The single biggest financial decision that most people will make is buying a home. This major purchasing decision will effect their budget, savings rate, credit score, relationships, lifestyle, and overall happiness in life.
If you want advice on this topic, there is no shortage of “financial experts” giving their opinions on what is best for you. When I Googled, “advice on buying a house”, a Ric Edelman Financial ad was #1 on the page. He is the foremost expert on everything financial. Most of his advice is very good, but in this case, I believe that he is well off the mark. He gives, “11 Reasons to Carry a Big, Long Mortgage”, and thinks a home is not an investment. For those of you that don’t know Ric, he has been giving financial advice for 30 years, and manages $16 billion for more than 30,000 clients across the country. He is the spokesperson for an army of advisors that follow his guidance.
I could never work at his firm. He would want me to tell you that we should leverage you up and invest any excess cash into the stock market. Instead of making a $100,000 down payment, take the $100,000 and invest it in a stock portfolio. He believes the bigger the mortgage; the bigger the tax-deduction. The aim of his advice is that the stock market will have a higher return than the interest rate on your mortgage.
Ric would have fired me anyway. My recent advice to an elderly client was to take $350,000 and pay off their entire mortgage. Another client, who is 10 years away from retirement, I recommended having them refinance from a 30-year mortgage down to a 20-year mortgage. I was hoping for a 15-year mortgage but it wasn’t in their budget.
I have yet to meet one retiree who has not regretted owning their house outright. For the savers that have paid off their mortgages, they have the flexibility to buy a vacation home or invest more for retirement. The best advice is actually quite simple. Buy a house with a fixed mortgage that you can afford. The price you pay is most important, but matters less if you plan to buy and hold. A house is a major investment because of the leverage that is creates. Many of my clients with smaller mortgages have tapped their equity to start a business, buy second properties, and ultimately, have the flexibility to retire young.
Buying a home is a personal decision and everyone will have their own circumstances to consider. In some cases, a big mortgage might be better if you bought at the right price and have the means to pay the mortgage. In other cases, a smaller mortgage is better, which will free up more money to allocate into a retirement plan. There are some retirees that prefer to have a mortgage in retirement because they have the ability to pay for it through their cash flows such as pensions, Social Security, and investments. No two situations are alike.
It is best to avoid any wild advice that is counter to common sense. The cornerstone of any financial plan is being able to afford where you live. The second most important part of the plan is saving for retirement. If you get the first part right, I’m confident that the second part gets that much easier.
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Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.