That’s exactly why we are taking out a HELOC now while my husband is still working. Do not plan on using it but to know it’s there is comforting.
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@shawbridge, I meant to imply no such thing. We maintain a modest 3% mortgage and the value of our imputed rent never enters our minds.
I was just pointing out that economists have a name for this.
I doubt we’ll see it happen anytime soon, but there are occasional proposals to treat this imputed rent as taxable income.
Imagine that, you pay off your mortgage and you have to pay extra tax to live in your free and clear home!
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I see how this could happen. Suppose you have a million dollar house where taxes and insurance are $1500 month and you put a small mortgage on it where your P&I payment is $500/month.
$2000/month payment, Of which T&I are 75%.
I don’t doubt that property taxes and home insurance can make up a large component of (escrowed) mortgage bill. My question instead related why this would impact decision of whether to pay off mortgage early? You still have to continue paying the high taxes and insurance, after you pay off the mortgage.
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I see, I misinterpreted the post to which you referred.
In our case we will keep our 3% mortgage until it’s fully paid; from my perspective because 3% is cheap money, from my wife’s perspective because she’d rather pay T&I monthly than get a fat property tax bill.
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There are 3rd party services that can provide something functionally equivalent to an escrow account for taxes & insurance without a mortgage, such that you get a monthly bill for taxes & insurance rather than semi-annual bill. However, this seems like a service that would be unnecessary with good financial planning.
I personally would prefer to have the option to pay taxes and insurance when due rather than being forced to make partial payments early. I’ve intentionally never had a mortgage that included property tax and insurance as part of mortgage bill.
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@oldfort any idea how they calculated pensions? Are they considered an income stream for loan purposes?
I agree. I would rather control what I pay rather than have a bank make a spread on the money that I prepay to them. Early on, we were able to do that, but with subsequent mortgages, the banks insist upon it. I wonder if they also charge fees in addition to making a spread. At the time, the Loan To Value ratio was probably only 25% and is now a lot lower because of the crazy bump in property values due to the Pandemic. But they absolutely insisted on paying the prop taxes and insurance.
On the insurance side, we had a $30K claim last year. A midcentury modern toilet that may have been in this midcentury modern house since it was built in the 50s cracked. There was a fairly big leak, which the insure got people in to remediate quickly so the damage was quite limited and our contractor did the repairs. But, then they raised the insurance for the upcoming year from $14K to $20K. I was able to lower the insurance cost at the suggestion of the agent by limiting the amount they would have to pay for non-built-ins (furniture, art, tvs etc.) and increased the deductible from $5K to $10K. The minimum I could reduce the cap on the value of the non-built-in items (they have a word for this) was still crazy high.
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We have a very steady unearned income level. We already have a HELOC.
have you run the numbers to see what that escrow account is costing you?
Let’s say, 10k per year for taxes, $5k due every six months. How much could you be earning in a MMF from which you’d have to cut a check?
Does your escrow account pay interest?
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One other factor that weighed heavily on our decision to pay down our mortgage early that hasn’t been discussed is debt aversion. DH and I are both so debt-averse (a close cousin to loss aversion) that we really were agressive about paying off our house early. We knew that it was supposedly the ‘wrong’ thing to do since our interest rate was low (mid-3s) and that instead we should have put that extra $ into the market.
HOWEVER, we also knew that we simply wouldn’t have done that: instead, we would have blown much of that excess cash by eating more take-out, buying more expensive clothes, etc. We were much more disciplined about paying off debt than we would have been about saving that same amount.
We did the same with DH’s student loans (i.e., paid them off early despite a low interest rate) and we’ve never regretted it. It feels great to be heading into early retirement in the next few years debt-free!
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The math is simple. Our T&I is about $15,000/year, with taxes paid in 2 installments. So the average escrow balance should be about $4,000, which would be earning interest at about 3.5% in our Fidelity government MM account. That would be around $140/year.
Not enough to induce us to prepay a low rate mortgage, but significant enough that, once it’s paid off, it’ll be easy for my wife to understand that the escrow account was costing us money.
Pension, SS, annuities would be considered income.
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We are debt averse, but in all honesty, we just live pretty modestly. Our mortgage was laughably small (bought our house in the mid 80’s with a good down payment), and the interest payments were not very high. Our property taxes are also quite low. We never felt the need to get a different house. For us, it was never really a big deal to pay off a mortgage that didn’t really benefit us.
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I discovered an interesting thing when trying to figure out why my house insurance was so high. I purchase replacement cost insurance so that if there is a problem, the company has to pay to return the place to its former state – in a total catastrophe, the company would have to pay to build a new house equivalent to the current one. That’s good. But it turns out that they also have to replace the non-built-ins (I think they call this personal property). They were insuring this for over $1 MM. I can’t imagine we have anywhere near that. ShawWife does not have expensive jewelry. We have nice-ish furniture but it did not cost that much. We have computers, ipads, phones, airpods etc. Bicycles, suitcases, sports equipment. But I can’t figure out how replacing this new gets anywhere close to $1 MM (and I think the amount they had used was significantly higher). They dropped it to the minimum they were allowed to, which still seemed quite high. It helped reduce the insurance premium (as did increasing the deductible from $5K to $10K.)
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This obviously varies across carriers, but my insurer assigns a value of 50% of the home value to the contents. This does not include jewelry, art, etc. I was able to have them agree to reduce the content coverage to 40%, but that value still seems far too high. Nothing I can do about it, similar to their 10% value for outbuildings. (I do not have any other buildings on my property.)
I pay for replacement cost for contents but extended replacement cost for the structure, which basically means the insurer will pay to rebuild or restore my home to its exact original condition after a covered loss, even if the final rebuilding costs exceed my policy’s stated dwelling limit.
Do you carry a separate rider for your wife’s artwork?
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This. When we moved into our House1 back in 1999, I was shocked that MetLife assigned a value of $200k to our possessions. Not counting the cars, our stuff was at most $20k to replace! IKEA is cheap!! I tried arguing with the insurance company but they wouldn’t budge. It was their policy. A certain percentage of the house replacement value it was. I don’t think we acquired that much since then but we ditched MetLife a few years ago because they wanted us to replace our roof and would not take the opinion of a licensed roofer into consideration.
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With a variation among carriers, there can also be a wide variation on costs, if you shop around. This may be particularly true for shawbridge, as he mentioned having a $30k claim last year.
When I had a ~$30k water damage claim several years ago (load in 2nd floor washer overflowed to 1st floor theater below), my insurance company dropped me. I found a new insurer that did not increase rates for me, in spite the recent claim. Their adjuster was able to ignore the claim in their models because I provided photo proof of taking steps that eliminated future risk of the same type of water damage event. These steps took ~5 minutes and cost me under $10.
My current home insurance gives me flexibility in choosing what replacement costs I want, what value of home items/component I want, etc. I can vary different aspects of the coverage and preview how rates change online. For example, if I increase deducible from $5k to $10k, it’s a 3% reduction in premium. However, if I were to add a water auto shutoff valve, that would be a far larger reduction in premium. They also have reductions for demographic type factors, associated with lower risk. For example, if home owner is age 50+, can request significant discount. I’ve also received discounts for things like finding errors in their website calculations/functionality .
Ugh Home Insurance. The stupid replacement cost is what kills us. We have to insure our house now for over $1 million when I could maybe, if lucky, sell it for $350K, $250-$300K is more likely. If it were to burn down, there is zero chance of building a million dollar home on this lot. Possibly $400K. But that’s what they require.
And the personal property? At one point, I did successfully talk them down some - somewhere in the neighborhood from $750K to $500K. The agent was saying things like “You’d be surprised at how much it will all add up.” I replied. “You don’t understand. We shop at WALMART. Target if only on clearance.” I do not have $750K worth of stuff. Of course, I just looked and it’s drifted up over the years to $850K… Sigh.
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I had a broker shop it a little more than a year ago, and confirmed that I am best off where I am. The lower end carriers cannot provide the level of coverage needed, and the higher end carriers (Berkley, Pure) could not match the premiums because of the discounts I have from being a longtime customer. So I remain, with excess coverage for contents and outbuildings.
And yes there would be premium reductions for water shut off or a full house automatic generator.