No Interest

Ken Cutler

THE HOUSE I GREW UP in was built in 1950 by my father, with some assistance from his best friend Joe, who was a master homebuilder by profession. After his work day as an accountant for a local hardware and lumber chain, my dad would head over to the job site and labor into the night.

My mom also provided some sweat equity, painting and even swinging a hammer at times. I was born in 1962, so I wasn’t a witness to our home’s construction, but I did reap the benefits of growing up in a well-built house in Moorestown, New Jersey, a comfortable suburban community not far from Philadelphia.

At some point as a young man, I became aware that our house had never been encumbered by a mortgage and, having a naturally strong aversion to debt, I internalized that strategy as something to emulate. Alas, I didn’t inherit or acquire my father’s construction skills, so building a home with my own hands wouldn’t be an option.

After graduating from Virginia Tech, I rented an apartment in Lancaster, Pennsylvania, for seven years. As a young, single engineer, I didn’t think too much about buying a house. That changed in 1992, when I married my lovely wife, Lisa. After living in a rented townhome for several months, we got the bug to purchase our own place. I disliked the idea of taking on a mortgage, but we couldn’t afford to pay cash even for the modest starter homes that we were looking at.

Fortunately, my dad was willing to lend us some money. I was able to bypass the banks by putting $66,000 down on a $98,000 split-level house, with my dad lending us the rest at an 8.5% interest rate. Because I hated being in debt even to my father, I ended up paying off the loan in a little over two years.

Our daughter Lauren was born in 1994 and our son Dan in 1997. Our little split-level was starting to get cramped and, by the start of 2000, we began thinking seriously about moving. Eventually, we found a lot in a nearby new development, and signed a contract to build a house.

We kept the cost for the new house at under $200,000. That was roughly the amount of cash we would have after selling our old house. The tricky part was that we were to settle on the new house a week before the sale of our old home was scheduled to close. Still, we had a great realtor, and she worked a deal whereby the builder lent us the necessary funds through a seven-day bridge loan. So, in November 2000, we owned our beautiful new two-story colonial home outright—but with very little cash left on hand, save for a modest emergency fund.

How did this all work out financially? One of the reasons I wanted to avoid a mortgage was that I didn’t like the idea of making interest payments to the bank. With interest rates in the 8% range at the time of our home purchase, the “return on investment” from this avoided expense seemed like a good deal, even after accounting for the mortgage-interest tax deduction.

Eventually, interest rates began a steady decline. Mortgages became increasingly affordable during the first two decades of this century, and many homeowners refinanced—often more than once—to take advantage of the lower rates. Would we have been better off financially if I’d piled money into my 401(k) rather than saving aggressively outside of retirement accounts so we could purchase the house for cash?

Probably. But I’ve never done the analysis, nor do I have much interest in doing so. The psychological benefit of not having a mortgage has been substantial. I made what I thought was the best decision based on conditions in play at the time of our home purchase, and those conditions happened to shift in the years that followed.

This, I believe, is yet another example of why we need to approach our financial lives with humility. Decisions that appear to be no-brainers at the time can seem far less clear-cut when we evaluate them years later.

Ken Cutler lives in Lancaster, Pennsylvania, and has worked as an electrical engineer in the nuclear power industry for more than 38 years. There, he has become an informal financial advisor for many of his coworkers. Ken is involved in his church, enjoys traveling and hiking with his wife Lisa, is a shortwave radio hobbyist, and has a soft spot for cats and dogs.

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