I didn’t ever think I would be writing this post. The rule always was to have as little debt as possible, just enough so that I could get through college, and then pay it off at a rapid and truly, rabid pace. Beyond that, I assumed that if I was able to pay off the debt, that would be the end of the debt story.
Mortgages
As I child I vowed that I would be a lifelong renter. Isn’t it strange that people are so willing to dive into a mortgage even though mortgages cause some people so much distress? My parents often fought about how they feared they wouldn’t be able to pay the mortgage and/or their second mortgage. I promised myself I would never live that way and that I would just never own a house.
Never Say Never…
It wasn’t until Mr. FinanceRox cashed out his 5 years of income from farming and we realized that we had enough money to buy a house outright, that I considered owning a home for the first time. We didn’t know much about investing and certainly didn’t know enough to invest such a big amount. Ultimately, we decided that buying a home would be a good use for that money.
Not Enough Cash
With no rent or mortgage payment, we felt more compelled to learn about investing and therefore have been able to save and invest in the stock market for the last 6 years.
Since we have been investing all excess money in the stock market, we actually don’t have the cash money to buy our next house in cash too (without selling shares which we try not to do because our strategy is to be buy and hold investors).
Here are the options we are considering:
*1. Sell our house, use $200K to buy a rental property outright, use $100K as down-payment on our next primary residence and get a mortgage for the rest (+1 mortgage).
*2. Sell our house, use $100K towards a rental property (+1 mortgage), use $100K for down-payment on next primary residence (+1 mortgage), and put remaining $100K into stocks.
*3. Take out some of our home’s equity using a Home Equity Line of Credit (HELOC) for a down-payment on our next primary residence (+1 mortgage), move, and rent out our current house. (Still not 100% sure how this will work, more research required)
Why Tho…
Income Producing VS Non-Income Producing
The other result of learning about investing has been the desire to make sure we are optimizing our net worth by increasing the percentage of Income-Producing Assets that we hold. For example, we try not to have a lot of money tied up in cars and we try not to hoard too much cash (even though hoarding cash helps soothe my money insecurities about being broke).
The goal is to have MOST of our money out there invested, earning more money, so we can become Financially Independent and potentially live off of investments.
Converting equity from our house into a rental property, would do just that. It would be moving money from the non-income producing category and move it into the Income Producing category.
Diversification
It has occurred to me that having such a big chunk of our net worth in one house isn’t as much diversification as I would like.
The house initially cost $210,000 and in the 6 years since we bought it it has appreciated to about $295,000. Now that $295,000 is protected by homeowners insurance and we even took the extra step to get an umbrella policy on it so we are fully insured, but it still feels like a lot of money to have within 5000 sq ft.
By using some of that equity to buy a rental property, we would be spreading the risk out a bit between two houses and between two towns.
How Rox got her groove back
A strange and interesting thing happened since we started talking about mortgages; I’ve been feeling motivated again. Between the ages of 8 and 27, I was on a mission, a financial mission. It was my #1 goal and my top priority in life to escape financial stress.
I was so unhappy for so long. I just wanted to be middle class, I just wanted to sleep at night without fearing going broke and running out of food. It created such a powerful feeling of motivation and purpose. Really it was a physical reaction. It was energy. It was focus. It was feeling amped. I’m glad to have conquered the financial stress but I’ve missed that drive.
Suddenly I feel energized again. It feels like:
“Hey debt, bring it bitch.”
“It’s about to get real up in here.”
“I’m about to make you wish you had never been born.”
Having debt again would definitely push me to focus more on making more money and going back to being more frugal.
Plus, because I started the blog more recently, you guys have never gotten to see me in action. You’ve only seen the laid back, less frugal, less determined, complacent Rox… And “ComplacencyRox” does not “rock” as hard. Once I get back in the debt pay off groove, I am positive that I will remember so many more of the tips I used to pay off debt the first time. I’m sure those tips would be helpful for you guys.
Closer to FI
Making these changes could supercharge our journey to Financial Independence. For all the reasons listed above and according to the math, this would speed up our financial progress and shorten the time to FIRE. Both because of moving money into an Income Producing rental and me being more motivated.
Why we shouldn’t go back into debt
I feel pretty good about the “pros” of getting a mortgage but there are definitely “cons” as well.
Most of these are emotional reasons but that doesn’t mean that they are invalid reasons. Yes, we should make money decisions based on logic and math but that logic and math are just one component of any decision. People shouldn’t go into careers they hate just because the income is good, for example. People shouldn’t marry partners based on the person’s net worth. We are humans and as much as I want to be “Roxbot 3000” and make the perfectly optimal decision mathematically, I just feel like I have to acknowledge and consider the emotional side of decisions too.
How we feel is important. We only get one life so try to make decisions that are BOTH good financially and that you can feel good about.
So here is the breakdown on the “cons” for going back into debt:
-Debt sucks: Fear and stress- The reason I would be more motivated is that I fear debt. I’m confident that as things are now we could easily pay a monthly mortgage payment. But if Mr. FinanceRox wanted to quit working, or had to quit working, I’d be more stressed out with a mortgage than without one.
-Debt sucks: Owing someone- I don’t like owing money. Having a legal obligation to a bank feels like a big “con”.
-Debt sucks: Higher monthly expenses- I’m a big believer in having low monthly expenses. This gives us the flexibility to do whatever we want with most of our monthly income. Adding a mortgage is going to increase our spending from $2000 per month to probably around $4000 per month.
-Debt sucks: Paying Interest- I know they say that if you can get a return on investments around 6% and you are only paying 3-4% interest on a mortgage that you are better off investing. But I just can’t help myself. Paying interest feels like throwing away money.
-Debt sucks: Risk of asset loss- I really don’t know much about this so I still need to explore what risks there would be with a HELOC or mortgage. Based on current understanding, if the home is collateral on the loan than there is a risk that the asset could be re-acquired by the bank.
It would be different this time…
When we were in debt before, we didn’t just have $49,000 of assets that we could sell to pay off the debt if we wanted or needed to. This time we would be able to sell stocks in order to pay off the debt. This would not be a preferred option since we don’t want to be at the mercy of whatever happens to be happening in the market at that time (if value is down we could have a loss) but would be an option. This does give me a sense of security about it…hopefully not a false sense of security!
Rapid, rabid pay off plan
If we get new debt, the goal would still be to pay it off quickly. With my student loans, I paid them off really aggressively until they got to the point where the monthly payment was almost all Principle payment and very little Interest Expense. Since it was a low monthly payment, I let my foot off the gas and just dropped down to paying the minimum payments.
I would probably do the same with a mortgage, paying rapidly for the first few years until the bulk of the interest has passed.
I don’t mind having a little bit of debt, for a little while, as long as we can easily make the payments. However, you can bet your sweet butt that either way, I will NOT be in debt for the next 30 years.
Summary
Overall, I think going back into debt for a mortgage or investment property wouldn’t be the unmanageable, scary scenario that I used to think it would be. I feel up to the challenge of a mortgage for the first time and am hoping that the risk will be worth it.
FOR DISCUSSION:
Which option would you choose?
Would you ever consider debt again after becoming debt free?
I think you had it right, debt sucks, period. We haven’t owed a single dollar in two decades. It feels very nice. But that’s us, plenty of others manage debt fine. You should do you. In fact, having cash on hand to pay off debt is the same as not having debt. You’ll be fine either way, just asking this question puts you in the thoughtful, intentional group that wins with money.