The Phantom Mortgage: How to Build Equity When You Live in a Parsonage
When I started advising pastors, I went through quite a roller coaster of hot takes on parsonage ministers, and whether their situation was conducive or obstructive to long-term wealth building. My journey in a nutshell:
Take #1: “What a great deal! Not having to worry about housing expenses really creates space for wealth-building!”
Take #2: “Actually, having to pay SECA tax on parsonage fair rental value makes the arrangement less than ideal.”
Take #3: “Actually, since pastors with a housing allowance have to pay SECA tax on their exclusion as well, the playing field is leveled—I’d rather take the parsonage.”
Take #4: “Actually, the hidden cost of the parsonage is the lack of equity-building in an owned residence. Parsonage pastors have a huge unseen disadvantage when it comes to their net worth in retirement—plus, they’re one board meeting away from homelessness.”
And now:
Current Take: “What a great deal! Not having to worry about housing expenses really creates space for wealth-building!”
As you can see, I’ve come full-circle in my views. I thought my Take #4 was pretty sophisticated… but as is often the case, I was getting bogged down in details, missing the forest for the trees.
Thankfully, there’s always good ol’ math to separate what sounds right from what’s actually sound and right.
When I ran the numbers—really ran them—my perspective completely flipped.
Now? I actually wish I lived in a parsonage. The wealth-building opportunities available to parsonage pastors are so powerful that they've made me reconsider everything I thought I knew about pastoral financial planning.
Are you ready to turn the tables on conventional wisdom about long-term parsonage planning? Let's dive in.
The Hidden Math (Behind the Hidden Math)
I love a story with layers, and this one is a doozy.
The first layer of hidden math is what I mentioned before: the lost equity-building power of real estate ownership that you miss out on as a parsonage pastor. Many pastors don’t make this connection, and thus they fail to plan for it—and so, like too many other pastors, they face retirement poverty. This is bad, and I’m on a crusade to fill the planning gaps when it comes to this (and other) financial planning blind spots that are unique to pastors.
However, here’s the second layer: residential real estate is not the wealth-building engine everyone thinks it is.
Don't get me wrong—there are good reasons to own real estate. Land is scarce. Real assets provide inflation protection. Homeownership forces financial discipline.
But the numbers tell a different story. And since we’re talking about hidden math, let’s bring some more to light when it comes to real estate ownership:
Real Estate Appreciation: Location matters, but historically and in general, single family homes appreciate at about 4% annually. However, your real rate of return has to take into account expenses and other drags on your growth, such as mortgage interest (which nowadays can easily be in the 6-7% range).
Hidden Expenses: According to multiple sources, homeowners should budget 1-4% of their home's value annually for maintenance—with newer homes requiring at least 1% and older homes potentially needing up to 3-4%—even as high as 8% if your home is built before 1960. For a brand new $350,000 home, that’s around $300/month. Add in other hidden expenses such as property taxes, mortgage interest, and insurance, and you could easily be spending well over $1,000/month in total costs to gain that same $1,000/month back in average appreciation.
So, if many homeowners are essentially “breaking even” between their appreciation and expenses, how is it possible that home equity most Americans' largest "asset"? Simple: the system forces them to invest. You can't skip your mortgage payment without dire consequences, and you don't panic-sell your house during market downturns. If you own a home with a mortgage, you may be building equity—but it’s very likely that the equity you’re building is less the result of a return on your investment and is more the result of the principal you’re paying yourself with each mortgage payment. Mathematically, you’d almost be better off putting that principal payment into the bank—at least then you could spend it if needed.
So, what if you could bring that same ironclad discipline to a better-performing asset class?
If you’re a parsonage pastor, you can.
Enter the Phantom Mortgage Strategy
Here's my favorite strategy for parsonage pastors: Pay yourself a "phantom mortgage" and invest it in assets that actually build wealth.
The formula is elegantly simple:
Step 1: Find a home you'd realistically want to own. Browse Zillow, Redfin, or Realtor.com in your area.
Step 2: Take the home price, knock off three zeros, then double it. This becomes your monthly phantom mortgage payment.
Step 3: Invest this amount religiously, starting with maxing out your Roth IRA.
The Math That Changed My Mind:
Let’s put out some real numbers:
Father Michael finds his ideal retirement home, currently worth about $400,000.
$400,000 → $400 → $800/month phantom mortgage
First $583/month → Roth IRA (2025 limit: $7,000/year)
Remaining $217/month → Taxable brokerage account
He buys stock index funds in both accounts
After 30 years (the length of most mortgages):
The $400,000 home (at 4% appreciation) is worth about $1.3 million
Father Michael's invested phantom mortgage portfolio (at 10% returns) is worth about $1.6 million
So, for less than half of what an actual mortgage would have cost (a mortgage payment on a $400,000 home, assuming 20% down, would currently be over $2,000/month), Father Michael actually ends up with more wealth than if he had actually purchased the home—and most of it tax free in a Roth IRA. Plus, instead of facing property taxes, insurance, and that 1% annual maintenance burden in perpetuity, Father Michael has a liquid portfolio that generates passive income for him—again, mostly tax free.
He could liquidate his assets and pay cash for his dream house. But until he has to… why would he?
Bringing It Down to Earth: A More Balanced Approach
Now, that example shows what's possible with maximum discipline, high risk tolerance, no capital gains taxes, and no surprises. But what if you want to build wealth with fewer ulcers?
Here's Father Michael's "sleep well at night" version (and closer to what I’d actually recommend to a real-life client):
The Three-Bucket Phantom Mortgage:
Same $400,000 target home = $800/month phantom mortgage
Bucket 1: $583/month to max the Roth IRA (growth investments)
Bucket 2: Half of the rest ($108.50/month) to a moderate-growth fund
Bucket 3: The other half ($108.50/month) to a "Future Housing Fund", invested conservatively
Crunching the numbers with more conservative assumptions, plus accounting for tax drag on taxable investments (minimal, thanks to the parsonage allowance):
Growth stocks return 8%
Moderate growth fund returns 6.5% after tax
Housing Fund earns 4% (bonds/high-yield savings) after tax
After 30 years:
The $400,000 home: still ~$1.3 million
Father Michael's balanced portfolio: ~$0.977 million total
Roth IRA: ~$793,000
Moderate-growth fund: ~$112,000
Housing Fund: ~$73,000
That's still 75% of the home's value, but with the flexibility to access funds anytime and weather market storms
The key insight: By accepting slightly lower returns, Father Michael gains massive flexibility. He's built 60% of the wealth with significantly less risk and volatility. That's a trade-off many pastors would gladly take.
The Behavioral Finance Solution
Let's address the elephant in the room: discipline. Without a mortgage forcing your hand, how do you ensure you actually invest?
The Automation Trinity:
Automatic transfers the day after your paycheck
Separate named accounts ("Future Home Fund," not "Savings"—makes you think twice before using it for vacations)
Visual progress tracking (apps like Personal Capital or the EveryDollar app—encourages you as you watch your wealth grow)
The Accountability Addition: Consider sharing your goal with a fellow pastor, your church board, finance committee, etc.
But What If I Lose My Parsonage?
It’s true, living in a church-owned parsonage does carry with it the risk of losing your residence if the church decides to go a different direction. But the phantom mortgage system has an answer for this too.
They key is that Roth IRA contributions can be withdrawn at any time, for any reason, without penalties or taxes—regardless of your age. True, any growth in the account has to stay in (or face early withdrawal penalties if you’re under 59 1/2). However, the principal (i.e. the money you put in) can be taken back out anytime.
Let’s say Father Michael, after 10 years of his “balanced” phantom mortgage strategy, takes a ministry position at a different parish that does not provide a parsonage. Father Michael has to find a place to live. It’s a disruption for sure, but let’s look at what he’s built:
Liquid portfolio value: ~$103,000
Roth IRA principal: ~$70,000
Moderate growth fund: ~$17,500
Housing Fund: ~$15,500
That $400,000 home is now worth around $592,000, requiring a conventional 20% down payment of about $118,000
Father Michael may not have saved quite enough for a down payment on his dream house. But is he homeless with no options? Absolutely not.
The “Three Layer” Savings System to Minimize Displacement Risk
That being said, let’s face it: being displaced from your parsonage in an untimely manner is the biggest risk. If this risk concerns you, here’s a more nuanced system that addresses this risk head-on with multiple safety nets:
Your Three-Layer Protection Plan:
Years 1-10: The Building Phase
Focus on liquid contributions
Keep that Housing Fund sacred
Build enough for a solid down payment
Years 10-20: The Flexibility Phase
You now have options: down payment ready
Could transition to homeownership if needed
Or continue building if parsonage remains stable
Years 20+: The Security Phase
Multiple six-figures in investments
Could buy a house cash if needed
Or continue renting with investment income
The Dave Ramsey Advantage Nobody Mentions
If you follow Dave Ramsey's Baby Steps, you've probably felt stuck watching homeowners race through Step 6 (pay off your mortgage early) while you... can't.
But here's the beauty of your situation: Parsonage pastors get to SKIP the longest, most grueling Baby Step entirely.
While your homeowning colleagues throw extra money at principal payments for 7-15 years, you can:
Triple down on Step 4 (retirement investing)
Accelerate Step 5 (college savings)
Jump straight to Step 7 (build wealth and give)
You're not behind—you're playing with cheat codes.
And yes, parsonage pastors often receive less cash compensation. But you also have something homeowner pastors don't: every dollar you save builds liquid wealth instead of illiquid equity. Even a smaller phantom mortgage creating accessible wealth often beats a larger mortgage payment creating trapped equity. It's not just about the amount—it's about the flexibility.
Two Pastors, 30 Years, $1.4 Million Difference
Let me paint you a picture of two pastors, both age 35. Let’s compare apples to apples, where the parsonage pastor actually invests the same amount as her homeowning colleague:
Pastor Tom (Homeowner):
Home purchase price: $350,000 (down payment $70,000)
Monthly payment: $2,100 (mortgage, taxes, insurance)
Maintenance budget: $350/month (based on the 1% rule)
Extra principal payments: $400/month
Total housing cost: $2,850/month
30-year mortgage paid off in 18yrs 9mo
Pastor Sarah (Parsonage + Balanced Phantom Mortgage):
Parsonage cost: $0
Immediately invests $70,000 (to mirror Tom’s down payment):
$35,000 in moderate growth fund
$35,000 in Housing Fund
Monthly phantom mortgage: $2,850/month
Roth IRA: $583
Moderate growth fund: $1,133.50
Housing Fund: $1,133.50
Stops investing when Pastor Tom’s house is paid off
Fast forward to age 65:
Tom: Paid-off $1.1 million house (still paying taxes/insurance/maintenance)
Sarah: $2.48 million investment portfolio generating $99,000/year
Who has more financial freedom for ministry in retirement?
Action Steps This Week
Calculate your phantom mortgage: Find homes on Zillow. Price ÷ 1000 × 2 = Your monthly payment.
Open investment accounts: Roth IRA first. Vanguard, Fidelity, and Schwab all offer low-cost index funds.
Automate everything: Set up monthly transfers the day after your paycheck.
Adopt the mindset: You're not "homeless"—you're strategically building invisible wealth.
Remember: This isn't about keeping up with homeowners. It's about surpassing them using the unique advantages only you have access to.
The parsonage isn't a limitation. It's a launching pad.