Persuing Debt Freedom

by John Ripley

I am often asked by people “how can you claim to be in support of pursuing debt freedom and at the same time recommending the use of mortgage financing?” I admit on the surface there seems to be tension in the idea of having a mortgage – a debt - and being debt free. In the next few paragraphs I would like us to explore the idea of pursuing debt freedom together but I need your help. The help I need is for you to follow along and avoid the temptation to reach your conclusion prematurely. I like the term my friend Douglas Andrew uses when he says “suspend your disbelief”. So with that in mind let’s jump in to the deep end of the pool and swim around a bit!

As a Mortgage Planning Professional I am constantly engaged in the process of evaluating real estate finance transactions for clients and training other Mortgage Professionals to do the same thing. While doing research and planning for our clients I have noticed a trend that is quite alarming. Not only are we as a nation saving very little on an annual basis, I can confirm through hundreds of transactions that individual families are unfortunately deficient in short term and long term savings as well. While this phenomenon is pretty normal for young families and those families who have come out of difficult financial seasons, it really should not be the case for those people who have been working for many years and approaching retirement. Unfortunately, the problem is pervasive and of great concern. I hear you beginning to ask… “So how does a mortgage help with this problem? Trust me we are getting to the point but I want to make certain that we are speaking about things with a common perspective.

Another similarity among the clients we work with is the strong desire to be debt free but a lack of clarity on how to achieve that goal. The Bible is literally full of passages that deal with the proper use of money. Numerous Christian organizations have been dispensing thoughtful and relevant advice on this subject for decades. For me to assume that in a short article I could make more than a small contribution to this subject would be arrogant. However, I am confident that I can speak to the idea of stewardship with clarity and trust that these thoughts will be helpful.

In Matthew Chapter 25 Jesus is explaining to His disciples about how He and His Father view the fruitfulness of those in God’s Kingdom. While the subject matter is really spiritual in nature and how Christ’s disciples are supposed to respond and steward their gifts and talents, it is interesting that to give His story maximum impact He uses something common that they can relate to – MONEY. Isn’t it kind of our Lord to speak to us right where we are, in the midst of everyday life? While we may not be riding our camels or donkeys to the market to buy grain, oil and wine, we do find ourselves driving minivans to school and soccer and finding a stack of bills each month that require our attention. So I think it is safe to say that earning money and spending money was a challenge in the year 25 just like it is today in 2007.  Two of the three servants were commended for their hard work and diligent use of the Master’s money for gain and profit. The third servant was chastised for being lazy and for failing to act on the Master’s behalf.  So whether it is money or time and gifting, there seems to be a direct correlation between our overall fruitfulness in our spiritual lives and our financial lives. To be a wise steward of the resources God has given us brings honor to Him and to that end we endeavor each transaction that we participate in to do just that.

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With the backdrop of stewardship in view, lets’ get back to problem at hand. As I mentioned earlier, numerous Americans are deficient in savings. Remarkably though, a large percentage of those same families have substantial equity in their homes. In many cases those families have diligently paid extra money in a systematic way to lower their mortgage payment with the ultimate goal of paying off the house to be truly debt free. While that goal has such a wonderful ring to it, the process can in many ways hinder if not prevent people from being able to live out their older years in a financially comfortable way. While I do not advocate the idea of retiring at a young age to become a perpetual entertainment consumer and forgo fruitfulness in the Kingdom of God, I do strongly encourage people to follow the example of Joseph in Genesis Chapter 41 where he superintend a massive “financial planning” effort with incredibly successful results.  In Gen 41:54 it states that “and the seven years of famine began to come, as Joseph had said. There was famine in all lands, but in all the land of Egypt there was bread.” This story is a classic example of the wisdom of preparing for the future and ensuring that you have resources for you and your family and even more to be able to share with those in need. So wouldn’t paying off your house help you do that? Well it might. However, all along the way you actually place yourself in a position of reduced safety and reduced earnings. I am going to recommend that you put yourself in a position to pay of your home with one big check if it becomes beneficial to do so, but in the meantime that you work with all the resources you have available to prepare for the future.

This concept of paying your house off in the future with one big check assumes that you have enough money to do so.  That’s exactly the point. I passionately coach all of my clients to press on towards debt freedom! But along the way - while they are not yet debt free – I want them to control all the money themselves as opposed to giving little chunks each month to the bank or mortgage company. For example: If you make a $250 per month additional principal payment on your mortgage you will eventually save interest because you will reduce your mortgage payment from say 30 years to 25 years or 15 years to 11 years. However, until that magic day that you actually have paid off your mortgage your entire mortgage payment is due in full the first day of each month. Let’s just say we get another visit from a violent hurricane and your home is considerably damaged. Even if you are properly insured you will not get any of those insurance benefits until you have paid your deductible amount. In many cases that amount could be $5000 - $25,000. The problem you have is that you have been giving your $250 to the bank each month instead of saving it. So with a limited savings you must wait to get your home repaired until you can come up with the cash. Even of you have a Home Equity Line of Credit it will more than likely be locked by the institution that granted it to you before the storm hits. Once the storm passes you will need an inspection on your home before they will release any funds. If the home is damaged the HELOC will NOT be accessible. Therefore YOUR MONEY - the $250 per month times the number of months you have been sending in those extra payments will literally be trapped inside your home. This same scenario can play out in the case of an auto accident, family emergency or a host of other events where your money is no longer accessible exacerbating an already stressful situation.

Compare that scenario with a family who took the $250 per month and set it aside in their savings account. If their account was only earning them a modest 5%, in just 5 years they would have accumulated $17,000 which they could use to weather one of life’s storms. In 30 years that same account would have $208,065 available to them. That is an extraordinary amount of money which they can determine the proper use of. Maybe they decided that it was time to be totally debt free and they wrote that big check to pay off their home. Maybe they realized that the mortgage was allowing them reduced tax expense and improved risk management and kept their mortgage. Maybe they discovered a need in their local church or community and were able to help someone else. It doesn’t really matter what the opportunity is – the powerful principle at work here is that they had the choice.

I can guarantee you that if the bank had gotten those monthly payments they would certainly have used that money to benefit the bank and not of the homeowner. This family simply took the principles of sound and safe financial management and used them for themselves.  So you see that by having a “debt” called a mortgage and managing that mortgage as part of a larger financial strategy you can achieve positive financial results which will over time afford you the opportunities to improve your safety, increase your opportunities and provide for financial momentum into retirement years.