Mortgages

I heard an ad this morning on the radio, so I went to this guy’s website and read an article.  This post is my response to that article.

 

First let me say that I am not a financial planner. I am not even a college graduate. I imagine the person who wrote the book, and the following excerpt from it, is both of those things. Which is why I am utterly amazed at what I am reading.

For reference you can find the material I will be discussing at the following link:

http://www.edelmanfinancial.com/education-center/articles/1/11-great-reasons-to-carry-a-big-long-mortgage

So, let me apply a little bit of logic and reason to this complete crap. And now, I am not affiliated in any way with anyone In the mortgage, real-estate, financial planning or investment industries. I’m just a guy. One that can’t stand stupidity being passed off as “smarts”.

Point by point:

 

Reason #1: Your mortgage doesn’t affect your home’s value.

Um..so what? My car payment doesn’t affect my car’s value either. But it’s a debt. It’s something I am obligated to pay. And it does affect my cash flow, and my net worth.

 

Reason #2: A mortgage won’t stop you from building equity in the house.

Again…so what? What it does do is reduce the amount of equity I have in my home. If I have a $400,000 house with no mortgage, I have $400,000 in equity. If I have a $400,000 home with a $350,000 mortgage, I have $50,000 in equity. This is pretty simple math.

 

Reason #3: A mortgage is cheap money.

Not borrowing money at all, or paying off the loans you have results in an effective interest rate of 0%. It’s very difficult, if not impossible, to owe less than nothing.

 

Reasons #4 and #5: Your mortgage interest is tax-deductible. And mortgage interest is tax-favorable.

Interest you pay on loans to acquire your residence (up to $1 million) is tax-deductible. The deduction is taken at your top tax bracket. Thus, if you’re in the 35% tax bracket, every dollar you pay in mortgage interest saves you 35 cents in federal income taxes. You save on state income taxes too.

This is easily the stupidest argument I have ever heard for having a mortgage. And I have heard it a lot. Follow the math for a minute… You should pay $1 in order to deduct $0.35 from your taxes. And people go to college in order to spout this crap! Come on!

Reason #6: Mortgage payments get easier over time.

His theory here is that as your income rises making your mortgage payments gets easier. Okay…

As your pain tolerance rises injecting yourself with heroin gets easier. As your waist expands, stuffing yourself with buckets of food gets easier. As you learn to cope with isolation prison gets easier. Anybody think the fact that you learn to deal with it qualifies as a reason to do something?? Wtf?

 

Reason #7: Mortgages allow you to sell without selling

Here he talks about refinancing your home at its’ current value to hedge against a drop in price which would negatively impact you. But…if you don’t owe a mortgage at all then a drop in the price of your home doesn’t affect you at all. So again, this makes no sense.

 

Reasons #8 and #9: Mortgages allow you to invest more money and to invest it more quickly. Mortgages allow you to create more wealth than you otherwise would.

You can read this part for yourself, but it’s a complete lie. I currently work and so does my wife. I have recently paid off my vehicle and hers as well as a few credit cards. What was the result of that? I have increased the amount of money going in to her 401k. I have opened a Drip with the power company. I am taking my kids out to do fun things regularly. After all of that I STILL have extra money, which I am using to pay off other debts.

What would happen if I paid off my house? I would have the entire principal and interest payment available to me to invest, or spend, or do whatever I like with.

Should I find myself in dire straights later, I can take a home equity loan. Or, depending on my age, a reverse mortgage.

 

Reason #10: Mortgages give you greater liquidity and flexibility.

WRONG! There is nothing more liquid than cash! And there is nothing more flexible than being able to do whatever I feel like doing with my paycheck because I don’t owe it to anyone! I’m not sure where these people went to school…but if you have kids about to enter college you should find out, and make sure they don’t go there!

 

Reason #11: You’ll never get rid of your monthly payment, no matter how hard you try.

And the most ridiculous reason of all. Because I will always have to pay taxes and insurance (and if I have no lender, insurance should be optional), I should just go ahead and pay the whole thing for all eternity.

So, my mortgage was $1800 before I refinanced. $1500 of that was Principal and Interest. The other $300 was Taxes and Insurance. So going by Mr. Edelman’s formula, because I will never get rid of a $300 payment, I should continue to make an $1800 payment for as long as I live.

Let me make this suggest. Do not ever employ the services of a person who would make these types of suggestions. Instead, check out Dave Ramsey and his method, which boils down to this; pay off all your bills and live off your salary. It’s called “freedom” and it feels good.

You will be able to invest, save and spend at increased rates. Your life will be more enjoyable, less stressful, and less complicated. And guess what! If you don’t have a $2000 a month house payment as you enter retirement, you will need $2000 a month less to maintain your lifestyle.

If you paid the house off early and were able to put those payments in to actual investments, you’ll likely have more than you need rather than less.

Lastly, consider this:

 

Loan Amount: $400,000.00   ~  Term of the Loan: 30 years  ~  Interest Rate: 5.000%

Monthly mortgage payments: $2,147.29   ~  Total interest paid over the life of the loan: $373,023.16

So…the advice here is to pay $773,023.16 for a $400,000 home, because paying $373,023.16 in interest is a great investment? Really??

 

If you invest that same monthly payment in a DRiP with a 3.51% yield, for thirty years, and pay taxes on your dividends in the 35% tax bracket, with a stock that averages 2% annual growth, you wind up with 1,522,589.30 at the end.

And I didn’t even go to college…

Wake up!

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