Bogleheads

[Gekko]

do you agree or disagree with this advice?


10 Great Reasons to Carry a Big, Long Mortgage

Never own your home outright. Instead, get a big 30-year mortgage, and never pay it off — regardless of your age and income.

http://www.ricedelman.com/cs/e....icleId=232

[mptfan]

I agree with most of his points. However, there are two major issues that he overlooks.

First, he simply assumes that mortgage interest is tax deductible for everyone at the highest marginal rate. The fact is that some people do not qualify for the mortgage interest deduction, possibly because they take the standard deduction, or, they only partially qualify, or they are in a low tax bracket anyway. When you take away this assumption, the advice is less compelling.

The second issue is the assumption that people will invest the amount they save from not paying off the principal. Most people are not that disciplined. If you take away this assumption, and you realize that most people will spend the difference on stuff they don't need, then the advice is less compelling.

[livesoft]

While young, I agree. When retired, you can have lower expenses if not paying a mortgage. If you have lower expenses, you will need to have less taxable income. The lower your AGI, the lower your taxes on your SS benefits, even substantially lower.

[Raybo]

Pure hogwash.

In one of his points he writes: There’s no way you can avoid debt in today’s society.

Is that right? I would be that many people on this board are, in fact, debt free. How have we managed to avoid it? By not taking our more debt on our houses (or anything else) then we have to.

Let's suppose you follow this guy's advice and are able to sock more money away into a retirement fund as a result (that is, once you pay your monthly mortgage payment). So, now you have all your money in an account that a) will be taxable when you use it and b) you can't use until you are, at least, 59 1/2 years.

What's more, suppose you decide to sell your house in order to unlock that equity so you can cover your expenses until you are 59 1/2? Well, the equity you have, which is tax-free up to $250K for an individual, is greatly reduced by your huge mortgage balance. Note that paying off the mortgage balance is not tax-advantaged in any way.

I think it is better to work toward being debt-free then to assume you never will be.

I can only wonder if his next article will be

Never Retire

There's no way you can retire in today's society. So, don't plan to retire, instead, get a job you won't mind having until you croak...

[liverust55]

Absurd advice IMO. All I have is mortgage debt and I'm paying it off as quickly as I can. I'm an early 30-something and if I could pay it off tomorrow I would, regardless of my age.

I think he's too smart for his own good this time.

.

[psteinx]

Most of these types of arguments, including this one, assume that if you don't pay off your mortgage, you will:

1) Save the money you would have put towards principal

[I suspect lots of folks have difficulty saving without the enforced rigor of a monthly mortgage payment (that includes principal paydown)]

and

2) That you will earn more on that money elsewhere.

This article uses an example where the money not devoted to principal earns 8%, AFTER TAXES.

Show me how to earn 8% after taxes, given current bond yields and equity valuations.

[Mel Lindauer]

That's the second silly thing I've heard that he said today. (The other was for retirees to be 100% in equities.)

This guy could be dangerous to your wealth!

Regards,

Mel

[FinanceGeek]

I used to think this way until the market drawdowns post Y2K, at which point I realized that I could wind up with a much smaller portfolio, but my mortgage was still there!

And, mortgage deductibility is only really meaningful for the first few years anyway - IF you don't make enough to lose some/most of it...

[SpringMan]

The article is complete balderdash IMHO.
Best,
_________________
SpringMan

[Homer]

I think the main point is that personal finance is just that...personal. Mathematically he can find ways to justify his position, but as a friend of mine says, the grass feels a lot different underneath your feet once you pay off your home.
I would never go into debt for a tax break, or because I could potentially earn more money on my money than the interest rate I'd be paying.
As for investing, there are plenty of people whose approach to real estate investing is to invest in PAID FOR real estate, and I'm with them. Yes, I know the arguments for using "other people's money", I just don't do it.
Kudos to the folks here who have paid off their homes or are working hard to do so!

[RTR2006]

We paid off our mortgage in December 2005 and it remains the single best thing we ever did with our investment dollars.

Sure, you can argue in hindsight that those dollars could have been invested somewhere else, and sure, that investment could have gone up 48%... or down 60%. Our home is paid off and the satisfaction we get from that outweighs any monetary gain on any investment.

RTR

[Gregory]

[quote="Mel Lindauer"] That's the second silly thing I've heard that he said today. (The other was for retirees to be 100% in equities.)

This guy could be dangerous to your wealth!

Regards,

Mel [/quote]

100% equities for a retiree!?! That's waaaay braver than I'll ever be!

I'll stick my my VG intermed-term bond index fund, TIPS and muni's for a good portion of my portfolio -- I'll sleep better.

Greg
_________________
Pecuniae imperare oportet, non servire.
Fortuna vitrea est; tum cum splendit frangitur. -Syrus

[nisiprius]

[livesoft]

Lots of emotional responses above. How about some numbers?

Our mortgage is 4.875% fixed rate. We itemize on Schedule A. Our charitable deductions alone exceed the standard deduction. We could pay off our mortgage many times over, but prefer to max out our 401k contributions, 529 plan contributions and other investments. We are in the accumulation phase of our investing life, so we are making no withdrawals now from any of our investments. Our CDs pay more than 4.875% and are in tax-deferred accounts. Even money market funds pay more than 4.875% now.

I don't need 'peace of mind' of no mortgage debt. I have peace of mind knowing that I could pay off the mortgage at any time with money I have invested elsewhere.

If the stock market dropped like in the summer of 2006 or the summer of 2007, I am buying (I bought) stocks, not paying (did not pay) off my mortgage. If we lost our jobs, our investments could be used to make mortgage payments. Our annual property taxes are about the same amount as our annual mortgage interest. If we lost our jobs, we would still have to come up with the money for taxes. Thank goodness our investments can cover the mortgage AND the property taxes AND the upkeep, maintenance and repairs. That's peace of mind.

[market timer]

The opinions on this board show how investing is a combination of calculation and psychology, and probably more of the latter. I agree with the person who noted how personal this decision is. Personally, I agree with the author, and would feel like a spendthrift paying off a low interest mortgage ahead of schedule. This might sound paradoxical, as paying off a mortgage is associated with good savings habits, but the opportunity cost is real. I am keenly aware of the long run cost of "sleeping well at night" by not taking enough risk with one's portfolio. For people not disciplined enough to save otherwise, taking a shorter duration mortgage is probably a good option.

[Gekko]

i've never met anyone who ever regretted paying off their mortgage.

[stratton]

[yobria]

Utter nonsense. The main flaws are

a) Article assumes you have to borrow lots of money anyway at high rates anyway for cars and TVs. Bad idea in most cases.

b) Article assumes you can make more in risky assets than your mtg costs. Might or might not be true over your time horizon (note the word "risky") - if not, you could be bankrupt.

c) The fact that debt may be "cheap" or tax deductible does not make it better than no debt at all!

Nick

[mptfan]

livesoft, I agree, a lot of people give emotional responses with no numbers. The emotional satisfaction of being debt free is real, and worthwhile as a goal, but that emotional goal can also be deleterious to one's net worth.

[jimmy futura]

at first glance, this is easy to write off under the premise of debt = bad.

however, it seems like this theory tests our "diehardedness."

our instinct is of course to have no debt ASAP - a great feeling! i'm personally pulled to that, too - strongly.

however, many of our mortgages are locked at historically low rates - lower than what the market returns over the long term. (your AA performance may vary at your discretion - and a key is having a fixed low rate mortgage.)

that said, if that is the case, your money could be working harder for you in your AA, while maintaining your mortgage driven tax break.

plus you would maintain more theoretical liquidity if something comes up. once you put more $ into mortgage principle it is not coming back out until you sell, and it doesn't reduce your monthly payments until you hit the end of the road. (granted, which would be earlier.)

the X factor in this theory is of course is market risk. this would test your confidence in your AA more than anything! (and also require you stick to it more than ever.)

also consider the future value of today's dollars. (as described in the article.)

seems some what counter-intuitive to me, being debt adverse - but the logic of this kind of leverage is pretty strong...

best,

jimmy

[bob90245]

[market timer]

[Sunny Sarkar]

[BigBird]

One item only briefly touched upon in the article is the inherent inflation protection of low-interest mortgage debt. Particularly in light of growing concern over the future value of our (US) fiat currency, there may be huge advantages to being in debt.

Those fixed nominal payments will only diminish in real value over time.

(wishing I had a home...)
_________________
BB

[EmergDoc]

While he makes a number of good points, points 7, 8, and 9 are just plain wrong.

Reason #7: Mortgages let you sell without selling....you may well find that your home has grown substantially in value, and you may begin to worry that you might lose that equity if there’s a decline in real estate values. You don’t want to sell the house, which is the obvious way you can capture the value, but there is another answer: get a mortgage. By cashing out some of the equity, you essentially collect the value of the house in cash without actually having to sell the house.

He seems to be saying here that the mortgage is somehow connected to the home and that if you take out a mortgage now, you won't suffer a real estate loss. This is untrue. For example, if your house appreciates from $100K to $200K and you take out a $100K HELOC in addition to your $80K mortgage, and your house value plummets to $150K, you are now upside down on your home. You didn't sell without selling, you just took out some debt.

Reason #8: Large mortgages let you invest more money more quickly....So which would you rather do: invest $250,000 today, or $1,664 per month for 30 years?

The problem with this argument is he ignores risk. His argument that investing now on margin is better long term rests on the idea that he can borrow at 7% and earn at 8%. Of course if that is guaranteed he is better off investing on margin. But this is immensely more risky so the risk-adjusted returns aren't necessarily better, and most of us would argue they're worse.

Reason #9: Long-term mortgages let you create more wealth.
Do you merely want to eliminate your debt, or do you want to truly build wealth? Please realize that the former does not automatically result in the latter. Indeed, many people who are debt-free are also dead broke.

So, the real goal is to create wealth. You do that by adding as much money as you can to your savings and investments. And the best way to do that is to lower your monthly expenses. That’s why long-term loans are better than short-term loans

The best way to invest more is to spend less on mortgage interest, not spend more on mortgage interest. This takes us back to the idea of investing on margin I discussed above. Might it work out better? Sure, but it is MUCH riskier. Incidentally, I know very few people who are debt free and dead broke, but I know many who are debt free and very well off. Most of the dead broke folks I run into are actually worse than broke because they have a lot of debt.


All that said, we as diehards are probably, on average, more debt averse than we ought to be. Being debt averse can lead one to make poor financial decisions. For example, I chose to let the military pay my way through med school. All patriotic thoughts aside, I once calculated how much money I saved by letting the military do this and discovered that I came out $180K BEHIND because I was debt averse. Several things I could not have predicted beforehand contributed to that result(all-time low student loan interest rates, choice of specialty, lack of increases in military physician pay etc), but the main problem was simply that I was debt averse.

There was a poll a few months ago that discussed the interest rate at which we would essentially invest on margin. The consensus seemed to be 4-6%. Here it is:

http://www.diehards.org/forum/....light=poll

In light of that, I'm not paying back my loans with an interest rate under 4% (a deferred student loan, a 0% time-limited CC offer, and a 1.9% non-time-limited CC offer) and I am making extra payments on my loans with an interest rate over 6% (my mortgage at 6.125%.)
_________________
1) Invest you must 2) Time is your friend 3) Impulse is your enemy
4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

[Sunny Sarkar]

[reeltime]

[shelanman]

[rob]

To me it's a flexibility thing. If what you plan occurs then I think carrying a huge mortgage and investing is a great concept. The problems start when you don't get the rate of return you think or when you want options - wife want to stop work for a few years with the kids e.t.c.

We still have a mortgage but it's only @25% of the value now (although a lot of that is the price inflation). Since we live in a high tax state, we are a fair way from using the standard deduction anyway.
_________________

Rob
Its a dangerous business going out your front door. - J.R.R.Tolkien

[livesoft]

[grok87]

I read the article and thought it was bad advice. Rather than dwell on that, I think it's useful to share around some practical examples. For example- here's what I'm doing.

I'm targeting paying off my house in a 20 year total period. I am roughly halfway through this period now- i.e. 10 years to go. I picked the 20 year period so as to be done before the college bills start coming in.

The way I, simplistically, think about it that means my current mortgage balance should now be half of the purchase price of my house. In other words if I paid $200,000 for my house, I should have $100,000 left on my mortgage at this point.

In actual fact, my mortgage rate is low, so I have deliberately kept my mortgage balance higher than this target. I have invested the difference in municipal bonds. These municipal bonds have a higher after tax return than the after tax cost of my mortgage. The muni bonds currently yield 4.1% after tax whereas my mortgage costs me only about 3.5% after tax. I believe this is the same thing livesoft was advocating above.

To me this approach is sensible and prudent. Excess mortgage debt should be considered as a "negative" bond in terms of your asset allocation. The last thing I would ever do is borrow excessively against my house (think cash out refinancing) and invest in stocks. To me this would be a recipe for disaster.

I wonder how Ric Edelman can give his advice with a straight face while tons of people with subprime mortgages are losing their homes.

cheers
grok

[Random Walker]

One major advantage that I have found of paying off the mortgage is that it makes me more secure for sticking to my chosen asset allocation. The additional confidence allows me to tolerate the market drops better. Sticking with a plan is probably more important than the specific chosen plan. No way to measure the benefit, since I can't determine when or if I would have bailed out of my chosen AA without the mortgage paid off. But I am certain that my likelihood of bailing out is much less with the mortgage paid off.
I also am in the group that sees little rationale in holding bonds at the same time as a mortgage. I always viewed the mortgage paydown as a higher return than I could get in bonds. So I stayed 100% equities until the mortgage was paid, then added stability to the portfolio by adding bonds. In hindsight I was either very disciplined and brave or just didn't know enough to know better.
Dave

Dave

[SamB]

As a number of posters have pointed out, Edleman ignores risk. Balancing the return on a risky investment with the certain mortgage payment is just another version of the retirement draw down problem. In fact, mathematically they are the same thing. You can use the McRetire program to run simulations to see the possible outcomes. But that would be way past Edleman's capability.

If you do run the McRetire program or something similar you will probably be surprised at the results.

Sam

[timid investor]

Intellectually I agree with the author yet right now i do exactly the opposite of his proposal, 15year mortgage paying 160% of required terms.

When the next bear market strikes I will gladly take equity out in a HELOC to invest.

To do as he suggests during a bull market sounds kinda stupid to me.

[Sunny Sarkar]

[woof755]

Wouldn't high HELOC interest rates prohibit investing in a taxable account? I mean at 7 or 8 percent, you'd need to earn over 10% in taxable accounts to make it worthwhile.

I'm intrigued by the fact that my mortgage 15-20 years from now will have been eroded by inflation--as an argument to resist paying down principal on top of minimum monthly mortgage payments.

Trouble is, few of us (at least few of us in our 30s) will be in the current homes for that long. We will have sold, and not enjoyed as much equity as we otherwise would have.
_________________
"By singing in harmony from the same page of the same investing hymnal, the Diehards drown out market noise."

--Jason Zweig, quoted in The Bogleheads' Guide to Investing

[Dale_G]

I abhor debt and haven't used any for 20 years.

That said, I might mortgage the ranch if PEs get to 4 or 5. (yes, I remember bank stocks with PEs of 4 - 5). Sometime during the 70s or 80s, I did have a mortgage. Munis were paying about 2% more than my deductible mortgage. It made a lot of sense to invest in munis and defer any extra payments on the mortgage. As interest rates declined, the munis appreciated and they were cashed in to pay off the mortgage. It was a once in a lifetime opportunity.

Would I borrow today to purchase equities - no chance.

Note: you cannot borrow to purchase munis, but in the old days anyway, it was ok to carry an existing mortgage.

Dale
_________________
first we crawl, then we walk, then we run, later we use any available transportation

[reeltime]

[mptfan]

[grabiner]

[RTR2006]

msg deleted...

[Pincher Martin]

[chipmunk]

Okay, I just had to chime in on this one. I love real estate, but I also love being debt-free. I am working aggressively to kill of the last of my mortgage debt, since I have discovered that personal finance is more about behavior than math. So, dumping the debt, to me, beats the tax writeoff and lost opportunity cost to invest the difference, and, thus, "make the spread." As a Dave Ramsey cult member (I'm almost as Dave-brainwashed as I am index-brainwashed), I limit retirement investing to 15% of total household income (which still makes a decent dent in the nest egg) until the mortgage is dead and gone forever and ever (amen), never to be reincarnated as a refi with cash out (which I stupidly did in the past) or never to be punished and sent to HELOC. Getting rid of the mortgage frees up your income to invest, save, spend, and even (drumroll, please, for this rarely covered topic) give to help your family or favorite charity. Once the mortgage debt is gone, you can then boost your retirement savings.

By the way, let me add that my philosophy in life is to experience short-term pain so I can win long-term. I would rather suffer for a short time than be mediocre and coast my whole life. So, that drives a lot of my decisions, like whether or not to pay off the mortgage. I would rather get it over with quickly, so that I can later be under less stress the rest of my life with no debt. Not everyone here would agree, and I realize that.

Dan
_________________
"Anyone who has never made a mistake has never tried anything new." - Albert Einstein

[Sunny Sarkar]

[yobria]

[Gekko]

>"There’s no way you can avoid debt in today’s society"

yes you can. pay cash for everything. i do.

[Valuethinker]

[Valuethinker]

[tadamsmar]

When I started reading this thread I thought I would find a good analysis of morgage vs investing.

But I have learned almost nothing! Amazing number of diehard seem to be addicted to avoiding debt at any price.

This is obviously an objective problem involving a good bit of math. Risk is reducible to math, it's not a voodoo curse.

I'm not saying that it's a good idea to take out a mortgage to invest. But it has nothing to do with how diehards feel about debt.

[chipmunk]