Are Mortgages Forced Savings?

A guide to understanding how mortgages can help train you to save better—but might not be your best investment strategy



Are mortgages forced savings?


Homeownership is the epitome of the American dream and is at the center of most individuals’ long-term goals. Although people might rent for a period of time, often earlier in life, most desire to eventually own a home. It may all sound like sunshine and rainbows, but owning a home comes with a lot of responsibilities and benefits.


Simply put? Owning a home is a prudent choice. After all, real estate is an asset in our current market in the early 2020s where supply is low and demand is high—and prices are reflecting it. A record number of mortgaged homes have become equity rich over these last few years as home prices boom, and even as growth starts to slow, the long term upward trajectory of home values is clear.


In fact, it might make you wonder if owning a home and paying a mortgage is even a real expense. After all, paying down the principal on your balance is something that adds to your equity in the home and your net worth, so isn’t it kind of like a savings account in disguise, or is that just a myth?




Elaborating on mortgages


In short, the answer is yes, and no. It’s not so simple! Owning a home does come with many monthly expenses that do nothing for your net worth—things like interest payments (which is what you’re mostly paying early on in the loan, anyway, due to a mortgage’s amortization schedule), property taxes, maintenance, and PMI if you don’t have a loan to value (i.e., “LTV”) ratio of less than 80%.


On the flip side, the money that goes toward paying down your principal directly benefits your net worth in most cases. This is because you’re adding to your ownership stake of an asset that holds value with each payment made. So it’s not just money being thrown down the drain on an empty recurring expense. (Do we sound like your Uncle Gary at the dinner table? #SorryNotSorry!)



The pros and cons of using real estate as a savings plan


If you look at your monthly housing expenses as a forced savings account, we recommend you consider the advantages and disadvantages before deciding to lean too heavily on it.



The pros of using your mortgage as a forced savings tool


  • Net worth: The most apparent benefit of paying down your principal is that it adds to your net worth by way of increasing your equity in the home. It also helps slowly create more financial stability and leverage as you inch closer to owning a home outright, which greatly reduces your expenses and increases your wealth.


  • Access to equity: On the more daring side, paying down your principal and viewing it as “savings” can also eventually give you access to that equity by way of a HELOC, fixed-rate loan, or a cash-out refinance. Can these loans be beneficial? Definitely! Especially in times of crisis or to if you’re hoping to make some home improvements. But, don’t jump in too quickly! They can also be dangerous in certain situations.



The cons of using your mortgage as a forced savings tool



  • Neglecting your savings: If we take this idea of treating our mortgage like a savings account too far, we could easily begin to neglect regularly putting money into an actual savings account that we could readily access at any given time. Sure, it’s nice to think of your home in that way, but taking it to the extreme is never a good idea. After all, we all need a rainy day fund when an emergency strikes!


  • Fluctuating home valuations: Elsewhere, equity or, “savings,” in a home is never something that’s set in stone. Home values fluctuate constantly, and a major market swing could quickly wipe out that equity.


  • A nightmare example: What happened back in 2008 is a prime example of this. Lenders were handing out mortgages like candy to anyone asking, many of those being ARMs, and when those interest rates adjusted, many borrowers could no longer make the mortgage payments they could hardly afford in the first place. This, along with many other reactions led to a domino effect collapse of the housing market. And, sure enough, prices went tumbling. Homeowners who’d previously had equity in their homes were now upside down, owing more on the loan than the home was worth. Their “forced savings” account was now underwater.



How to use a mortgage properly—and how to protect yourself


Leaning too heavily on your home for savings can result in a nightmare situation circa 2008. In that sitch, if your mortgage goes under, you don’t have any extra cash to help pay down the principal. At this point, you’d be staring down the barrel of some unpleasant options like refinancing with the HARP program, selling the house, selling through a short sale, or worst case, foreclosing.


As we can see, planning your finances and thinking through scenarios—even, no especially, if they’re scary!—will help you to avoid them. By diligently paying down your mortgage, and maybe even paying a little extra whenever you can, while also saving religiously, you can very likely avoid disaster.


But hey, we get it. Inflation is high and things are expensive! The markets are turbulent, and the times are highly uncertain at the moment. With all this going on, it can certainly be tempting to tell ourselves it’s okay to save a little less because our house is doing it for us, but we know better than that.



Being prepared is key to financial success


Ultimately, preparation is just as crucial here as it is in all financial situations, if not more. Whether we’re just buying a home or something to invest in, it’s helpful to think of the future of those assets. The reality is that, in an ideal situation, we get to pass our estates down to our heirs one day, meaning they’re extremely important assets to protect.


Plan ahead with your finances when buying a home. Only buy when you can, and what you can comfortably afford. Take pride in the fact that each payment makes you wealthier, but don’t get too proud to make time for the other necessities of saving, investing, and budgeting for the future.


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