I’m struggling with whether to get debt free as fast as I can or use the equity in my home and invest. I’m in the process of refinancing and cashing out $40K. I don’t have any liquid savings. I do have a little in 401K. I’m in my mid 40’s. Some say get out of debt but other’s like Ric Edelman says to carry big long mortgages. I’m confused.
Is it better to get debt free then think about investing or invest now?
Thanks for your help. So many different views out there.
Nice to see my buddy Ric mentioned. I’ve never been a big fan of the big mortgage approach. I understand his logic and the math on that (borrow at low rates and invest the cash for higher rates) but for me there are things which are more valuable that the spread on borrowed money and investment. There is a tremendous emotional value to not having a mortgage at all or having a small mortgage.
This does not have to be an all or nothing approach. If it was a perfect world I’d rather see you not refinance and instead focus on taking your extra money each month and use half for debt reduction and the other half for putting away each month. With that half put half of that into a boring old savings account and the other half in investments. So of the 100% of the extra money you have each month, 50% used for debt reduction, 25% savings account, and 25% investments. You can use the debt snowball method to get out of debt faster.
I’m a fan of keeping the mortgage as low as possible so that in the event of an unexpected situation you do not wind up in a position where you can’t afford your big mortgage payment. This past unexpected economic downturn has been a great example of that.
If you look at the massive foreclosure rates you will find many people that had maxed out their mortgage in recent boom times only to lose their homes to foreclosure now when their income dropped or job was lost and they could no longer afford the big mortgage.
Think about it like this, a person with no mortgage can never lose their house to foreclosure.
I really hate to confuse you with an exact opposite position here but even though Ric is a friend, I just don’t agree with his approach.