Are Mortgages Forced Savings?
March 18th, 2008 by Ana
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.
March 18th, 2008 at 11:03 am
I wholeheartedly agree. As a matter of fact, we were discussing mortgages with some friends the other day, and they said, “We don’t need a down payment with all of the incentives for first-time home buyers.” I wanted to scream! It’s amazing how our attitudes toward mortgages have changed even in just the past few years. DH and I would like to have at least 20% down–more if possible. But our plan right now is to save for a year or two and then look around for something we can afford. We believe in Dave Ramsey’s philosophy of buying something well within your means. And we’re going one step further: we want to buy our home based on one income. If someone loses a job, we decide to have children, etc., our mortgage won’t be the proverbial elephant sitting in the living room. We can live the way we want, not the way our mortgage dictates.
March 18th, 2008 at 11:14 am
Mortgages are forced spending, not forced savings!
I believe that home ownership is a really good thing and that most people need a mortgage to get started. I have helped people get loans for many years and have finally found a service tht really helps you get rid of the “good debt” much faster without refinancing or changing your monthly cash flow. Most people don’t belive they will ever own it out right! I didn’t think it was possible for me either but it is real, it is true, and I am doing it. Mortgages are forced spending, not forced savings. ownitoutright.com gives an overview of the help available.
March 18th, 2008 at 12:19 pm
Bonnie,
To say people can pay off their home much quicker the the $3500 program without changing their cashflow is a lie. Most Americans have a negative savings rate. People are far better off following Ramsey’s plan, paying off their consumer debt, doing a written budget, and systematically paying down their mortgage in the proper order than they are giving you $3500 for some magic software. The MMA isn’t a scam, but it is a waste of money and completely unnecessary. The only thing that pays down a mortgage faster is adding additional principal to it. You don’t need a heloc and magic software to do that.
March 18th, 2008 at 4:34 pm
I think this lending crisis has done one good thing people are considering loans have taken a good look at there finances and are trying to improve there credit ranking. So people are taking notice of there interest rates and moving debt to interest free accounts and lower interest accounts and paying down debt faster. They are setting budgets to work towards a goal of home ownership with a large deposit and closing cost. So maybe they won’t buy know but I see them being better finanially sound for the future.
March 18th, 2008 at 7:59 pm
I absolutely agree although a few years ago I might have disagreed. Unfortunately my home was the one investment I could afford. The housing market is declining in the Washington Metropolitan area as well. I lost $75K in equity in 6 months which is not the kind of savings account I would recommend. I do think my house is very similar to a piggy bank but only because I keep dropping money into it.
March 19th, 2008 at 5:10 am
OK, so in the early years of a mortgage, if I make a $1000 payment, $930 of it is for interest, and I’m “saving” $70.
WTF?!
Savings accounts PAY interest, not charge it!
(And they say rent is throwing money down a rathole?!)
If I stick to that mortgage schedule, I pay for the house 2-3x its sticker price.
Yikes, even passbook savings is a better savings account than that.
I laugh at the word “homeowner”–a tiny percent of Americans actually own their homes. Everyone else just occupies them. IF YOU HAVE A MORTGAGE, THE BANK OWNS YOUR HOUSE! You’re a mortgageowner and a house-occupier. Duh.
March 20th, 2008 at 7:50 am
I agree they are forced spending. Many choose to rent and put there savings from a higher mortgage payment, house insurance, taxes and home maintenance that they would of paid into a investment account or investment venture and use that to grow there wealth and they buy there house out right cash on the barrel. You do the math and will see that is the way to go.
March 22nd, 2008 at 2:02 am
[…] Are mortgages forced savings accounts? Ana from DebtFreeRevolution brings up some pretty interesting points about it. I never thought […]
May 15th, 2008 at 1:56 pm
Dear NCSU95,
There are also Americans with no consumer debt other than their mortgages. I am living proof the MMA works without cashing your monthly cash flow. The program uses stagnant idle money we keep in our checking account each month “just in case.” The program helps people accomplish this faster and more efficiently than most people can do on their own. The cost pays for itself in short order and it provides a great return on your investment. People spend much more than the one time $3500 every 3-5 years refinancing in order to save interest. I respectfully invite you to talk a look at the program in greater depth.
August 22nd, 2008 at 6:54 am
Without mortgages we would not be able to buy a home just dont borrow more than you can afford to pay back. I would recommend you get advice from a mortgage broker as this can save you a lot of money in time.