In our previous article, we emphasized the importance of a strategic approach to personal finance, drawing inspiration from the wisdom of Benjamin Graham. He championed the idea that true financial happiness stems from a modest standard of living—a lifestyle that can be easily sustained regardless of economic fluctuations. When we talk about “modest,” we don’t mean a lower standard of living but rather a comfortable and financially manageable one. For many, the cornerstone of such a lifestyle is their home, which often represents the largest purchase they’ll ever make in their lifetime.
As highlighted in Table 9.1, a typical home purchase example shows a cost of $230,000, which generally necessitates financing through a mortgage. The burden of a mortgage is evident in Table 9.2, where the annual cost of servicing a mortgage is recorded as $25,000 in line (b). Imagine the financial relief of living without this monthly expense—most people would undoubtedly agree that it would be fantastic. However, fewer people today plan or strive to become mortgage-free, a sharp contrast to past generations.
| Table 9.1 Modified Simple Personal Balance Sheet | |||
| Assets | Liabilities | ||
| Cash (including savings & checking accounts) | $1,000 | Credit cards | $30,000 |
| Retirement account (IRA, 401(k), etc.) | $2,000 | Car loan | $2,500 |
| Electronic goods | $2,000 | Mortgage | $215,000 |
| Furniture & appliances | $3,000 | ||
| Cars | $7,500 | ||
| House | $230,000 | ||
| Total | $245,500 | $247,500 | |
| Personal net worth (Assets minus Liabilities) | ($2,000) | ||
| Table 9.2 Modified Simple Annual Household Budget Example | ||
| Line | Amount | Description |
| (a) | $65,000 | Annual income (salary or wages) |
| (b) | $(25,000) | Mortgage payments |
| (c) | $(10,000) | Food |
| (d) | $(6,000) | Utilities (electricity, water, gas, phone, etc.) |
| (e) | $(3,000) | Car payments |
| (f) | $(4,500) | Clothing, shoes, miscellaneous |
| (g) | $(2,000) | Insurance |
| (h) | $(1,000) | Donations |
| (i) | $(15,000) | Taxes (income, real estate, car) |
| (j) | $(1,500) | Amount over budget |
While it’s true that the future is unpredictable, it does not mean that we should live “life to the fullest” today without regard for future financial security. We do know certain things: life expectancy in the United States averages in the late-70s, and most people’s peak earning years fall between their mid-40s to mid-50s. This leaves a significant period between the end of these peak earning years and the average life expectancy. If your mortgage and other debts aren’t paid off by then, how will you manage?
This question is particularly relevant because we know of individuals in their 50s, who have recently lost their jobs and are struggling to service their debts. This situation is not uncommon, affecting both white-collar and blue-collar workers alike.
A couple of generations ago, paying off a mortgage was such a significant achievement that people celebrated with “mortgage burning parties.” This tradition, which marked the milestone of owning a home outright, was once considered an essential part of the American Dream. Sadly, this tradition has largely been lost, but it’s one worth reviving.
While we don’t suggest literally burning your mortgage documents, it’s symbolic of the freedom and financial stability that comes with owning your home outright. Your home, after all, is not an ATM or a financial asset to be leveraged repeatedly. Instead, it’s a special kind of investment—one that provides you and your family with a secure place to live, with significantly reduced financial obligations once it’s fully paid for.
To illustrate the transformative impact of a mortgage-free home on your finances, let’s revisit our example from Table 9.2. By removing the mortgage payment in line (b), you’ll see in Table 9.3 that $23,500 is now available for savings, compared to the $1,500 deficit in the original budget. This simplified scenario holds all other factors constant, which might not reflect real-life complexities, but it clearly shows the potential benefits.
| Table 9.3 Modified Simple Annual Household Budget Example – Mortgage-Free | ||
| Line | Amount | Description |
| (a) | $65,000 | Annual income (salary or wages) |
| (b) | $0 | Mortgage payments (house paid off) |
| (c) | $(10,000) | Food |
| (d) | $(6,000) | Utilities (electricity, water, gas, phone, etc.) |
| (e) | $(3,000) | Car payments |
| (f) | $(4,500) | Clothing, shoes, miscellaneous |
| (g) | $(2,000) | Insurance |
| (h) | $(1,000) | Donations |
| (i) | $(15,000) | Taxes (income, real estate, car) |
| (j) | $23,500 | Leftover amount from budget |
The effect on net worth is even more striking. When we eliminate the mortgage liability from the personal balance sheet in Table 9.1 and recalculate it in Table 9.4, net worth jumps from -$2,000 to $213,000. This significant increase underscores why paying off a mortgage should be a key personal finance goal.
| Table 9.4 Modified Simple Personal Balance Sheet – Mortgage Free | |||
| Assets | Liabilities | ||
| Cash (including savings & checking accounts) | $1,000 | Credit cards | $30,000 |
| Retirement account (IRA, 401(k), etc.) | $2,000 | Car loan | $2,500 |
| Electronic goods | $2,000 | Mortgage | $0 |
| Furniture & appliances | $3,000 | ||
| Cars | $7,500 | ||
| House | $230,000 | ||
| Total | $245,500 | $32,500 | |
| Personal net worth (Assets minus Liabilities) | $213,000 | ||
There are several paths to mortgage freedom. The most straightforward is to make the required monthly payments over the full term of the loan, typically 20 to 30 years. Alternatively, if your income allows and there’s no penalty for prepayment, you can accelerate the process by making extra payments. For instance, one additional payment per year on a 30-year mortgage can reduce the term by approximately eight years.
While this may not sound exciting, reviving the tradition of mortgage burning parties could add a sense of accomplishment and celebration to the process. Once your mortgage is paid off, financial discipline remains crucial. In some cases, it’s even more important to avoid falling into the trap of remortgaging your home for other investments or expenses.
As we’ve discussed previously, your home is not a financial instrument to be played with—it’s the place where you and your family live. Despite advice from some politicians and economists, it’s rarely wise to re-mortgage your home. For example, in 2001, Alan Greenspan, then Chairman of the Federal Reserve, praised homeowners for using their homes as collateral to fund purchases. In hindsight, this advice was misguided, as we’ve seen the negative consequences of such practices.
The Risks of Reverse Mortgages
As time passes, financial circumstances can change. If you haven’t saved enough for retirement, you might find it challenging to cover the ongoing costs and taxes of a paid-off home. Some people in this situation turn to reverse mortgages, a product heavily marketed by media personalities. However, it’s crucial to evaluate whether a reverse mortgage is the right solution.
A reverse mortgage allows homeowners, typically seniors, to borrow money against the equity in their homes. Unlike traditional mortgages, repayment isn’t required until the borrower passes away, moves, or sells the home. This deferred payment feature is attractive, but it’s essential to consider whether the amount offered is sufficient and how the funds will be used.
Understanding the valuation of a reverse mortgage can be complex, involving factors such as interest rates, life expectancy, home values, and the lender’s margin. If you’re not confident in your understanding, it’s wise to avoid entering into such agreements.
Moreover, the funds from a reverse mortgage might not last for the remainder of your life, leading to even more severe financial difficulties when they run out. This scenario has unfortunately played out for some individuals we know.
In many cases, downsizing to a more affordable home can be a better financial decision than taking on a reverse mortgage. Smaller homes typically come with lower costs across the board—taxes, insurance, utilities, and maintenance. “Living smaller” can translate to “living better,” and it aligns with the principle of funding your lifestyle comfortably.
Whether you opt for a reverse mortgage or choose to downsize, the goal should always be to create a lifestyle that is both comfortable and financially sustainable. As you age, it becomes even more critical to use debt sparingly, if at all.
