No Mortgage/Debt

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Re: No Mortgage/Debt

Postby scrabbler1 » Wed Dec 19, 2012 8:42 pm

sscritic wrote:I guess I am missing something on a basic level. If you don't believe in mortgage debt, pay cash for your house. Paying off a mortgage you took out is a cop out; obviously you liked mortgage debt or you wouldn't have had a mortgage in the first place.

I recently bought a house; I didn't pay cash, I took out a mortgage. Why would I then turn around six months later and sell $200k of stocks to pay it off? I didn't want to pay cash; I wanted to keep the $200k invested. It's really simple. Do or don't, but don't do and then turn around and say you didn't really want to.


I think you are missing something on a basic level. Many people, including me, took out a mortgage because not because we liked mortgage debt but because we wanted to live in our own place, not rent any more (and renting is often an unwise move financially). But rather than wait until we had saved up enough to buy a place, something which could take many, many years, we opted to go out and buy our place and take out a mortgage. This did not mean we wanted to keep said mortgage for its full duration or liked keeping that debt around so we paid it off early - not necessarily 6 months after we bought the place, but in 5 years or 9 years (like I did) or 15 years or 20 years.
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Re: No Mortgage/Debt

Postby sscritic » Wed Dec 19, 2012 8:57 pm

scrabbler1 wrote:I think you are missing something on a basic level. Many people, including me, took out a mortgage because not because we liked mortgage debt but because we wanted to live in our own place, not rent any more (and renting is often an unwise move financially).

Which is to say you liked mortgage debt when you thought it was to your advantage to have mortgage debt, and you later decided you didn't like mortgage debt when you thought it wasn't to your advantage. There is nothing wrong with that; I just think that people should admit that having mortgage debt is a personal preference. A mortgage allows you to do things you wouldn't otherwise be able to do, like buy a house in your case, or have an extra $200k in equities in mine.
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Re: No Mortgage/Debt

Postby cherijoh » Wed Dec 19, 2012 9:56 pm

I think it depends on where you are in your lifecycle. If you are nearing retirement and have already made adequate use of tax-advantaged accounts then paying off the mortgage should be weighted more heavily than if you are just starting out and have unused tax-deferred opportunities. In that case, by paying off the mortgage you may be wasting the benefit of compounding inside a tax advantaged account over 30 years plusputting all your eggs into the real estate basket at the same time. I targeted my mortgage pay-off to be about 6 months prior to my earliest possible retirement date. But I was able to do so without sacrificing any tax-advantaged space.

Also if you are currently in the early years of your mortgage, you are highly likely to see a huge difference between the now historically low mortgage rates and what will be prevalent before you have it paid off. It could be a fantastic inflation hedge if you stay put in your house. My parents were in the same situation as jsl11 except that they had a 4.75% VA loan in the period of 15% returns on a MM fund.

FYI, the standard vs itemized deduction argument could be totally immaterial if you are either single or live in a high tax state. I am both and as long as I am working, I will continue to easily exceed the standard deduction even without any mortgage interest.

C
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Re: No Mortgage/Debt

Postby grabiner » Wed Dec 19, 2012 11:55 pm

sscritic wrote:I guess I am missing something on a basic level. If you don't believe in mortgage debt, pay cash for your house. Paying off a mortgage you took out is a cop out; obviously you liked mortgage debt or you wouldn't have had a mortgage in the first place.


Your options are different in the two situations. If you have $50K in the bank and you want to buy a $200K house, you probably can't buy the house at all unless you take out a mortgage, or you might be able to buy it by cashing out your IRA and paying a huge tax penalty. In that situation, you should use $40K of the $50K as a down payment (keeping $10K for extra expenses such as the need to repair the house) and take out the mortgage. But in a later year, you might have $10K of extra money which you can either contribute to your 401(k) or use to pay down the mortgage, and it might be better to pay down the mortgage. The cost of debt is the same, but the cost of the alternative is different.

I have done the same thing with a car loan. I took out the loan because I could only have paid cash for the car by selling stock and paying a large capital-gains tax; holding my stock was a better use of the money than avoiding the loan. But I paid off the loan well in advance, because a loan payment was a better use of my new money than buying more stock was.
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Re: No Mortgage/Debt

Postby dad2000 » Thu Dec 20, 2012 12:00 am

The decision for me wasn't purely between having or not having mortgage debt. It was that my desire to OWN a family home was greater than my desire to not have mortgage debt.

I still don't like mortgage debt, and will be rid of it in 2014 barring any catastrophes.
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Re: No Mortgage/Debt

Postby umfundi » Thu Dec 20, 2012 3:35 am

When I bought my first home, in 1980, I had a 13% 30-year mortgage and a payment big enough relative to my salary that I lost sleep over it. A few years of high inflation and 20% raises took care of that, and I then refinanced to a 6% 15-year loan. I had no savings to speak of, my only real assets being a good education and a good job.

I think it is entirely rational to allocate a future income stream, with some balance, both to savings and to a mortgage. For most younger people, there's not much alternative.

That is different (in my mind) than equating the two. Today, my mortgage is paid, and I have a HELOC (2nd mortgage) available at 2.25%. Should I max out my HELOC and invest the proceeds in taxable investments? I could, but I have decided not to.

I don't need the risk. I do not like the idea of creating a liability that is balanced against an asset that has a completely different risk profile. Going short in one place to go long in another is not my cup of tea.

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Re: No Mortgage/Debt

Postby sscritic » Thu Dec 20, 2012 10:06 am

I never said max out anything. I believe in balance, which is why I took a mortgage rather than pay cash for my house. I might have been able to get a mortgage for 97% of the value, but I got one for 36% of the value. Balance. If my house drops 40% in value, it would still need to drop another 40% from there for me to be underwater (in which case I will continue to make the payments and continue to live in the house I want to live in).

Math fact: 0.6 times 0.6 = .36 With two 40% drops, the home is worth 36% of its original value.

When my loan balance drops low enough, I will have to consider if I want to borrow more to invest rather than concentrating so much into my house. Since I will be 10 years older and will have a 10 year shorter life span in which to invest, I probably won't, but that's a decision I will make at the time.
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Re: No Mortgage/Debt

Postby Call_Me_Op » Thu Dec 20, 2012 10:10 am

ronk wrote:Hi,

I am in my early 40s. In the past few years, I used my savings to pay off my house/car etc. I am currently debt free and pay my credit cards in full each month. The idea of having debt is nerve racking for me. I also started putting my money into a vanguard lazy portfolio.

From what I have read on the forums (and from talking to coworkers), I see that most people choose not to pay of these debts and instead have the money in liquid cash/invested. Is the idea that you can make more money by investing the reason people don't pay off their debts or is it for tax reasons.

Please explain.

Thanks.


People usually look at this as purely a question of numbers, which it is not. For example, if you live in a state with a generous homestead exemption, taking cash off the table to pay-off your house could be a very wise move vis a vis asset protection.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: No Mortgage/Debt

Postby mptfan » Thu Dec 20, 2012 12:36 pm

sscritic wrote:Which is to say you liked mortgage debt when you thought it was to your advantage to have mortgage debt, and you later decided you didn't like mortgage debt when you thought it wasn't to your advantage.

No. Sometimes you do something not because you "like" it, but because you have to, or because it is advantageous to do so at that time, or because it is a compromise between the lesser of two things that you dislike. Life is not as black and white as you present, there are a lot of gray areas, and a lot of decisions that require balancing interests.
I eat risk for breakfast. :)
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Re: No Mortgage/Debt

Postby sscritic » Thu Dec 20, 2012 12:39 pm

mptfan wrote:
sscritic wrote:Which is to say you liked mortgage debt when you thought it was to your advantage to have mortgage debt, and you later decided you didn't like mortgage debt when you thought it wasn't to your advantage.

No. Sometimes you do something not because you "like" it, but because you have to, or because it is advantageous to do so at that time, or because it is a compromise between the lesser of two things that you dislike.

OK. split hairs. You don't like the debt but you like the advantage it gives you. You can say that about every one of your decisions: I don't like what I am doing but I like the advantage it gives me. In other words, circumstances forced me to do something I didn't want to do. Is that the line you use in the confessional? :)
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Re: No Mortgage/Debt

Postby mptfan » Thu Dec 20, 2012 12:52 pm

We are just arguing about semantics here, but everyone does things that they don't like to do for various reasons. Do you like to get up and go to work everyday? Do the laundry?
I eat risk for breakfast. :)
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Re: No Mortgage/Debt

Postby sscritic » Thu Dec 20, 2012 1:27 pm

mptfan wrote:We are just arguing about semantics here,

Agree, except that long ago when I was in college a good friend told me that her parents hated debt so much that they didn't buy a house until they could pay cash. They may have borrowed some money when they were younger, but as far as she knew they had never borrowed money during her lifetime. If you really, really, really hate, hate, hate being in debt, then you postpone getting the things you would like to get if getting them means taking on debt. Admittedly, hate is stronger than dislike, so while many here dislike debt, not many seem to hate, hate, hate it.

P.S. I don't hate, hate, hate doing the laundry, so it's not a problem for me to reconcile my beliefs with clean clothes. Of course, there is always the dry cleaners; they also offer laundry services (for those who hate, hate, hate doing laundry, but don't hate, hate, hate spending money).
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Re: No Mortgage/Debt

Postby JupiterJones » Thu Dec 20, 2012 4:39 pm

sscritic wrote:
mptfan wrote:If you really, really, really hate, hate, hate being in debt, then you postpone getting the things you would like to get if getting them means taking on debt.


Unless of course you really, really, really, really, hate, hate, hate, hate postponing things.

It's all relative. :-)

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Re: No Mortgage/Debt

Postby SamB » Thu Dec 20, 2012 5:06 pm

Note that the question of paying off the mortgage versus investing the payoff in a risky investment is exactly analogous to the retirement draw down problem. The draw down involves a fixed amount coming from the risky portfolio, and the mortgage problem involves a certain required payment coming from the same risky investment.

How does it work out? Roll the dice and find out or run a simulation to help estimate the odds. If you don't have the SW, you could consider MCretire at http://www.effisols.com/.
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Re: No Mortgage/Debt

Postby umfundi » Thu Dec 20, 2012 5:30 pm

SamB wrote:Note that the question of paying off the mortgage versus investing the payoff in a risky investment is exactly analogous to the retirement draw down problem. The draw down involves a fixed amount coming from the risky portfolio, and the mortgage problem involves a certain required payment coming from the same risky investment.

How does it work out? Roll the dice and find out or run a simulation to help estimate the odds. If you don't have the SW, you could consider MCretire at http://www.effisols.com/.

Sam, that's a very interesting observation!

Keith
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Re: No Mortgage/Debt

Postby ronk » Fri Dec 21, 2012 11:29 pm

Good viewpoints. Thanks everyone!!
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