When a client comes in and says they’ve found their dream home, whether that’s a horse farm or a downtown condo, I absolutely want you to have that. If you’re thinking about purchasing a new or additional property, I encourage it – if it fits your lifestyle and you can afford it.
One client came in recently and said they’d found a dream property in the Carolinas, and they wanted to spend as much time as possible walking the beaches at sunrise and sunset, and as much time together as a couple in between. After all, they don’t know how many years they have left. That’s when the romance ended, and I put on my financial planner hat. Their next question was, of course, “How much can we spend?”
When I hear that question after almost 25 years in this business, I’ve learned that they aren’t referring to the purchase price alone. This also means gutting the house of all the awful accent walls, or themed rooms, or [fill-in-the-blank], and still being able to afford to repaint, tile the floors, buy new furniture, art and rugs so their friends can enjoy this amazing new oasis, and find some peace too. All of you who’ve done this know I’m 100 percent accurate. What are your plans for the house you’ve just bought?
Now, I work with many frugal clients who can stretch a dollar into onion skin, and I’m amazed. I’m not that person. I hire professionals. You don’t want me helping with your plumbing, or your carpet installation, or painting. But, I can tell you how much you can afford to spend on your project.
Assuming you have good credit (720 or above), it may be foolish of you to pay more than 20 percent down based on today’s interest rates. The reason? Try to think like a bank. If a bank could borrow money at 3.25 percent or less for 30 years, wouldn’t that bank borrow the maximum amount? Yes, and you’d probably be wise to do the same. As long as you’re making the minimum payments, you can’t be evicted, and any gains are real whether the house is paid off or you took a 100 percent mortgage.
I will also tell you that as long as you’re not in the most expensive house in the neighborhood, there’s nothing wrong with that 80/20 ratio to maximize the value of your house.
Now, let’s talk about the question of whether to pay off your mortgage early or not. I know Dave Ramsey tells people to be debt-free, and while there can be advantages to paying off a mortgage early, I believe this is not always the best advice. Think of it this way: You’ve borrowed money at 3 percent, and you have some extra cash each month in your budget. Should you pay off your 3-percent-interest mortgage faster, or should you take that extra money and invest it where it could earn 6 or 8 percent? The answer varies by individual of course, but it deserves serious consideration regarding where your money will work the hardest for you.
When addressing the mortgage payoff question, I typically see two types of clients: those who make decisions based on math, and those who make decisions based on heart and emotions. Either way, our team will work with you and help solve your financial problems. If you want to be debt-free and pay off your mortgage, we’ll help you plan to do that. Or, if you’re thinking like a bank, we’ll help you invest the money you’re not using to pay off your mortgage. Regardless, we’ll sleep at night if you’re happy.
Do you have questions about buying, selling, downsizing, upsizing or adding a vacation home? Please – consult with us before making any major decisions. We’re always here to help.
Article by David Smyth, Senior Partner at Family Financial Partners — a financial services firm in Lexington, Kentucky.
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