Real Estate: Home Sweet Piggy Bank?

Three years ago the Quinns paid off their mortgage. We took a windfall out of the stock market, wrote a check and kissed the biggest debt of our lives goodbye. I hadn't a clue that the market would soon commit suicide. But my husband was breathing "sell" in my ear and the stock was already down from a price too good to be true.

But this story isn't about a lucky sale of stock. It's about why you might--or might not--want to put some extra money into your home.

Prepaying a mortgage may not be high on your "to do" list. On average, people are pulling money out of their homes through refinancing and home-equity loans. But after our blighted affair with stocks, home values are suddenly starting to look like the real deal--something familiar, reliable and, above all, up. Price gains have been hitting quarterly rates of 8 percent to 10 percent a year, the highest since 1979.

Investing in homes is now part of the general gab about finding something better than stocks. But here's news that may surprise you: prepaying a mortgage is not a real-estate investment. Your prepayments give you a fixed return that equals the loan's interest rate. My mortgage was costing me 6.9 percent, so by wiping it out I got a 6.9 percent return, pre-tax. Not an exciting number, but, hey, it's not WorldCom.

The total value of your home is, of course, an investment exposed to the vagaries of your local housing market. The investment is usable, however, only when--and if--you take the profits out.

Let's say you're thinking of your house as a future retirement investment--one more reliable than stocks. To cash in, you'll have to do one of two things: sell and move to a smaller place or borrow against the house when you've retired. Either way, you'll need a home worth far more than the mortgage against it.

Two arguments favor prepayments. First, you gain job and retirement flexibility by losing that big monthly bill. You might get a thrill out of knowing that you'll burn the mortgage by a certain age.

Second, mortgage payments are a disciplined form of saving. In fact, that's the best case for taking a new 15-year loan (at just 6 percent today) rather than sticking with the traditional 30 years. With a 30-year loan, you do get flexibility; you can pay it off faster or not, depending on whether you have income to spare. But a shorter term forces you to reduce your loan early, no kidding around.

If you don't care whether you have a mortgage, you might prefer to invest your spare money somewhere else. You can currently earn 6 percent on quality bond funds--almost as much as you'd save by prepaying the loan, says planner Harold Evensky of Coral Gables, Fla., and the cash would always be on tap. Planner Mark Sievers of Fairfield, Calif., thinks that people without much in other savings should attend to that first. You don't want to be one of those retirees who's house-rich but cash-poor. Prepaying a mortgage is strictly a luxury buy for people who have other assets to live on.

But (as you've learned) it's dangerous to borrow against your house to buy stocks. To me, a house is supposed to be a security blanket. I'll take risks with my financial investments, but I don't play around with the place I live.

So the Quinns wrote their final check and planned to curl up by the fireplace, burning our copy of the mortgage. Naturally, we first wanted the bank's copy--the one that said paid in full. Memo to other prepayers: you've got to keep on top of this. Our bank dragged its feet for six months. When the documents finally came, we said, "oh," and dropped it in a folder labeled file and forget.