Mortgage Free Strategies (plus posh pre-fab)

MORTGAGE FREE PLAN & STYLISH PRE-FABRICATED HOMES

After a long day we sometimes plop down for a quick late night 30 minute show. We have become addicted to another Netflix “guilty pleasure”! The show is called “How to Live Mortgage Free with Sarah Beeny.” No wonder folks want to be mortgage free, US household debt is $13 Trillion and mortgages stand at $9 Trillion. Talk about a debt bomb for the economy! Therefore the topic here is how this show is inspiring me to rethink the whole mortgage concept in the quest towards financial independence! In my opinion, a key pillar of financial freedom is not having a mortgage or having a small monthly payment by the time one reaches retirement. Mortgages are typically a person’s largest monthly expense. But when you no longer have that expense you may be amazed at how little you can live on. The delightful and knowledgeable Sarah (famous realtor and TV personality in England) introduces us to clever people that find all manner of ways to live mortgage free. From tiny homes, to payment acceleration plans to living on a boat. Above all, each story is colorful, unique and inspirational. Some of the participants I suspect get a bit of support from their landed parents, so keep in mind it is a show and not the complete reality. In general, these folks are feeling the squeeze between high rental markets and high priced real estate. Where Jerry and I live in So Cal, everything about real estate is expensive no matter if you are an owner or renter! Each person on the show is cracking the code in their own unique way. The show inspired me to think more deeply about my own mortgage situation. How can I slay my mortgage faster? Is it worth it? How will it play into my FI plans? But before we think more creatively about how we could live closer to mortgage free, let’s first get to the root of the problem.

MORTGAGES, A DOUBLE EDGED SWORD

Having a mortgage is not the worst thing in the world and a quite handy financial tool that in many ways helped build the American middle class. The leverage I obtained from using a mortgage on a rental property has given me the opportunity to create cash flow and income for life. It would have taken me 30 years to come up with the $500k required to obtain this asset. Instead, I only needed to sock away $100k over 10 years and then acquire the passive income machine. If not for the mortgage tool, this would have been impossible. Another important point to keep in mind about mortgages is that in a way, when you buy your house with a mortgage, it is a kind of hedge against inflation. Inflation will cause the price of rent to rise over time. As rents rise over the next 10 plus years, your mortgage payment will stay constant. With a fixed rate mortgage, the monthly payment is predictable and allows a person the ability to better prepare and plan their finances.  

I DON’T BELIEVE IN DREAM HOUSES

Yes, I love Disney stuff and I think fairy tales are fun for fantasy purposes. You know I like Disney stock. But we are fed all kinds of dangerous fantasies when it comes to homes. Folks tend to go overboard and get suckered into risky situations. We are fed all kinds of lies. “Buy your dream house!” they say. “Buy as much house as you can afford and push yourself to the limits, it will go up in value.” Use this adjustable rate mortgage, etc. etc. The truth of the matter in my opinion is that a “dream house” has nothing to do with the fancy crown molding, light fixtures or square footage. I believe many homes can become your unique “dream home” based on a few simple principles. Keep it clean and maintained. Make it unique to you. And fill it with support for your family and loved ones. That is a dream home! Home ownership rates in the US are at historical lows after the carnage of the great recession and housing crisis. The average new home mortgage balance for the US is about $245,000 and 65% of homeowners have a mortgage. Californians have an average of about $350k, significantly higher than the rest of the country. For a guy like me that lives in expensive Southern California, $245k sounds low, but it is all relative. Many borrowers are only putting 5% down. The average a decade ago was 20% down. A key aspect of achieving FI is wrestling the expenses to provide you and your family with safe and adequate shelter. So what can one do to either live “Mortgage Free”? Or if you have a mortgage how do we get it knocked out as soon as possible? Keep in mind that some prominent financial advisors advise against paying off a mortgage. They argue that the extra money can be plowed into equities or other assets that can produce gains, dividends and cash flow. This is a personal FI decision and all depends on the strategy you deploy.  

5 “MORTGAGE FREE” STRATEGIES AND IDEAS, Slaying the Mortgage Monster!

 

1. The Extra Payment Each Year

If you do the math (which most of us don’t) it is amazing how much one extra monthly payment a year can shave off the life of the mortgage. Remember the term mortgage comes from French meaning “until death.” How ironic! So kill that mortgage sooner by doing one more payment each year. In many cases this can result in paying off the debt 5 plus years in advance and save thousands in interest payments. There are several strategies folks deploy. One is to switch to bi-weekly payments. Another is to make one more payment each year towards principal only or divide the one payment into 12 smaller chunks and add that amount each month. Every couple of months I add a little more to the principal section on the payment stub in order to achieve some of these savings. If you can afford to go big, you can double your principal amount each month and pay the whole thing off in half the time! Just make sure before signing any loan docs that you see in writing that there is no pre-payment penalty, which are very evil in my opinion and should be outlawed!    

2. Downsize Everything

Every extra square footage you mortgage also needs to be taxed forever, filled with stuff, air conditioned and maintained. You may think you need that extra space or bedroom, but we typically do not. I get a good laugh out of the home buying shows when the guy needs a “man cave”. He will pay extra his whole life for that extra unneeded space. I believe in having a modest size house that fits your particular needs. Remember history here, much of the vast Vanderbilt fortune was blown trying to maintain these palatial castles and estates. Castles look cool in fantasy films and at Disneyland, but you would never want to own one!    

3. Outside the “Box” thinking

A home is basically a box to protect you and your family from the weather so that you can live longer and healthier lives. Unfortunately in our culture a house has become a status symbol. It is a signal in terms of what you can afford, your rank in the class system, etc. It should not be this, it is shelter and a place to rest and play with family. The show I mentioned earlier provides all kinds of unique examples of alternative housing solutions. I am intrigued by the idea of living on a boat, in a yurt, or in a tiny home or a converted shipping container. Or think about ways to shack up with others or Airbnb your property. This will not work for everyone’s lifestyle, but particularly for younger unmarried folks without kids, do these things now to save money for your future! Now is the time you have the flexibility and can tolerate a little less “comfort” and conformity. The bottom line is to turn your home into an actual asset. In other words generate income somehow from the property through renting out rooms, etc.    

4. PRE-FAB DREAMS, Home Kits and DIY Construction

I have a not so secret dream of building my own home with a DIY kit. Have the foundation laid and then order up a few flatbeds of materials and an instruction manual. In fact, there used to be a house kit you could order from Sear’s a hundred years ago. There is a long history and hundreds of companies and resources available now in this space. Some are absolutely beautifully designed. Here are a few websites and designs to be inspired and captivated by: Livinghomes.net Northwest by Ideabox 99-2b by Cubico Tumbleweed Tiny House Company  

5. Buy in Cash (It may not be as out of reach as imagined if we make it a priority)

If living mortgage free is very important to you, then consider buying a home in cash. It may be impossible in expensive markets like the one I live in, but in other markets it may be within grasp. In some parts of the country a small single family home or condo can go for $100-200k. If you keep up with the FIRE movement and have a good paying stable job, there are ways to live a lifestyle that allows you to sock away major chunks of money every month. It took me 10 years to save $150k when I really put my mind to it. I could have secured a job in a more rural area and purchase a home outright, why not! To do this though there would probably need to be some major lifestyle adjustments. No car or no new car at all. Limited travel. Limited consumerism in general. Eating basic foods at a discount. No new clothes. But by living simply a person could perhaps sock away $3k/month or $36k a year. In 3 years you could have $100k! It is possible, but this will take some pretty dramatic commitment and focus for an extended period of time. All these strategies above are not all or nothing. They can be used and deployed at various times to various degrees. Let’s say you can’t always pay extra on the mortgage, but every other year you can, you will still shave years off the mortgage and interest. Perhaps you will think hard about buying a large home and realize you can do just fine with a smaller home that may be ideal in many ways. You don’t need to go to extremes like living on a boat to make the dream of mortgage free closer to reality. Perhaps at some point after 10 years of a mortgage you re-amortize the loan, this can dramatically reduce the payment and make it a very manageable monthly nut to crack! Just like the overall pursuit of FI, there are many options and tools to deploy that can help you reach your goals in your own unique way.

6 thoughts on “Mortgage Free Strategies (plus posh pre-fab)

  1. I just saw an episode of that show a couple of nights ago! What a fun show! Of course, they find all kinds of oddballs to fill the show with so “normal” people won’t think they can do it, but it’s chipping away at the facade of “debt fuels the economy” that we’ve been fed for so long. Also, those pre-fab houses look great! Not only do they cut the build time down tremendously (and I love the DIY aspect- naturally) but they also reduce the environmental impact of construction enormously.

    1. I can see how this would be right up your alley in terms of DIY living. It’s fun and inspirational to a guy like me with a very traditional house and mortgage.

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