Who Wants a Death Pledge?
If someone asked you if you wanted to take a death pledge, how fast would you run away?
Actually, there’s a good chance you already have one. While reading The Big Short, we learned that the word mortgage means “death pledge” in French. Despite being a former English teacher, I never thought about the etymology of the word mortgage. I just assumed it was finance jargon. And it is—would you have a thought a little harder about taking a mortgage if everyone called it a death pledge?
“I’m refinancing to a better interest rate on my death pledge.”
“Death pledge rates are really good right now.”
“Death pledges are good debt.”
“I’m debt-free except for the death pledge.”
“You’re invited to celebrate my new death pledge!”
The literal translation suggests a very serious commitment that is going to be with you for life. This isn’t something you’re going to waltz away from easily if you change your mind. You’ll be stuck with this contract until you die.
Though many mortgages are paid off long before death, the allusion to a serious, long-term contract still applies. You can check out the math behind the death pledge in Mortgage Myths. Today let’s consider other aspects of the decision to purchase a home.
Sorting Out Your Emotions
Many have pointed out that purchasing a home should not be an emotional decision. It is a business transaction. But let’s be honest—it’s hard not to be influenced by emotion when buying a house. A house becomes a home, and “there’s no place like home.” After all, “home is where the heart is.” I’ve heard people who are moving say that they are sad to sell because “this is where I brought my babies home” or “this is where I raised my kids.”
Seeing a beautiful home we believe will meet our family’s needs, host friends, and provide comfort day in and day out is emotional. Rather than pretending we can eradicate emotion, why not recognize them and navigate the decision making process with attention to how those emotions influence us?
Creating a spreadsheet of the features, size, costs, pros, and cons of our final death pledge candidates helped us objectify the choice. Sleeping on any big decision such as a death pledge is also essential. We also gained valuable insights from bringing an entourage of friends and family (the remodelers) to weigh in on prospective properties.
We purchased our home after three years of contemplation, number-crunching, and a year of renting in the neighborhood where we purchased. We questioned the cultural assumption that we needed a house and seriously considered the option of renting long-term. This was a helpful exercise which brought a perspective of gratitude, stewardship, and financial sobriety to our decision to sign a death pledge.
Is a House an Investment?
All the research we did surrounding our home purchase led us to a belief that has been truly freeing for us: buying a home (for your residence) isn’t primarily about investment.
I broke down the math debunking this myth in Mortgage Myths. If you are going to live in, maintain, furnish, pay taxes & interest, and insure a home—you are not primarily making a financial investment. Even if your home appreciates significantly, you probably won’t make a huge profit when all is said and done. And that’s perfectly fine, so long as you aren’t expecting it to be wildly profitable.
There are exceptions, of course. Some people get a great deal on a foreclosure, purchase with plans to rent the home in the future, or buy in a hot location that will drastically appreciate. And then there is actual real estate investments, not to be confused with purchasing what amounts to a liability on many levels.
The house we bought was our least favorite home style, in a city we didn’t love, in a neighborhood we didn’t love, to be near people we love. By near I mean I can watch my four-year-old ride his bike to his best friend’s house down the street. In many ways our home is more of a real worth investment than a net worth investment. I’m not offering that this example as great financial advice, but we couldn’t imagine living any further from our friends.
The false assumption that real estate is sure to appreciate has been brutally exposed, so while you shouldn’t purchase a personal residence as your main investment strategy, I wouldn’t be nonchalant about the numbers, either. Purchasing a home you can afford with wiggle room for all the hidden costs is prudent. Especially after seeing so many go upside down in their death pledges, even though they never missed a payment. I’ll bet that feels a bit like death.
Viewing our home as primarily a home, not an investment, also takes some pressure off when it comes to living in it. We knew hosting parties would invite stained carpet and having kids would invite stained everything! Of course we maintain our home with the hopes of being able to sell it when the time comes.
If you scored a killer deal on a home, congrats! But if you’re contemplating acquiring a death pledge, I’d encourage you to acknowledge your emotions, clarify why you want to purchase a home, and make sure your financial expectations are realistic.
Do you view your home as an investment or residence? What advice would you offer a prospective home-buyer?
55 Responses to “Who Wants a Death Pledge?”
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Taking the emotion out of buying a house was virtually impossible for us, especially because we bought at a time when demand was high and supply was very low. For every offer we made, we knew there were going to be 5-10 others. It was such a roller coaster because we’d get our hopes up only to lose out. Thankfully we did a lot of research first, so we knew going in that the house wasn’t going to be an investment, and that we were buying primarily because that’s the lifestyle we decided we wanted. So far it’s working out and we are very happy with the place we ended up in (it also helps to have a handy husband!).
It is great to have a handy husband when you’re a homeowner! I’m glad you were able to come to terms with your emotions and the purpose of your home purchase.
LOL, that’s good stuff. I actually do think of mortgages as death pledges already. I hate our small mortgage and we are paying it off fairly fast, but not at the cost of our other financial goals.
We are also itching to get ours paid off, even though it is reasonable, but I agree that it has to be balanced with other goals.
We always view our home as a residence. A place to raise our family, a place to host family and friends. I do wish we were smarting about the purchase price and improvements we have done over the years. My advice I give to someone today is keep the overall purchase price low, monthly payments should be no more than 25% of your monthly income, stick with a 15 year mortgage. Once in a home don’t borrow more money to do improvements, cash-flow them.
Great advice, Brian! I couldn’t agree more. We initially took a 30-year death pledge and then refinanced to a 15 year within 2 years.
I remember being surprised to hear that too when I watched the movie. Good movie BTW! For the longest time I thought buying a home was something I was “supposed” to do as an adult. I almost did too when I lived in Seattle. But being in LA, it feels damn near impossible, and now that some time has passed I realized I could be perfectly fine renting, and also liked not being tied down to a location. I do believe the decision is personal, and it would not be the worst thing in the world to take on that kind of debt, but it doesn’t have to be a “have to” in life!
Location is definitely a huge factor in the equation. Home prices are very reasonable in our area, and it’s not a fast market, which made it much easier to purchase.
Me and my wife were on the state of deciding where to settle and buy a house. Just recently, we watched this tv show in HGTV called tiny house hunter. Houses here are really small like less than 500 sq.ft. that cost from as low as 25k. And then we realized that we really don’t actually need a large house that is costly. From what I’ve seen in large houses there are spaces and rooms that are actually don’t have use like double living room. This is just one option that we are considering.
Right now, we are looking for other options and possibilities that will not scare us with death pledge.
I agree that a lot of the space in large homes isn’t necessary or really put to use. We’ve liked have room to grow in our home, as we’ve had two kids here and hosted out-of-town guests, but it makes sense to buy only what you need for the foreseeable future.
In my opinion, houses are about as solid an “investment” as automobiles. There are lots of hidden costs beyond the sticker price like maintenance, insurance, & taxes. A house should at least maintain or eventually appreciate in value, but you put in a lot of time & money.
I can sell my car today & have $20,000 or sell my house and get $150,000. It might seem like a lot of money for short-term needs, but chances are you lost money overall.
In my previous job, where we were required to move every couple years very rarely did people make money selling their house. Even after the company paid the difference when it sold at a loss, so the employee would “break even.”
At least houses tend to appreciate whereas cars depreciate, but overall neither is likely to be an investment. That’s kind of amazing that your company paid the difference on those homes.
You had to buy & sell the house through their program with certain realtors & appraisers. For example, you couldn’t buy a house with stucco & it could only have so much acreage.
My former boss took a $50,000 loss on his house when he moved from his previous assignment. He bought during the 2007 peak when he moved there & sold in 2011. They reimbursed him the loss, but tax laws treat it as income. So his W-2 showed an additional $50k in income that year because of the relocation policy.
Interesting. I guess that is a lot better than a pure $50,000 loss.
Now that we’ve lived without a mortgage for two years, I’m hesitant to go back to owing to a bank again. Most places in the US, houses are anywhere from 2-3 times as expensive as they are here, but I still think I would prefer not to have a mortgage. Someday, Rob and I would like to build a house where our parents could live with us as they age, but for now we are happy with a house that fits us and a roommate.
That’s nice you don’t have one–and are enjoying it! Renting a portion is a great way to offset the cost.
I can’t help but think that if we’d framed our recent post on paying down the mortgage vs. investing as “paying down the death pledge” vs investing that we might have gotten more comments in favor of paying off the house faster. Haha. But I agree with absolutely everything you said. A house is only an investment as an afterthought. It’s primarily a place to live and call home, and I can never understand the thinking that seems to suggest that it should be free to have a roof over your head — that renting is “throwing money away” and that a purchased home is an investment. Sure, we should all expect that you’ll take more money out when you sell a house than you put in when you first bought it, but you shouldn’t expect to “make money” in any real sense. The best you should hope for is to retroactively reduce the amount it cost you to live there each month. But as for the death pledge idea, you’re giving me new motivation to pay our house off quickly! By the time it’s paid off next year, we will have had the mortgage for six years and four months, but now I’m wondering if I can shave another few months off of that! 🙂
Haha, yes you might have had a little different response with that title! I agree that shelter isn’t something we can expect to be free. “Retroactively reduce the amount it cost you to live there” is a great way to put it. I suppose if the whole rent vs. buy or pay off mortgage vs. invest questions were simple, there wouldn’t be so much debate surrounding them. In the end I think expectations and attitude matter as much as some of the numbers behind these choices, assuming one is being financially responsible overall.
My emotions apparently swing the opposite way yours do – I’d much rather have a “death pledge” right now than be tied down to a house! I’m afraid that by the time we actually want to buy the interest rates will be significantly higher.
We’re not living in our “forever city” at the moment so we definitely don’t want to commit to a residence. I also think I’m using the fact that I’m a renter as an excuse for not care much about the aesthetics/decor of my home, which I think I’ll have to force myself to do when we finally buy something.
I guess the grass is always greener! I’m sure in your shoes we’d be itching to buy while interest rates are low, but of course not if you plan to move in the near future. I am definitely not a very good at decorating, and while I’ve tried a little harder since purchasing a home, I’ve done so very slowly.
Interesting stuff. I view my home as both an investment and a residence. An investment because I’m building equity, but a residence because I’m living in it and I probably would have different opinions if it was purely a rental. We’d like to keep this house forever and eventually rent it out and move into another home…big financial goal that we’ll have to sort out.
Sounds like you have a very balanced view. I think the pure investment view can lead to disappointment. I hope you can sort out that transition when the time comes!
I never considered the “mort” in mortgage before! It’s a sobering consideration. I’m all for considering your home as a residence more than an investment. Ours is both a residence and a place of business now. I really look forward to having our death pledge done with!
I don’t know why the “mort” never crossed my mind, either. That’s nice that your home is multi-tasking! Yes, we’ll be glad to be done with our death pledge, too.
While I saw The Big Short, for some reason I don’t remember that part. Interesting. Maybe my brain purposefully blocked it out.
Our mortgage does get on my nerves because even though we did get a good deal on our current house, we were 9 years into our old mortgage and starting over really isn’t fun. When I think about why we moved and what we’re getting for the price (our old school district was the worst in the state and the neighborhood was bordering on unsafe and now we have the opposite), I sort of let my frustration go.
The “death pledge” is explained in the book. I don’t recall it being in the movie, though it’s also possible I missed it. It makes a lot of sense to “start over” in a new mortgage so your child can go to better schools and live in a safer neighborhood. That’s worth a lot!
One of the biggest reasons that people are in financial trouble these days is their belief that debt is normal. I think it’s a great idea to start referring to mortgages as death pledges, then maybe people will wake up to the commitment that they are making. Instead of figuring out how much you can afford in a monthly payment, you should do everything you can to minimize the amount of your death pledge.
We have two “death pledges” right now – one is for our rental property. Investing in property is a big part of our long-term plan. I’m going to expand on this in a post soon, but it’s one way we’re dealing with my husband’s reluctance to invest money in the stock market, bonds, etc.
I agree that the “debt is normal” belief is a huge problem. And that when buying a home, it’s best to minimize the expense as much as possible.
We are interested in owning rental properties someday. I look forward to your post on it!
This reminds me of the episode of the office where Michael buys a condo and Dwight tells him that at his age, he’s really buying a coffin.
We’re viewing our house as a home rather than an investment, too. We are trying to get in a city we love in a neighborhood we like, but we’re saving to do it right.
That’s a good quote. And a good plan–save up to get into the type of place you really want.
We watched our home being built.
Still there 36 years later after two children, now two grandchildren.
This is ‘home’ in the true sense of the word.
I never want to leave.
Angela
Sounds like you’ve put your home to great use!
Interesting!
Right now we are currently renting, but my wife is constantly looking at homes around the area to buy. I think she has the fever!! We are both in agreement though that getting out of debt is our number one priority and building a solid financial platform before tying ourselves down to a place is smart.
I can imagine it is hard to break the emotional aspect of buying a house. With me its more of the financial aspect. I just feel anxious thinking about putting my name on a loan 15-30 yrs.
Great Post!
-KB
It’s good to enter the death pledge solemnly. I’m glad you are thinking through it and building a good foundation.
The French sure have a way to wording things. Really cuts to the chase! I love not having to pay a death pledge for our home. But I go back and forth about it for our rentals. As soon as we know that they will be no more house buying in our future, I might start trying to wipe those out. The tax benefits are just more tricky with rentals than primary residence. It will be nice one day when they are all paid off. I dream of that cash flow!
Yes, rental properties as investments are a different game. But I’m sure you’re looking forward to being done with those mortgage at some point, too.
Though we we’re fortunate to notch a respectable (and tax free) capital gain when we sold our last home–particularly since we put the house on the market in April 2009–we didn’t buy because we wanted to make money. Sure, we took care in choosing a home with characteristics and in a location that we judged would help support long-lasting value. But mainly we chose the house because it met our needs and desires at a good value.
Buying a house with the aim of making money is speculation, I think. Nothing wrong with speculating, if you have a high risk tolerance and deep pockets. If not, best to stick with renting, me thinks.
That’s a great way to put it, Kurt. It is often speculative, and that’s fine, as long as you’re not counting on that to float you.
As it stands now due to unprecendented FED Intervention & Manipulation, one is damned if they do & damned if they don’t. The proverbial Rock & a hard place. The Housing Bubble is back, yet rent is absolutely exorbitant in most places with the short term metrics leaning hard toward signing a “Death Pledge”. However, the House of Cards, when it falls will leave many that signed the Death Pledge, yet once again, under water and for quite possibly, in real Dollars, a very very long time. These are very uncertain Times we find ourselves in, where up is down & down is up. I am currently renting and paying a very large penalty to do so. I have an uncertain career with virtually zero job security which forces very defensive living arrangements upon my Family, while at the same time paying a relatively high salary.
Rent vs. buy can be a very tough choice, especially when rent is high but you anticipate possibly moving for your job.
Well that is one way to look at it (particularly since the most popular, 30 year mortgages, really were death pledges back when they were becoming common when compared to the average life expectancy of that time). While I am enamored of the concept of a zero balance mortgages, I am also interested in maintaining a level of liquidity, so I have a personal target to not let my net value in my house exceed 25% of my net worth (since in reality, residential real estate is historically not as a good performer as other asset classes, so why would I want too much money tied up in my least performing asset, and of course outside of a HELOC not very accessible).
That’s an interesting personal target regarding your net worth. I think it’s wise to distinguish between different types of assets and find the balance of what you want in terms of liquidity and performance. We also like the idea of being mortgage-free but it has to be balanced with other goals.
For me, it was around stability and health – and pleased to say it has absolutely worth it in every way. There are markets elsewhere where renting is a viable alternative to buying, but not in mine 🙁 I love knowing that I can stay here till I die, if I want, as long as I keep paying.
Home prices are very reasonable in our area as well, which was a factor in our decision. And it’s nice to have the option of staying long-term.
My only real worry about my mortgage is the prospect of capital loss. Not so worried about capital gain.
My home is my home – the place of refuge for my family and myself. If I happen to make a gain when I sell it, that’s a nice plus. While most optimize every aspect of their lives for ROI, in my life I tend to optimize for time and stress, e.g. finding a job 15 minutes from home to reduce commute time / stress, or owning a home to avoid eviction or lease/rent hassles, and save the ROI focus for my investments.
Yes, I think buying with a goal of avoiding capital loss is a better goal. That’s an interesting approach to ROI. I agree that time, stress, and other factors are important to consider.
I agree that homes are not a financial investment. I want to buy a condo for the personal investment in my happiness. I want to be able to host without having to consider what is convenient for my roommates. I want a bathroom of my own. I don’t think I’ll make money off of it.
Your reasons are similar to the reasons we decided to purchase a home. I think they’re great reasons, so long as you have reasonable expectations about the “investment” part.
WOW! I had no idea that mortgage stemmed from “death pledge.” That is hilarious (in a sad sort of way!) I am in the process of selling my first home right now. As for advice for prospective buyers – I would say only view homes within your price range. A house about $50k above our price range come on the market and we fell in love with the pics. We toured the house and made an offer. In retrospect, it was the only house we viewed in that price range so we had nothing to compare it too. Of course it looked better than the cheaper houses and we had no idea how it compared to other houses in that range. Hoping it sells fast!
I hope it sells quickly for you. I agree that being firm about your price range helps. It is all too easy to convince yourself to go in over your heads. There can be so many emotions tied up in that decision.