Last week, we covered the “Real Estate and Mortgages” lesson in the Financial Peace University class that I’m facilitating at my church. It’s always a weird lesson because it’s the only time that Dave Ramsey doesn’t go ballistic on us for having some debt. Here are the reasons why: 1.) Most people don’t have the means or patience to save up and put 100% down on a home, 2.) Many people who attend FPU currently have a mortgage, 3.) A mortgage is a forced savings plan that builds up equity over time, which isn’t the case with renting.
You do want to make sure that you are purchasing a house the RIGHT way! Choose a 15-year mortgage over a 30-year mortgage. You’ll get out of debt much sooner and pay much less in interest. Save up a down payment of at least 20% to avoid PMI (Private Mortgage Insurance, a.k.a. “foreclosure insurance.”) Make sure that your mortgage payment is no more than 25-30% of your family’s take-home pay. I always encourage folks to escrow their homeowners insurance and taxes.
This being said, we still want to pay off the mortgage as quickly as we can, but things need to be done in the proper order. Don’t pay extra on your house payment until: all of your other non-mortgage debt is paid in full, you have six months of expenses in your emergency savings, and you’re putting 15% of your income into retirement accounts. If you have all of your other debts paid off, you should have a pretty big chunk of change to pay extra on the principal of your home loan.
Whenever the subject of mortgages comes up, so does the topic of credit scores. Personally, I don’t even discuss credit scores with my financial coaching clients. I’m most concerned about helping them get “financially healthy,” which means decreasing their debt and increasing their savings. Improved credit scores are usually a natural consequence of increasing your net worth. However, if you are applying for a mortgage, your credit score will determine your interest rate, which directly affects your payment. Typically, a mortgage lender wants to see several sources of credit reported on your credit report in good standing for a least a year. If you currently have a mortgage, this will be one source. Now, I don’t want you going into debt just to get a good credit score because that would defeat the purpose. The easiest way to do this is get a pre-paid or secured credit card. With a secured credit card, you deposit $1,000 in the bank and they issue you a $1,000 credit card. I suggest you charge something you’re not tempted to overspend on, such as gas or your utility bills, and pay it off every month. This way you’ve got something reporting to the credit bureaus without accumulating debt.
One of my Financial Peace University students asked an interesting question: “If my mortgage rate is only 4% and I have the opportunity to invest money with a return of 8%, why would I pay my mortgage off early?” In 950 B.C., King Solomon, one of the wisest men who ever lived, said, “The borrower is slave to the lender.” So, if you have a mortgage, you have a master. Don’t be deceived about that. If you don’t think so, just try skipping a few house payments… (No, please don’t do that!) Personal finance is not really about math and interest rates; it’s about behavior and emotion. If we were handling our personal finances based on math, none of us would have any debt! So once you’ve paid off your non-mortgage debt, have a fully-funded emergency fund, and are putting 15% into your 401k or IRA, it’s time to break the slave mentality and work on becoming 100% debt free.
The only debt my husband and I have is our mortgage and we are diligently working on paying it off ahead of schedule. I can’t wait for the day that we are completely debt-free!
Do you have a mortgage? Are you paying extra on it right now?