Personal Finance (Not Investing) • Payoff mortgage or maintain liquidity?

When you own your house you are vulnerable to non insured disasters or events. I had this happen to my prior house, mortgage balance was very very low, market value was $600,000 , an event took place that dropped the value to zero. I was able to sell the property to the county and at least got something, otherwise it would have been almost a total loss.

I don't have a mortgage on my current house and I know I'm taking that risk again.

I’m not sure I follow your logic. If you had had, for example, a $400k larger mortgage, then you would have also had an additional $400k in financial assets. So while you may not have cleared anything on the house sale, you would still have those additional financial assets that are not tied to the house. Then the bank either would have had to claw those other assets back if they can, or if not you could have walked away from the loss event and still had the $400k in assets.

Generalizing, if you are in a non-recourse state & you are willing to walk/short-sale, the only amount at stake for you is your equity. Given the same house value and the same net cash position, a larger mortgage is less risky because your equity is lower.

If not in a non-recourse state or not willing to short sale, then you are indifferent to the mortgage size, the total amount at risk is your total house value regardless of the mortgage.

So in either scenario, you either come out the same or ahead with a larger mortgage. This is why the bank always requires insurance, otherwise they are setting themselves up for big losses in the event of a total loss of the structure due to fire, etc.

I know that people generally don’t like to walk away from their financial obligations, but if a situation ever calls for it, it would be “I suffered a $600k uninsured total loss on my house.” Short sales or non-payment of debt isn’t illegal as long as you are not defrauding anyone, etc. I once suffered an (insured) total loss just 6 months into a mortgage, at a time when I had few other financial assets to my name. If that loss had not been insured, no way was I going to sit there paying off the mortgage on a burned out house for the next 29.5 years. Sorry, not happening. Bank can screw my credit if they wish, but you do what you gotta do.

If there is a quibble here it would be that the assumption that your “net cash position is the same” is not often met and the likely alternative is that the additional cash from the larger mortgage is instead invested in risky assets, e.g. stock. In that case you are in a riskier position, but the additional risk (and reward) comes from having a larger position in risky assets, not from the mere fact of the mortgage. Something to be aware of.

The other assumption that maybe is not often met is that you have the same house value in either mortgage/no-mortgage case. For most people, the decision on how much house to purchase is greatly affected by whether they are paying cash or getting a mortgage. With a mortgage you will generally end up with the same home equity and similar amounts of unrelated financial assets, just more house & more debt, and yes, more risk. This is kind of a subpoint of the above, since real estate is just a specific type of risky asset that might be purchased in lieu of keeping the mortgage proceeds in cash. (Who gets a mortgage and then keeps all the proceeds in cash just to have liquidity? No one.)

IMO the larger takeaway is that by setting up a fantasy scenario and waiving away all the day to day concerns, the entire exercise becomes quite theoretical and almost pointless. Often there are large differences in risk free rates for borrowing vs lending, and a whole host of other considerations.

I'm not sure why you quoted me, nothing you mentioned had much to do with my explanation or situation.

Statistics: Posted by evancox10 — Tue Mar 05, 2024 4:02 pm — Replies 46 — Views 2331