The average length of time someone lives in their home in the United States is estimated at around 13 years.
Assuming most people buy their first house around age 25 and the average life expectancy in the U.S. is 79 years, that means the average person buys around 4 houses in their lifetime.
In contrast to the average holding period in the stock market of 5-8 months, most people never gain a lot of experience when it comes to buying houses.
This is a good thing in many ways and stock investors would be better off with a longer time horizon but it also makes it more difficult to come up with a good financial plan for managing this asset.
Should you use a fixed rate or interest-only mortgage?
Should you pay it off early or make minimum payments?
Is a 15 year mortgage better than a 30 year mortgage?
When should you refinance?
When does it make sense to take equity out of your home?
There are no easy answers to these questions because they’re driven more by personality and personal circumstances than spreadsheets. That’s what makes this transaction so challenging for many households.
There are no hard and fast rules.
I’ve changed my mind a few times about my housing strategy.
For a number of years, we were paying double the mortgage payment on our first home after a handful of refis dramatically reduced the minimum payment. We planned on staying in that house for a long time but life intervened. Once twins came into our life we quickly outgrew that house (although we were still there for a decade).
Making those double payments did mean a decent chunk of equity for a down payment for our current house but it made me think about the value of those extra payments.
As rates fell to ridiculously low levels during the pandemic we decided to refinance our new house. Since rates had fallen so much it wasn’t that big of an increase in the monthly payment to go from a 30 year fixed rate to a 15 year.
So in the spring of 2020 we made the switch.
Then the housing market proceeded to take off like a rocketship.
Our house is up around 40% or so since we bought it in 2017. That makes our loan-to-value ratio less than 50% (meaning the mortgage we have left makes up less than half the value of the home).
When we got the 15 year mortgage I liked the idea of having the house paid off by the time my twins would be going off to college. But seeing so much equity in the home has caused us to reconsider.
Why do we need so much equity in our house?
Why keep it sitting in the home doing nothing?
Don’t we have better uses for this capital?
I’m not one of those people who is repulsed by debt. We’re planning on staying in the house for a very long time. Interest rates remain low. The debt is tax-advantaged. We have other uses for that extra cash flow.
So the first step was taking out a home equity line of credit. We plan on using this for future home renovations, investment opportunities that arise or any other large purchases.
The second step will be going back from a 15 year mortgage to a 30 year mortgage. That will free up some money in terms of a lower payment but also cause us to pay down the debt at a slower pace. I’m perfectly fine with that. We don’t see the need to be in a hurry to pay it off with rates so low.
A 30 year mortgage at these levels might be the single best hedge against future inflation.
I also asked myself the following: When does this money mean more to us — now when we have little kids (hello daycare) and a lot of responsibilities or when we retire and have a far bigger nest egg?
And if rates remain low it’s possible every 5 years or so we’ll simply refinance again and pull more cash out of the house. Yes, we’ll be paying higher interest costs over the life of the loan but an after-tax interest rate of around 2% is a fairly low hurdle rate.
This strategy is not for everyone.
We have a high savings rate. We’re comfortable with this debt and the amount of equity we have in our home. We don’t plan on blowing this money on excessive vacations or a boat or a convertible. I understand the risks involved with leverage.
It’s also possible we’ll change our minds as we age and life happens.
Interest rates could always rise creating a more challenging environment to refinance or borrow against our home. My wife and I could change our minds about our relationship with mortgage debt. Life could throw us a curveball.
Many personal finance debt scolds will scoff at such a strategy. And that’s OK. I get it. Some people are deathly afraid of debt in any form. I have no problem with people paying off their mortgage early. I’m sure few people ever regret that decision.
But I’m going the other direction.
It’s possible we never pay off our mortgage and simply keep the equity at a reasonable level with a built-in margin of safety.
Michael and I discussed how we’ve both changed our minds on this in recent months and much more on this week’s Animal Spirits video:
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Now here’s what I’ve been reading lately: