We Signed Our Death Pledge

mortgage means death pledgeThat sounds horrible… doesn’t it? Don’t worry though. It isn’t as bad as it sounds! We only signed a mortgage!

In the last few weeks I read that mortgage, if broken down into parts, actually means death pledge. Supposedly the term mortgage comes from the old french word mort, which means dead, and gage, which mean pledge.

It has a somewhat double meaning since if you die without repaying the debt, the bank gets your property if it isn’t paid off by your estate. However, if you retire your mortgage by paying it off prior to your death you have killed the debt!

Why We Made a Death Pledge (Took Out a Mortgage)

As I had mentioned in the past, we were in the process of looking for our next home! We couldn’t pay cash for our new house so we had to take out a mortgage. Even if we could have paid cash, I still would have taken out a mortgage in today’s extremely low rate environment.

Our townhouse would have suited us for a few more years but we would eventually want to move away from the beach and into town and have more space. The minute we have a child the townhouse would have become really cramped. The new house is large enough for us to live in for at least 10-15 years, if not the rest of our lives.

The new house is also in a neighborhood we feel much more comfortable about. The house is in a more stable neighborhood where there are many more owners than renters and everyone actually comes out and says hi to you.

The townhouse neighborhood has a lot of renters and is somewhat on the sketchy side at times but we were well aware of it when we bought it. We knew it’d be fine for us until we had kids. The biggest reason we were OK with it was because it was 3 blocks from the beach and the price made it a complete steal! You can’t beat that!

The townhouse was a great rental opportunity and we knew that when we bought it. We can rent it for a good bit above the mortgage, insurance and taxes. That extra should easily cover maintenance and vacancy times. Eventually we’ll have a paid off townhouse close to the beach paid by our renters! How awesome is that?!

But Why Buy Now?

Initially it wasn’t the plan to buy a house in town so soon after buying the townhouse, although we always knew we eventually would. After considering the alternatives and looking into the future it made more sense to make the move now.

Should We Have Renovated?

If we were going to stay in the house for the next five years there were some pretty expensive improvements we wanted to make. We wanted to gut the kitchen and redo the full and half bathrooms and that isn’t cheap. It wouldn’t work out well for us when we go to rent out the townhouse in the future.

The rental market in our area wouldn’t be able to handle the increase in rent that would need to occur to offset the cost of the new renovations. Our townhouse is already toward the nicer end for the neighborhood and putting in an awesome kitchen and nicer bathrooms would put our townhouse in the even nicer house in the not so nice neighborhood category.

We knew these renovations would only make the townhouse nicer, not bigger, so it wouldn’t extend the amount of time we could continue to live in it. It didn’t make sense to us to sink money in the townhouse if we wouldn’t get it back.

Low Rates and Low Prices

crystal ballI’ll admit that I don’t have a crystal ball and I don’t pretend to either but the mortgage interest rates have been so low lately (less than 4%) and we don’t think they’ll stay that way for another 5 or so years. Increases in mortgage interest rates have a large effect on how much house you can buy for the mortgage payment (assuming you keep the down payment the same). Even moves as small as a quarter of a percent can make a big difference in your mortgage payment.

The other factor we considered was home prices and the local inventory levels. Home inventory levels have been shrinking and home prices have begun to creep up. It could be a false positive or it could be the bottom in our area. Either way, we don’t feel the housing market has much room to move down in our area over the long run. After all, we’ll be in this house for at least the next 10 years!

What are your thoughts on the current housing situation? Do you have a strong opinion on death pledges? I’d love to hear your thoughts in the comments!

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About Lance Cothern

Lance Cothern, a Certified Public Accountant (CPA) licensed in the Commonwealth of Virginia, is the founder of Money Manifesto. You can read more about him here or connect with him on Facebook, Twitter, Google+ or Pinterest.

Comments

  1. Congratulations! Nobody can predict the future, but it sure looks like interest rates are headed upward. And home prices are rising. They’re not as low as they were, but it sure looks like they still have some good headroom.

    And way to go on your foresight to have an investment property now! 🙂

  2. Ha! I love the “death pledge”! Good stuff.

    Congrats on buying a house. We love being homeowners. I hope you like your new place!

  3. Death pledge…Lol! Congrats on signing the paperwork and getting your new place.

  4. Congratulations! Interest rates are low and just because you take a 30 year mortgage does not mean you will pay for 30 years. There are some areas of the country when prices are going up because of low inventory. You may have just made it.

  5. Interest rates are incredibly low and I believe if you are a real estate investor or buying a house for the long term 15-20 years now is the perfect time to buy. I’m glad you were able to get in while rates are low.

  6. Buying a home in most areas is the safest bet now. Purchasing after a bubble collapse actually provides safety as assets are either undervalued or fairly price. Much like tech stocks in 2003, stocks in 2009, now housing in 2013. You’ll look back in 10 years and see how “cheap” everything is today and wish you bought more.

    • Eh, I don’t think I will have wish I bought more. No point in buying more than you need unless you’re looking at it as an investment which we aren’t. It is just a place to live.

  7. lol! I had no idea that mortgage literally translated into that. Sounds like you feel pretty good about the new neighborhood!

  8. Nice work Lance. I don’t mind mortgages because for the average person, buying a house in cash is unattainable. We plan on purchasing a new place next year and hopefully the mortgage rates will still be low.

  9. Yay for death pledges and congrats on your new home! We’re seriously considering purchasing an investment property this summer while the rates are still low (hopefully).

  10. Congrats! Owning a home has been AWESOME for the past few years for us. Sure, mortgages are technically “debt”, but with the low rates, they are the “least” evil of all debt. Sure, buying a house with cash would be awesome, but you also don’t want 90% of your money in something as volatile as real estate. I still plan on paying my off early, but not as aggressively as some 🙂

  11. My view of mortgage debt may be different from others as I am not originally from the U.S. In many countries 10 year mortgages are the norm. That’s why I refinanced to a 15 year mortgage 10 years ago. So I only have 5 years left on my death pledge.

  12. I think now is a great time to buy if you are able. Interest rates are low and in many cities the prices of real estate are still fairly low. I am not necessarily a big fan of taking the “death pledge” but I think having a plan to pay it off early is the way to go. I meet with far to many people in their 50’s and 60’s who still have a mortgage and have no view of retirement in site because of their hefty mortgage payment.

  13. Wow, I had no idea that mortgage translated like that. So great. Did you get a fixed-rate or adjustable-rate? Sam over at Financial Samurai trumpets adjustable, which is so contrary to the way my parents and friends did it: http://www.financialsamurai.com/2012/05/02/30-year-fixed-mortgage-loan-vs-adjustable-rate-mortgage-arm-the-choice-is-obvious/

  14. Congrats on the new home.

    The death pledge. 🙂 I look at them the same as any debt. Use it when it makes sense. Hell, I have a friend who years ago had lousy credit but a crazy high credit limit on her card. (Remember those days? Or are they still going?) She bought a cheap house on that card. Probably paid 15% or 20% interest, but wouldn’t have owned a home any other way. And even at that rate the interest and property taxes were probably still cheaper than rent. Today it’s paid off and she has about a $1000/year in property taxes.

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