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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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I never understood why one would pay off the mortgage or not have one. Why pack the walls with money when you can invest in the market (s) that over time have been far superior in providing long term growth. In the upper 70’s I refinanced to a 30-year mortgage a few years ago at a rate slightly in excess of 3%.
Can you sell a bedroom and take a Viking River cruise? Can you sell the commode and pay for a new car? Let’s not forget the carrying cost of that annual property tax.
Let’s say in year 2000 someone had bought a $200,000 home with 20% down and invested $150,000 in the market. The $200,000 was the amount of money left after selling prior home. The S&P 500 through June 30, 2023 and three bear markets would be worth $473,000.
In my thinking a house is a place to raise the family and a refuge from the “outside world”. A house I live in is not an investment in my opinion.
Like the author my father built our house and even dug the well. I lived in that house until this one in 1973. We paid $47,500 and because of location it could sell tomorrow for $1.3 million. That same $ in the S&P 500 as of 06/30/2023 in excess of $7 million.
Interesting article and makes one consider how different we all are in our approach to wealth creation.
Al, I’m glad you found the article interesting. Thank you for your comments. I am content having “enough”.
Carrying a mortgage and investing the money in the S&P 500 instead should indeed generate a better return. But there’s also a vast difference in risk. Paying off a mortgage offers a guaranteed rate of return. Buying a diversified stock portfolio comes with no such guarantees — and this is coming from somebody who has invested heavily in the stock market his entire life.
It’s interesting how people looking to finance a house are bemoaning current mortgage rate of around 7%. In 1984 when my wife and I purchased our first home our rate was 13.5%.
Many of the posts below address HELOCs. When I was facing a potential job loss I took out a HELOC and paid off the small balance remaining on our mortgage. The thought process was that if I could not find a new job quickly enough after I was laid off all we would be obligated to pay was a few hundred dollars interest rather the several thousand dollars of the mortgage. Because we have always lived well below our means when I was between jobs for a few months we were able to pay same amount off of the HELOC as the mortgage. We never used it for anything else.
Ken, great article and I’m with you on the psychological benefits of being debt-and-mortgage-free.
And when you said: 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, it called to mind poker champ Annie Duke’s admonition to avoid “resulting”, mentioned in previous HD articles. That is, judge an action by how reasonable it was in light of the factors known at the time rather than those that appeared later.
Thank you, Andrew. I have a number of areas in my financial history where “resulting” could cause unnecessary self-recriminations. You may hear about some more of them if you read my future articles.
I agree with your thinking on the Homefront Ken.
I recall Westinghouse in the 50s and 60s before Google’s reviews its agreed upon timeline.
History is a powerful incentive, rewritten once again.
Google displays a typical business lifecycle.
A traditionally structured manufacturing operation was constructed, along with approximately 1sq. miles worth of support staffers housing across the street. With railroads access on its right side and water access to docks on the left side, if needed.
There are numerous Mills, now Apt.complexes on that tributary now.
You can see it on google maps.
It’s now called Westinghouse Plaza.
Residential, Commercial, Playgrounds, Schooling.
westinghouse readville mass
I recall Westinghouse as a General Electric competitor. I’d heard it was aiming for gov. contracts initially.
Starting with its support of its general publics products revenues.
Like Sears catalogs and its Kenmore Products of that era.
I agree with you Ken, being debt adverse, no matter how it’s structured. I speculate many are additionally focused on revenues now then back then. I do recall an employee of westinghouse fruitlessly appealing to the shops stewart many yrs. after its bankruptcy.
I’d known a couple of its staffers. Having dumped its debt, including pension modifications. sad.
I lived in an apartment within walking distance of work for many years, saving and investing money I would have spent on a car. After retiring, I bought a townhouse for cash because I couldn’t bear to be in debt. This probably wasn’t the best decision financially, but I am not sorry I did it. I realize I’ll never have a perfect FICO score because “lack of installment loan information,” but that’s OK.
Great article, Ken. Thanks for sharing.
I’m with the other commenters and dislike debt. We’ve been debt free for decades. I was a CPA for 40 years and “classify” people as savers or spenders.
In 1990 we moved so I could take a position with a regional CPA firm. We had a 30 year fixed rate mortgage, around 10.5%. In October and November, I paid an extra $100 principal each month. Just for grins, I plugged the numbers into an amortization program to see the effect, and if I remember correctly, those 2 $100 dollar principal payments early in the life of the loan cut around 8 years off the term; that would be all interest! (I used to have all of the formulas memorized for the CPA Exam.)
Most people I’ve told, aren’t interested in this concept, and blindly make bankers richer. The largest client in our office owned 4 state chartered banks and 1 nationally chartered bank. As I learned about bank accounting and taxation, I can only say a well run bank is like being able to print your own money.
“Those who understand interest collect it; those who do not pay it.”
Thanks for the encouragement, Jeff. Banks have enough tools at their disposal to enrich themselves without additional help from us.
Thanks for a good post Ken. I consider myself fortunate for the example of my parents in my dislike of debt.
Best, Bill
Thanks for the kind words, Bill.
Everybody’s different. I would never buy a house for cash alone — I’d much rather have my money invested, working hard but still readily available, than stuck in the walls of my house where it’s not easily accessible.
Plus, at the right rates a mortgage makes financial sense. My last house was financed at 2.87%, and my current one is at a fixed 3.25%. At those levels compared to inflation, I’m making my unchanging mortgage payments with cheaper and cheaper dollars as time goes on.
Some folks here proclaim peace of mind from being debt-free. For me, peace of mind is a big chunk of money in the account if I need it, and knowing I can access it right away without a HELOC or a 2nd — or a forced home sale.
And if something terrible happens to the house, I’m not at the mercy of an insurance company paying me, or not paying me, in a timely manner. Lots of folks in Fort Myers know about that. Many will never get their money back out of their paid-off, destroyed walls.
No contest for me. I have no other debt, but I love my mortgage.
I’m in the exact same situation. Low interest rate on our mortgage, no other debt, and no interest whatsoever in being house-poor again, after a couple of decades of having most of our net worth tied up in our house. When we sold our home four years ago, we put 25% down on our new place, set aside some cash to furnish and decorate it, and parked the rest in online high-interest savings accounts so that the cash is easily accessible in an emergency.
One thing I’ve learned about since becoming a Humble Dollar reader is “reconstituting” a mortgage, which I’m going to look into when we retire. I checked, and our mortgage company allows that option.
Mike, thanks for your comments. It sounds like you have an approach that works well for you. I have friends who have had a miserable time dealing with their well-known insurance company after a dump truck rolled into their house. Your concern is well-founded.
“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…”
This is also a good illustration about how our emotions can impact our financial decisions, and how we feel about something is often just as, if not more important, than what the data would logically direct us to do. As we grow older, I think, recognizing this interplay between data and emotion can lead us to making better financial (and life) decisions–at least I hope so.
It’s easy to look back and second-guess some of our decisions, as oftentimes we’ve lost the emotional connection that we had to the factors that led us to make a particular decision at the time. Looking only at the data isn’t a complete picture, and isn’t really fair to our former selves, either.
On this particular issue, I’ve allowed myself to evolve somewhat. Like you, debt of any sort used to bother me a great deal. These days though, a low-interest loan doesn’t bother me at all; we recently needed to do just this to finance some much-needed home repairs. On the other hand, a high-interest loan bothers me a great deal; when that same loan’s rate skyrocketed this year, I quickly paid it off and got rid of it. I can’t honestly say I’ve purged all emotions from our financial decisions, nor do I see that as a desirable goal. But I am learning to manage the interplay a little better.
Thanks for your insights. Sorry for the delay in response, apparently there was some website maintenance going on that blocked my posts. I expect that I have evolved a bit as well. If I had been buying a house in 2020 rather than 1992 or 2000 under similar personal financial constraints, I might have found my satisfaction merely in locking in a low fixed rate mortgage.
Ken,
Great post!
Both my wife and I are debt-averse like you.
We did have a small mortgage, easily manageable on two incomes, for about a decade.
I have to say that that situation really bothered us.
Now we have no mortgage debt. Pay Cash for our cars.
Buying first, moving, and THEN selling our old house DID require use to the HELOC on the old place for a few months. It served as a good reminder as to why we dislike debt so much.
Now we are mortgage free. Yes, we do pay HOA on our condo. And we still have other costs like utilities.
But we do FEEL better knowing our liitle box is OURS! And not co-owned with a bank.
Thanks, again, for the great post!
Thank you, Winston! It sounds like you understand my mindset quite well. I can’t quantify or put a price tag on the value of debt-free financial peace of mind over many years beyond saying it is substantial.
Good for you Ken. Like you, I hate debt. I did have a mortgage for our house, but paid it off in 17 years. We buy our cars with our own funds. I have used HELOC for partial financing but paid it off quickly. The HELOC is for emergencies and has been rarely used. I did use it for a kitchen remodel, but paid it off in a few months.
There is a certain satisfaction in knowing you, not the bank, own your home and cars.
Debt is necessary sometimes, but I believe our modern world relies on it way too much.
Thanks for reading and commenting, Jerry. And I definitely agree with your last statement.
Dave Ramsey would remind us that there is a risk to having a mortgage and that (beta) is rarely if ever factored into an analysis of holding a mortgage vs. what your market returns might end up being. Smart and safe move on your part I would think.
Thanks Jeff. I don’t follow Mr. Ramsey too closely but I think his aversion to piling on debt is spot on.
Ken, I’m with you on your decision to avoid debt, though I know it’s possible for a person to have circumstances that make it difficult. Still, the sacrifice made to limit debt in amount and duration can be worth the weight it removes from the mind.
Thanks for commenting, Edmund. Delayed gratification is ultimately immensely satisfying, in my experience.