patrick.net

Isn't it fun when the other players in the game also write its rules?

Oh man, I got a credit score report from Experian a while back. The only negative thing on my report was, "You don't have a mortgage. Paying a mortgage shows that you are fiscally responsible and capable of honoring a long-term financial obligation. Consider taking out a mortgage to increase your credit score."

bmwman91 says

I got a credit score report from Experian a while back. The only negative thing on my report was, "You don't have a mortgage. Paying a mortgage shows that you are fiscally responsible and capable of honoring a long-term financial obligation. Consider taking out a mortgage to increase your credit score."

the ironic part is, assuming you don't have other installment loans, your FICO score drops when you pay off the mortgage since there is no longer a mix of revolvers and installments

What they are saying is that by making principal prepayments, you build your net worth faster by significantly reducing the interest that you will pay to the bank over the life of the loan.

from the article

Summary:
Building equity in a home is a great way to increase your net worth.
Building equity to have portable wealth to take with you is important.
Owning your home free-and-clear when you retire is a great goal.
Paying off your mortgage faster is a great way to build net worth.

ok, i figured it out, but building equity via housing is one of many options (and a terribly slow way to build equity)

CASH 100
OWNERS EQUITY 100

CASH 25
HOUSE 500
MORTGAGE 425
OWNERS EQUITY 100

CASH 15 (1 PRINCIPAL, 9 INTEREST)
HOUSE 500
MORTGAGE 424
OWNERS EQUITY 101

bmwman91 says

Isn't it fun when the other players in the game also write its rules?

Oh man, I got a credit score report from Experian a while back. The only negative thing on my report was, "You don't have a mortgage. Paying a mortgage shows that you are fiscally responsible and capable of honoring a long-term financial obligation. Consider taking out a mortgage to increase your credit score."

Credit score system in USA is a great ponzi scheme on this planet. Banks say, you become my slave and I give you points for your slavery.

FICO is a joke! Mine dropped below 800 this year because of "no recent revolving lines of credit." Serves me right for paying off my cars and student loans early! And then there is my completely inexcusable lack of credit card balance. I'm really a shaky bet, I guess.

Quigley says

Serves me right for paying off my cars and student loans early! And then there is my completely inexcusable lack of credit card balance. I'm really a shaky bet, I guess.

You answered your own question.

Buy something you have cash for and finance it interest free from sears .

Oxygen says

Building equity in a home is a great way to increase your net worth.

Building equity to have portable wealth to take with you is important.

Owning your home free-and-clear when you retire is a great goal.

Paying off your mortgage faster is a great way to build net worth.

Response to the Article points, not meant to offend Oxygen:

Building Equity (difference between any lien interest on the property and what it is perceived to be able to sell for) in a home..... By paying down the principal balance is just trading cash wealth for house wealth, making the wealth LESS liquid, but converting it to a vehicle that does not go down in value due to inflation. By an increase in perceived "able to sale" price does not necessarily increase wealth per se, rather it allows one to remain at parity with what they had before, and could actually be bad for the homeowner if they think they "own it free and clear" due to property taxes increasing via increased "valuation". A person that does not want to sell their house or take out a HELOC has NO logical reason to want house prices to be higher as they will be paying the price of higher taxes. Only when it is required that the financial vehicle becomes liquid again does an individual want the "value/price" to at minimum have risen with parity to other comparable vehicles or surpassed those.

Building equity to have portable wealth.... Well, I think I made myself clear in the above paragraph. It is relatively Illiquid wealth relative to CASH. And at the time that it becomes liquid again, it is at the terms of you and another individual which should ultimately have the upper hand as they are bringing the liquidity to the table that you so desire.

Owning your home free and clear...... HA HA HA HA HA.... I could go on with the laughter. Anyone duped into thinking that they are not paying rent to the government needs to pull their head out of the sand. Property Tax is the RENT you pay to the government that allows you to Reside on THEIR land. Yes, those property taxes go to pay for MANY different services, but a fee structure for use of those services based on wealth (means to pay, within reason, not some BS you have $5,000 net worth you pay 5 dollars, he has $1,000,000 net worth he pays $10,0000) might be a more equitable solution to replace property taxes. As the services that the lower net wealth fellow would be receiving would be the same as the higher net worth individual would, actual thought would have to be put into how to structure fees to make them logical and agreeable. I don't see a real problem with allowing a 1 residence property tax exemption to exist if a service fee structure was put in place, as that would allow someone to ACTUALLY own their home/property free and clear without fear of loosing it because they didn't have the money to pay their property tax. As it is now, You can't stay somewhere RENT Free, someone is paying rent to the .Gov for that patch of ground.

Paying off mortgage faster..... Build net worth? ehhh, that's a stretch, what it does do is lower the cost of acquiring the somewhat Illiquid financial vehicle that is conceived as wealth. So, less cash wealth in > to equivalent house wealth can be construed as conserving cash wealth over paying based on the original terms.

ForcedTQ says

Response to the Article points, not meant to offend Oxygen

definitely not offended. i posted this article soley for discussion on the technical aspects. the entire article is pure bullshit. anyone with accounting/finance training can spend an hour or two and tear it apart.

You can pretty much know with certainty which facts will be ignored or twisted just from looking at the source of the article.

In this case, credit.com is the source, and they make a living being part of the debt-industrial complex. Acutally, by being part of the debt-and-lack-of-real-industry complex.

They want you to get into debt, so they're going to spin it as a good thing. But it's not.

Debt is slavery.

I don't see the problem. Keep in mind the audience - this article was written for people with mortgages, who have little or no equity.

Net worth is your assets - your liabilities.
If you pay extra on your loan, you pay it off faster, and your liabilities decreases. So, unless the underlying asset prices are plunging, the article is more or less correct.

Also, there are merits to paying off your mortgage by the time you retire. 1) you lower your cost of living expenses going forward and 2) if your plan is to ultimately downsize to a smaller house once you retire, you (at least in theory) can sell your home, buy a smaller home for less money and pocket the majority of the difference.

So on the whole, although a bit simplistic, the article is mostly correct. (Although I don't follow the Building equity to have portable wealth to take with you is important.)

- not that liquidity is not important, rather, I don't see how they consider building equity synonymous with portable wealth.

Oxygen says

bmwman91 says

I got a credit score report from Experian a while back. The only negative thing on my report was, "You don't have a mortgage. Paying a mortgage shows that you are fiscally responsible and capable of honoring a long-term financial obligation. Consider taking out a mortgage to increase your credit score."

the ironic part is, assuming you don't have other installment loans, your FICO score drops when you pay off the mortgage since there is no longer a mix of revolvers and installments

Bubblesitter said it best. You see, the point system is not about you being a good bet to repay your loan. The point system is about you being a compliant slave. You aren't a slave when you aren't in debt.

EastCoastBubbleBoy says

I don't see how they consider building equity synonymous with portable wealth.

you sell the house and cash out the equity. the whole article is a stretch from the increasing net worth to portable wealth points they try to make. there are far better ways to accomplish those

EastCoastBubbleBoy says

you lower your cost of living expenses going forward

need to elaborate on that more

To elaborate as requested.

Let's take me for an example. I have a 30 year fixed. I'm making biweekly payments, and pay a bit extra towards principle every time. Based on my current repayment rate I'm due to have the house paid off in full in (roughly) 25 years rather than 30.

All things being equal (I don't refinance, I don't sell and move up to a bigger place, etc.) by the time I am in or around retirement age the mortgage will be paid off. From that point forward, rather than paying mortgage, taxes, and upkeep I am left with only taxes and upkeep.

Granted the mortgage amount will seem like a pittance 30 years from now... but it still lowers my monthly cash outlay as I head into my "golden years.

Also (and I know a few that have done this) you pay off (or almost pay off your house) by the time you retire, sell it at market rate, and move to a smaller house and/or in a lower cost area.

One guy I know bought his house 30 years ago for under $100k (not sure how much it was exactly). He just sold it for over $600k.(the northeast corridor still has its pockets that are expensive). Even factoring in taxes and commissions that were part of the sale process – he walks away with $500k free and clear.

Buy a smaller 2 Bdrm / 1 bath townhouse “down south” for $300k, or even $400k and you still have $100k or $200k left over.

Could you have done better (on paper) by investing the $100k 30 years ago. Probably. (particularly when you include the maintenance costs.) But the idea behind “tapping ones home equity” can only be done by.

1) Selling
2) Taking out HELOC
3) Cash out refinance.
4) Reverse morgatge.

One other thought… once your house is paid off, your carrying costs are lower, so you could rent it out and generate a positive cash flow.