Pay down mortgage debt or save more for retirement?

originally posted by: Boadicea
a reply to: Edumakated

May I pick your brains too pretty please?

My son and his wife are looking to buy their first home. We have advised them to buy the biggest home they can comfortably afford, where they feel they can be happy indefinitely, as opposed to buying a smaller home with the intention of moving up in a couple or few years. Others have advised them to get a starter home, then sell in a few years using the equity to move up to something bigger. That makes no sense to me. Especially because my daughter-in-law is anxious to start their family, and my son won't start a family until he's settled in a home. My concern is that the market won't go up, and they'll be stuck in a small home. But even if the market does rise, it will be even more expensive to buy that bigger home, plus the closing costs that will come with it. Are we missing something?

Also, when they do buy a home, we plan on giving them one month's mortgage payment to pay towards principle immediately, thus reducing the interest over the life of the loan. It seems to us that in the grand scheme of things, they will benefit more from paying down the principle/reducing interest/increasing equity, than if we gave them the same amount for their down payment. Plus, we already gave them some cash when they got married for their down payment. Are we figuring correctly?

These may be stupid questions... and if so, I apologize... but it is what it is!

It all depends.

Some people stretch to buy a home. This is ok if you are confident in your earning ability and income will likely rise.

It used to be that you could buy a starter home and sell in a few years. However, that isn't always the case. Then you have to factor in transaction costs of selling.

I'd tell them to buy a home they could live in for at least 10 years... with kids. In addition, they need to factor in the cost of daycare in their budgeting. It would suck for them to buy a larger home and then couldn't afford day care if needed.

The biggest factor imho is buying an area with good elementary schools.

There isn't a huge difference between giving the a payment or assisting with down payment.

a reply to: Edumakated

I'd tell them to buy a home they could live in for at least 10 years... with kids. In addition, they need to factor in the cost of daycare in their budgeting. It would suck for them to buy a larger home and then couldn't afford day care if needed.

The biggest factor imho is buying an area with good elementary schools.

Thank you -- very good advice. I'm kicking myself for not thinking of it myself.

When we bought, we couldn't afford the best school district, but we managed to get into the second best. That was very important to me. I don't know why I didn't think about it now!

They are looking in the same school district as it is -- just not specifically for that reason. More because it's convenient to their work, and their families. But I will mention it anyway!

Thanks much

a reply to: TonyS

There's simply no place for middle class retirees in the US in 25 years except maybe a trailer in the remote Appalachian area.

I actually think that is going to change too. Thoses area once considered cheap are being flooding with retirees. Look at
Tennessee! Look at Florida. There was a time in a not so distant past that Florida was mostly rural!
The other thing is that some have figured out the Appalachian area (some) is perfect for growing hemp.
Next 20 years is going to be interesting.

originally posted by: Boadicea
a reply to: Edumakated

I'd tell them to buy a home they could live in for at least 10 years... with kids. In addition, they need to factor in the cost of daycare in their budgeting. It would suck for them to buy a larger home and then couldn't afford day care if needed.

The biggest factor imho is buying an area with good elementary schools.

Thank you -- very good advice. I'm kicking myself for not thinking of it myself.

When we bought, we couldn't afford the best school district, but we managed to get into the second best. That was very important to me. I don't know why I didn't think about it now!

They are looking in the same school district as it is -- just not specifically for that reason. More because it's convenient to their work, and their families. But I will mention it anyway!

Thanks much

School districts are extremely important. In fact, I'd say buy a smaller, more expensive house in the best or good school district over a larger cheaper house with a bad school district.

I see people make this mistake all the time. When you are childless, it isn't a big deal, but if you plan on having kids, you absolutely need to be a in good school district. Any money you save by buying in a bad school district could be thrown away by private school tuition.

I live in a fairly expensive area in Chicago. We have high property taxes. However, we have top notch schools from K - 12. Many people don't move here because the property taxes seem high (and old historic homes that need TLC). They often buy in neighboring communities with larger homes and lower taxes. However, they then don't want to send their kids to the schools district and wind up spending way more on private school tuition than if they just bought in a community with good schools.

a reply to: CriticalStinker

I like his approach to finance, however, he places too much importance on paying debt even when it's manageable. That's not always the best way to go.

a reply to: Edumakated

School districts are extremely important. In fact, I'd say buy a smaller, more expensive house in the best or good school district over a larger cheaper house with a bad school district.

That's pretty much what we did. Although we actually got a great deal. So great that after accepting our offer, the sellers tried to get out of the deal. The only thing that saved us was that we were pre-qualified and had the required down payment. We could have bought a much larger house in other districts, but this was not only in the district I wanted, it also has a huge lot. And now, with the kids on their own, the house is more than enough for the two of us.

I see people make this mistake all the time. When you are childless, it isn't a big deal, but if you plan on having kids, you absolutely need to be a in good school district. Any money you save by buying in a bad school district could be thrown away by private school tuition.

That was pretty much my thought. It was as much an investment in their education as it was in a home. Truth be told, I wanted to homeschool, but my husband thought the kids would lose out socially and sportswise, etc. So if I couldn't homeschool, I figured we'd make sure they went to the best public schools possible.

a reply to: Edumakated


Mortgage is probably the biggest outgoing in any household? So paying down

my mortgage gave me the biggest sense of security,

If I hit hard times I could live on beans on toast, egg on toast etc.

I could let a room or two rooms......

Fortunately I never had to, and the roof over my head has cost me zilch

over the past twenty five or so years......

So yes again it was the best thing I ever did.

Pay down the 2nd Mortgage... easy peasy.

OR, refinance the 1st AND 2nd, at a lower interest rate, using the cash you are coming into as a downpayment on the loan, and then DO NOT TAKE OUT ANY MONEY on the deal... strictly debt retirement, and lowering your interest nut.

Doing the above will yield you a much larger return towards your retirement, VS carrying that debt and putting the new funds into retirement.

15% returns are something of an aberration. If you have 10+ or more years before retirement, the average will be much closer to 8-10%

Blue collar workers that live on less than they make and don't debt other than a mortgage, and who run moderate risk middle of the road investment portfolios, will be millionaires by age 65.

But the living on less than you make and not incurring debt are ESSENTIAL to make that happen.

Good luck to you!

originally posted by: Boadicea
a reply to: Edumakated

I'd tell them to buy a home they could live in for at least 10 years... with kids. In addition, they need to factor in the cost of daycare in their budgeting. It would suck for them to buy a larger home and then couldn't afford day care if needed.

The biggest factor imho is buying an area with good elementary schools.

Thank you -- very good advice. I'm kicking myself for not thinking of it myself.

When we bought, we couldn't afford the best school district, but we managed to get into the second best. That was very important to me. I don't know why I didn't think about it now!

They are looking in the same school district as it is -- just not specifically for that reason. More because it's convenient to their work, and their families. But I will mention it anyway!

Thanks much

I would interject that in my opinion that school districts have to be given more thought than just looking up the ranking on some web sight.

Obviously a higher ranking school is always better ... but if you can't afford the house you want in the best district its not always right to find a less desirable house in that better district.

For my own personal story; I bought a house that I could comfortably afford when I was 26 at a salary less than I make now that I am 40; it was big enough to have a family of 4 or 5. But it was in a school district that ranks just above the mid range for my area. I could have bought a smaller starter home in a better school district or I could have bought a bigger house if I stretched myself.

Buying the home I could comfortably afford but would fit my family helped me whether the great recession. While the last 13 years sucked for me as far as equity goes; I never felt uncomfortable or uneasy about what was happening. I knew that no matter what happened, even losing a job, I could afford the house. It's only gotten more comfortable as my salary has increased.

As for the school district goes; those rankings don't take into consideration external factors. You can put a great well resourced school in a working class neighborhood and it will get a lower score than it would if it was in a affluent neighborhood all its internal workings being the same. For example the scores are made up in part based on how many kids graduate into higher education; the school can do a great job preparing kids for college but if the towns people have less money to send their kids to college than that score goes down through no fault of the school. Same can be said for the amount of time working class parents can afford to spend on educating their kids vs affluent parents. That will certainly affect standardized test scores through no fault of the school.

So if you know for sure you can support your child on a road to success no matter what school they attend than jockeying for that higher scored district at the expense of a nicer house may not be the right thing to do.

Most of the school districts where I live are adequately funded; some more so than others but I would be comfortable sending my kids to most of them knowing that I would be able to back stop any difference. So when it came time to buy my house finding the best school district was not at the top of my list of priorities.

A friend of mine who had his children in one of the lowest ranked districts found that his children, who did quiet well because he back stopped any differences, were given a lot of scholarship opportunities because they did well in a low income school district.

a reply to: DanDanDat

Totality of circumstances for everyone will vary -- so good points!

In our case, back when we were looking, we didn't have ratings and school "report cards" like we do today. That didn't come until my kids were in high school. So at the time, I was looking more at what reading method they used to teach -- whole language vs phonics -- and the electives offered in high schools, such as shop classes. Our school district used a combination of phonics and whole language, based on a New Zealand program that was considered the best at the time. They also taught musical instruments starting in 4th grade, which was a couple years earlier than other districts which didn't start until middle school.

So I really had to do my own homework!

a reply to: JAGStorm
You are quite correct. Its a minefeld in terms of picking a place to go and my advice is to be extra careful to pick low population zones with very few schools. Property and school taxes will eat the retiree alive if they are not careful.

Pay off the second mortgage. Then take what payment you saved and invest it or pay down your first mortgage with it.

Our house is paid off, we never got more than a fifteen year loan on it and it has been paid off for around five years now. It sure is nice not to have that payment every month.

Pay down debt first.

An investment is an unknown. It could go up, it could go down.

Paid off debt is a sure thing.

Investing doesn't do you a bit of good if you lose your income via a layoff/downturn/etc, because then you still have the debt and will be very tempted to pull that investment out (at a penalty) just to live/pay bills.

The peace of mind alone knowing that you don't owe anybody anything is worth it.

Would you rather have great investments with lots of debt or good investments with no debt?

a reply to: DanDanDat

maybe the better question is how are you making 15% in your portfolio?

I have to wonder at these interest rates.

15% on investments? Who do you invest with. I need that accounting firm.
and 7% on a home mortgage? You should refinance immediately. That is ridiculously high.

a reply to: cynicalheathen

Paying off your house does not alleviate you from monthly payments.
You still need homeowners insurance and you need to pay the property taxes.
You'd be surprised just how much of your monthly payment does not go to paying off the house.
I paid off my house years ago and still make a payment every month just not to the mortgage holder.