
So, what does this mean for me? Not much really. Rather than use this equity to buy more crap, we are actually accelerating the payments on our mortgage. So, if the prices do come down some, I just won’t be quite as well off. No sweat. I’ve got many years to see this house appreciate. My goal is to pay this house off in the next 15 years. It probably doesn’t sound very aggressive, but I have a 30 year loan on our house. Cutting that in half works for me.
I really hope that my neighbors aren’t all spending this new equity, although I know that some of them are. I hope they can afford to live here for the long term because I like them!
Hi. I also bought my primary residence 3 years ago and have watched the value of my home increase tremendously. I also have a 30 year mortgage and plan to pay it off in 12 more years. I am selfishly hoping that real estate prices don’t come crashing down, because I have quite a good chunk of my net worth in real estate. Good choice on not cashing in on your equity, but do you ever wonder how nice a plasma tv would look in your living room?
Time to sell? ;-)
Seriously, good for you — not spending that equity. I’m sure that’s what 75% (or more) of your neighbors are doing.
I can tell you exactly where my plasma tv would go in my living room. :) But, there’s no way I’m spending that kind of dough on a TV. The prices continue to come down. When they reach “commodity” pricing, I’ll probably pick one up. Until then, I’ll just keep watching the 32″ TV that came with our house. :)
Hazzard
Why pay off the mortgage at an accelerated rate? If you financed it recently chances are your mortgage rates are in the 5-6% range. You can earn nearly that in a savings account these days and much more if you invest in index funds. Paying off your mortgage early is essentially locking in the return on that money at a relatively low rate.
Plus, the investments have the advantage of being liquid if you need to get the money out in an emergency. Yes you can get a HELOC but that might be difficult to do if you are actually experiencing an emergency (i.e. loss of job etc.)
Bottom line, your debt to equity ratio is very healthy due to the appreciation of your home. Paying your mortgage off early can actually be more risky than saving the extra money elsewhere.
(note: I am not practising what I preach here, my wife and I refinanced our home almost three years ago with a 15 year mortgage @ 5 3/8%. Had I known then what I know now I wouldn’t have done it, but I can’t bring myself to refinance again at a higher rate…)
Good points Steve. I’ve thought about that many, many times. Now that rates are higher, it is appealing to consider not paying it down. Psychologically there is something about not owing on a mortgage that really grips me. You are probably right that I should invest the money I’m putting towards the mortgage. I’m only paying an extra payment each year, roughly and had originally planned to put down a few lump sums that I’m not going to do now that rates are higher. I’ll keep paying a little extra principal each month so that it comes out to one extra payment per year, but don’t plan on putting any more towards it.
I am maxing out my 401k and am also funding a ROTH each year. What I really need to do is open a non-sheltered brokerage account and get the money in there. The complexities of dealing with taxes on a brokerage account has kept me from doing it. It’s a hurdle that I need to get over.
Thanks for the comments!
Hazzard
Hazzard,
You know what they say, only two things in life are certain… The former doesn’t keep you from driving a car, don’t let the latter keep you from opening a brokerage account.
That being said, I think paying down your mortgage is not a bad idea. You can certainly make the argument, as Steve has, that on a dollars and cents basis you can do better by saving and investing it yourself. But what you are dealing with is the difference between a risk free rate of return versus equity risk premium. If your mortgage is 6%, that’s a guaranteed return of that amount. Yes, it is tax deductible, reducing the actual return by paying down. But the return on investment will be taxable, more or less cancelling each other out.
Can you get 6% in a liquid savings/money market? Awfully close, but I haven’t seen it yet. Index funds? Now we’re dealing with the risk free versus equity risk premium returns. Keep in mind that money invested in 2000 is still below starting value. I know investing is a long term process, but six years later is a long time to be negative.
you can get 8% in federally tax free muni bonds for 1 yr. some 3 yr munis offer 14%!!!
anyway, i sold my condo last august [took 6 months to convince my wife] and pocketed a large chunk
of cash. renting it back for an extra $100/mo. its lost around 40k in value since then. sure glad its not my money!