Are Mortgages Forced Savings?
Fathersez (who has given ME encouragement on parenting) left a question in a comment over the weekend on my post about search phrases that bring people to this blog. He wrote:
If someone tells me that getting a good debt (say, a mortgage, that still leaves me with a lot of equity) is a way of forced savings, what should I tell him/her?
I am low on ideas and coffee this morning, so I’ll tackle this one since I did say that was a post all unto itself. I’ll also interpret the question as narrowly as possible so I don’t fly off on too wide a tangent.
“Good Debt.” That phrase gets bandied about in the PF blogosphere quite a bit, but you might have noticed I don’t use it. I just don’t subscribe to the good debt vs bad debt idea. Debt is debt, and it all means you owe money. I’ve learned I really don’t like owing money!
Some folks believe mortgages and student loans can be classified as “good debt.” I am cash flowing my college and only going part-time to avoid student loans, so that probably gives you an idea of my opinion there.
As for mortgages, I am very old-fashioned with my notions on those! A mortgage (which means “death contract” or “death grip” if you translate it from old French) is a means to buy something that would otherwise take you years to save up for. I still have a mortgage, but look forward to the day it is paid off. Not too long ago here in America, there used to be mortgage burning parties for when people finally paid off the note on their houses. It used to be a big deal and a big goal to own your home outright.
“A lot of equity.” I have to ask how “a lot” is defined. I’m considered hideously conservative when I say I want a 20% down payment to put on a house before I buy next time. Even as conservative as that may sound, there are areas in America where that still might not leave you with much equity over the next few years as the housing market is plunging in states like California, Nevada, and Florida.
Equity is a slippery eel, as we are finding out. People who thought they had equity in their homes have woken up to discover they don’t as housing prices fall. Equity seems to be based not on the mortgage amount paid versus the amount borrowed, but the current appraised value. If your neighborhood has foreclosures, your appraised value goes down significantly, along with any equity you thought you had. Until housing prices stabilize, equity has become a mostly fictitious number.
“Forced Savings.” Now we get down the the actual question: is a mortgage a form of forced savings? I don’t think so. When I have an actual savings account, I have money in there that earns some interest (of course, that interest is falling lately) and I can withdraw my savings if I need to immediately. I can’t do that with my mortgage.
Even though I have lived in this house for seven years, a large portion of my monthly mortgage note still goes to paying interest, and absolutely none of it earns interest. That’s mostly because a mortgage is not an investment, and a house is not a piggy bank. A house is a home, a place to live. A mortgage is a “death contract” because with some of these mortgages out there, you’ll be paying it til the day you die.
If I am going to save money, I will put it into an interest-bearing money market account. Oh wait, that is what I am doing now that the debt is gone! No forcing necessary. No one needs to put a gun to my head, because I want to save up money. Which reminds me: the weakest part to the “forced savings” argument is the fact that if a person wants to pull that imaginary equity out of their home, there are twenty ways from Sunday to do it. People have been treating their homes like ATM machines, and now the ATM is out of cash. You can’t forced a person to save. Either they will because they want to, or they won’t. A mortgage doesn’t change that.