Is Having a Mortgage a Great Way to Force Savings?

Today, Passive Income MD looks at a mortgage and how it forces one to “save money” by paying down the principal on real property, building equity.

Is that one of the key advantages to holding a mortgage?

PIMD will go into detail below, but when I hear the term “forced savings,” I am reminded of one of the arguments in favor of cash value life insurance, often purported by those who profit from selling such policies.

A mortgage, of course, is very different from an insurance policy, and is actually a good and necessary product for many people. I no longer carry a mortgage, and pay no life insurance premiums, but still manage to save plenty per year.

Let’s see what Dr. Kim has to say. As always, this Saturday Selection first appeared on Passive Income MD.

 

Is Having a Mortgage a Great Way to Force Savings?

 

I’ve been thinking about mortgages and savings a bit more than usual lately, and with good reason. My father recently retired from his nearly 40-year career as a physician, and in trying to be a good son, I’ve been helping him prepare for the transition financially.

This involved taking an account of what he has saved up, his investments, and his expected cash flow. For him, the future that many of us scrimp and save for has come, and since he no longer works a day job, planning is all the more important.

Unfortunately, my father didn’t have the benefit of having resources like the White Coat Investor, Physician on Fire, or the Fire Your Financial Advisor Course. In fact, though he would have benefited greatly from having one, he never even sought advice from a financial advisor.

He just scraped together things from what he heard in doctors’ lounges. Although he provided an amazing upbringing for which I’m extremely grateful, he unfortunately didn’t plan well for his own retirement.

Fortunately though, he recently sold the home we grew up in, and it had long been paid off. The cash from that sale ended up being more than the amount he had in all his investment accounts combined.

 

 

mortgage forced savings

so much forced savings

A Mortgage is a Great Forced Savings Vehicle

 

All I remember thinking was thank God he had the mortgage. It actually forced him to save. Mortgages are often thought of as terrible things – after all, no one likes making monthly payments on anything.

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But there are quite a few reasons why having a mortgage is very beneficial from a savings standpoint. For example:

 

It’s Easy

 

Most experts suggest at least a 10% savings rate, with some, like the White Coat Investor, even recommending 20%. The truth is, thanks to life’s little expenses, many of us fail to come close to those percentages. But how many people forget to pay the mortgage every month? When the alternative is homelessness, most of us make it an easy priority.

 

Creates Long-Term Wealth

 

Statistics show that the average homeowner has a higher net worth than a renter. The US Census Bureau puts out statistics and the last time they did in 2013, they stated that homeowners have a median net worth of $199,557 vs. $2,208 for renters. That’s a 90x difference!

Why is this? This is a chicken or the egg situation – is it that homeownership leads to higher net worths or just that higher net worth people buy homes?

I think it’s a little of both. Homeowners are typically older making higher salaries than younger renters with lower salaries.

On the other side, over time, the homeowner’s property will appreciate 3-4% on average a year while they’re paying off the mortgage and gaining equity in the home. Most homeowners use leverage (put down 20%) to gain the benefits of the appreciation on the full value of the home, leading to an increased net worth over time.

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A simple example of this: If a $500,000 home appreciates at 4% a year, then after one year, the home is now worth $520,000, a gain of $20,000. However, if you had only put down 20% ($100,000), your return on investment is 20% ($20,000 gain / $100,000 down payment). Over time, you can see how that multiplies your gains. (Admittedly this is a very simplified illustration without accounting for taxes & fees.)

 

Tax Deductions

 

Interest on your mortgage can be deducted at tax time, which means more money in your pocket. Although with the new tax plan, this benefit has been reduced for some people, particularly in high cost of living areas. Mortgage interest can now only be deducted up to a $750,000 loan (for new loans) instead of up to $1 million as before.

 

Avoid Capital Gains Taxes

 

Yes, it’s possible that you could pay nothing in taxes on the sale of your home even if you realize a nice gain. You also don’t have to wait until you’re 60 years old to realize this tax benefit. How many other investment vehicles can you say that for?

This is a tremendous benefit, particularly for those in higher tax brackets. If you’re single and have lived in your home for at least 2 of the last 5 years, up to $250,000 in gains is tax-free ($500,000 if you’re married).

 

 

A Mortgage is Not So Great as a Savings Vehicle?

 

Since nothing is perfect, there are some cons to thinking of a mortgage as a savings vehicle. For example:

 

There are Better Places to Save and Invest

 

This can absolutely be true. If you’re disciplined and save well, you can definitely make better returns on your investment than using your own primary residence. Unfortunately, with the nation’s abysmal savings rate and high credit card debt, discipline just doesn’t seem to be our forte.

[PoF: For better returns and lower costs in real estate, consider crowdfunded real estate investments with annual returns often in the high single digits to low double digits.]

 

The Liquidity Issue

 

True savings, some say, should be liquid – something we can tap quickly if needed. A mortgage, therefore, shouldn’t be used as an emergency fund. So lack of liquidity is a valid issue.

However, one way to remedy this is by having a home equity line of credit (HELOC) open and available to tap in the case of an emergency.

Honestly, that’s what I do. Unlike Vagabond MD and his $500,000 cash stash, I don’t like to keep a lot of cash sitting in savings. I like my money to work. So I have a HELOC in place just in case of an emergency. I just have to be disciplined not to use it as a credit card for home renovations or to buy a Tesla.

 

Summary

 

Utilizing a mortgage to help you save may not be ideal for everyone, but I know for a good number of people, a mortgage is a great forced savings vehicle. It was for my dad, and I’m grateful. Now we just have to be smart and figure out what to do with this savings and his other investments for the rest of his retirement. But that’s a story for another post.

 

 

 

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Physician mortgage loans are being offered by more and more banks. Whether it is a good option for you really depends. I discuss my experience using a doctor mortgage in this post. The three main features you will see with most physician loans are:

  1. No PMI despite a down payment of only 0-10%.
  2. Special treatment for the student loans (usually that they only take required payments into consideration).
  3. Will close before you start working by accepting a contract, instead of paystubs, as evidence of future earnings.

Are you interested in a physician mortgage loan? The individuals listed below offer physician mortgage loans for these lenders and are paid advertisers on the blog. We appreciate hearing feedback on these advertisers, both good and bad.

Thank you for supporting those who support this site and our charitable mission. Some of these lenders also offer loans for other high income professionals such as dentists, veterinarians, attorneys, podiatrists, optometrists, accountants, and others. (Lenders- if you would like your name and contact info listed here, contact us for a quote.)

Physician Mortgage Lenders

KeyBank

AK, AZ, CA, CO, CT, FL, ID, IN, ME, MA, MI, NC, NJ, NY, OH, OR, PA, UT, VT, WA
Contact: Jonathan Rouse (NMLS #998283) at 714-721-5845 or [email protected]

Key Mortgage Services Inc:

CO, FL, IL, IN, KY, OH, PA, MI, WI, WV
Contact: Fritz Julien (NMLS #425324) at 630-701-0636 or [email protected]

Loan Depot: 

AZ, CA, CO, FL, HI, IL, KS, MA, MI, MO, NV, NJ, NC, OH, OK, OR, PA, TX, VA, and WA
Contact: David Henderson (NMLS#1183120) at 916-549-9916 or [email protected]

Suntrust:

AL, AR, DC, DE, FL, GA, MD, MS, NC, PA, SC, TN, WV, VA,
Contact: David Hager (NMLS #595259) at 904-208-1349 or [email protected]

Synovus:

AL, FL, GA, MS, NC, TN, SC
Contact: Paul Rainer (NMLS #116670) at 706-410-6434 or [email protected]

UMB:

AZ, CO, IL, KS, MO, NE, OK, TX
Contact: Doug Crouse (NMLS #363861) at 816-728-3631 or [email protected]

**U.S. BANK:

All 50 states
Contact Jonathan Brozek (NMLS #850168) at 916-601-8782 or [email protected]

Washington Trust:

CT, MA, RI, and NH.
Contact David Fay (NMLS #513224) at 617-429-2059 or [email protected]

*Arvest Bank:

AR, KS, MO, OK
Contact: Jim Secrest (NMLS #1104170) at 913-634-2323 or [email protected]

BankMD:

TX
Contact: Moses Luevano (NMLS #1426259) at (855)4BankMD (422-6563) or [email protected]

BBVA/Compass Bank:

AL, AR, AZ, CA, CO, FL, GA, ID, KS, LA, MA, NM, NV, OH, OK, OR, PA, RI, TN, TX, VA, and WA.
Contact Michael Wagner (NMLS# 801156) at 817-310-4017 or [email protected]

BMO Harris Bank:

AZ, FL, IL, IN, KS, MN, MO, WI
Contact: Marc Evans (NMLS #362579) at 920-831-7721 or [email protected]

Cadence Bank:

CO, FL, GA, NC, TX
Contact: Stephen Moore (NMLS #268781) at 512-785-5354 or 713-871-4057 or [email protected]ank.com

Chemical Bank:

IL, IN, KY, MI, OH, PA, and WV
Contact: Darick Hensel (NMLS #1177936) at 810.245.9609 or [email protected]

Citizens Bank:

All States except AK & HI
Contact: Michael Keithley (NMLS #29261) at 513-607-0850 or [email protected]

Fifth Third Bank:

FL, IL, IN, KY, MI, OH, TN, WV, GA, NC, SC, WI, PA
Contact my business manager Cindy ([email protected]) for contact information by sending her an email with Fifth Third in the subject line.

First Citizens Bank:

FL, GA, MD, NC, SC, TN, VA, WV,
Contact: Valerie Leonard (NMLS 415176) at 864-630-0921 or [email protected]

First Federal Lakewood:

OH, MI, KY, WV, IN, FL
Contact: Eric Veronica (NMLS# 83197) at 419- 318-8985 or [email protected]

First United Bank:

OK, TX
Contact: Brian Pratt (NMLS #310252) at (512) 632-1731 or [email protected]

Fulton Mortgage Company:

MD, DC, VA, PA, DE, NJ
Contact Jim Webster (NMLS # 658933) at 240-620-1414 or [email protected]

Horizon Bank:

MI, IN, and IL,  (call for specific counties served)
Contact Barbara Reamer (NMLS #783173) at 517-816-4124 or [email protected]

Huntington Bank:

OH, IL, IN, MI, WI, WV, KY, & PA.
Contact Sandi Jameson-Frith (NMLS#564023) at 586-749-8355 or [email protected]

 

*Arvest Bank
**Equal Housing Lender. Member FDIC.

How do you feel about a mortgage? Do you feel like it’s a great way to force savings? 

21 comments

  • Tony B.

    Mortgages are great as savings vehicles, the problem is that most people buy way more house than they can either afford or effectively use.

    • Jbe

      Unless you bought your house in 2004 before the bubble burst and now it is still worth less than when you bought it….

      • John C

        You have to live somewhere mine as well buy a house and have it paid off in 30 or15 yrs then be Mortgage free during retirement. Check any 20 to 30 yr history housing has always increased but nothing goes straight up in value either.

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  • Thank goodness it worked out for your dad. I think being a homeowner is better than renting too. Homeowners have some equity to fall back on. It really depends on the family, of course. Some renters are probably better off than homeowners because they could invest more. Most people just spend way too much, though.

  • Dr. Green Thumb

    I bought a home. I pay the note every month and pay an extra $150. Just like you I push buttons, talk to people, and get paid. I’m sure my colleagues will agree, it’s a hard knock life for us.

  • I agree with everything stated except for that it is forced savings vehicle. The problem comes when the banks know you have all that equity and they prey on the weakness of the spenders through HELOCs and reverse mortgages. You got lucky with your dad that he didn’t touch it. My dad kept on using his house like a credit card and at 73 still owes the bank 60+%🙃. Now he has to live off of SS and almost no savings. My sister and I have been trying for decades to convince him to save with no luck. Now it looks as if we are going to inhert his debt too since he can’t live on so little. Fortunately he still has his health, for now.

    • I am a single woman, 52 years old, who just got a HELOC. After thinking long and hard about it …I do not have or use credit cards anymore. It gives me a great sense of financial security to know if only really needed there are funds available. The interest rates on HELOC are considerably lower than a standard credit card also. My financial security means everything to me as I work to pay off my mortgage and car loans. I do not feel preyed upon at all. I am a natural saver and hope to never have to use it. I feel safer and more secure having a safety net plan in place.

  • I’m undecided on the rent vs buy question – although I accept the math that says rent + invest is better, I know when I was renting I had no idea what a home cost and I certainly didn’t invest the difference.
    We’ve now bought a modest house and I’m happy with that decision.

    In one of those right wing up left wing down things, we can’t deduct mortgage interest from taxes where I live (not for a primary residence anyway) but our homeloan account basically works like a savings account – so although we are accumulating extra equity in there it is totally liquid and can be drawn out quickly in an emergency.

    • nick

      I’ve seen “Rent + invest” as being better than buying before, but what if the comparison is between “Rent + invest” and “Buy + invest.” Does that swing the pendulum back the other way?

  • Rick L Carter

    I have a question. We are building a new house. It is worth 500k. We have the money to pay it off. My friends tell me to have a 30 year mortgage and keep my cash and invest it. What do you recommend. I am 64.

    • It’s tough to give a definitive answer without a more complete picture of your finances, but I doubt you want to be in debt until you’re 94.

      If you’ve got $500,000 in cash, I’m guessing you’ve got a net worth in the millions and more than enough to sustain your standard of living. Just a guess. If that’s the case, I’d be inclined to pay cash. I chose to be debt-free by forty and paid cash for our current home.

      If, on the other hand, paying cash for the home would leave you house poor without investments or income to pay for your living expenses, a 15 or 30 year mortgage could make sense (or a less expensive home).

      Cheers!
      -PoF

      • What life moves does one make to have $500000 cash. What part of the pie am I missing that people cam have 500000 homes. Im in NY. and that seems i impossible

        • Rick L Carter

          Working 2 jobs for 35 years. And paying off all debt as fast as I can. I hate interest. I wanted to be debt free by 60. I made it. Home and Car And Toys.

      • Rick Carter

        My father and mother just passed. My brother and I split these assets. That is why I have this cash. I have 2 pensions. Social security and Cal pers. I am not rich. My friend has his money I vested. Makes his mortgage payments and gets some more dividends. I personally have paid off everything. Doubling my principle payment. Thanks for your advice.

    • I was in a similar situation and decided to use a 15 year mortgage. Two years later, after paying all the fees associated with that mortgage, I got sick of the debt and just paid off the mortgage. Being mortgage free is an amazing feeling, and I should have just paid cash up front.

      This is obviously just one man’s opinion and experience, but if I was you I’d just pay cash.

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  • I’ve known so many people who take out a mortgage then feeling they HAVE to go to work. Working in a career where “compassion fatigue” is an issue, my goal is to pay off my mortgage as soon as possible. I want to WANT to go to work every day, not feel I am there because of the golden handcuffs.

    I love owning a home, but not owing a mortgage.

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