Paying Down the Mortgage? Go for it!

Well, a recent gathering of fortysomething Stanford MBAs yielded a rich discussion of art, literature, and philosophy.  Oh, of course I am kidding.  We talked about IPOs, career moves, stock options, and hotels.  It sounds boring and pretentious, but I promise it was neither.  On the whole I would like to think Stanford folks are more grounded than would be expected.

A good chunk of conversation was spent on an age-old financial topic:  should a mortgage be paid down early?  The consensus was… oh, there was no consensus.  Opinions ran the gamut from “of course” to “nfw”.  One went so far as to say the smartest housing bet is to get the biggest mortgage you can find and make it interest only.  At the opposite end of the spectrum was me, with the very conservative approach: find the most appropriate space that is no more than 250% of your annual income, and try to pay it all off in five to ten years.

Perhaps all my time at UBS has embedded a conservative approach to financial considerations.  UBS is known for taking a more cautious approach than its competitors, preferring prudence to the promise of extraordinary returns.  Personally, I just think a person rests so much easier knowing the four walls around them are well within budget, and on their way to being wholly their own.  A person’s home is their castle, and they should own that castle, not rent it.

I get the opposite side.  The devil-may-care approach can yield a nicer crib for sure.  In a rising market, you can always refinance.  In a crashing market, well, you can walk away and make it the bank’s problem.  The former situation is hardly a guarantee, as we have seen quite painfully.  And the latter picture– aside from being of dubious ethics– wrecks your credit and leaves you either scrambling to find a new place or always nervous about a sheriff knocking on the door with an Order to Vacate.  That is an awful scenario.

I stand by my viewpoint: paying down the mortgage is one of the most gratifying financial moves a person will ever make.

–Tim Shields, UBS

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