Have to love this mortgage advice !

[frayne]

Carry A Mortgage to Make Money And Create Investment Opportunities - AOL On

 

[Sesq]

Basically, take out a big loan so you have more money that I, your investment adviser, can charge you a fee on.

 

[harley]

Mortgage vs. paid off house. What a great new topic! This should be interesting.

Having said that, Ric Edelman is a typical self serving FA scumbag.

 

[frayne]

I actually thought this was some crank advertisement along the lines that "The Onion" might post.

 

[Fishingmn]

We actually did take out a mortgage on our current home 18 months ago when we could have rolled over our previously paid off house to the new one.

Reason? We got a 15 year 3% loan.

I then took the money and turned it into 5 more rental properties that are fully paid off and returning over 9%. The numbers just made sense.

 

[Andre1969]

Back when the Great Recession started ramping up, and word on the street was that mortgage companies were starting to freeze HELOCs, I maxed mine out, just to make sure I had access to the money if I needed it. Turns out I didn't really need it, so I ended up investing it, as the market was in its lows.

Worked out pretty good for me, but as they say, past results are no guarantee of future success!

 

[Animorph]

I've taken out HELOC's, used <1% car financing twice, and drawn out our mortgage, including a large cash out in the second to last refi, and invested the proceeds. So far my "HELOC" brokerage account where I invested the HELOC and mortgage money is up about $80k after subtracting out the $100k cash out still in there and about $20 in interest paid so far. That's $80k from nothing, just taking the mortgage/investment risk and investing in my normal AA for 12 years. And the two cars, purchased in 2001 and 2009, ended up costing us less than half price as we made money on what we would have paid in cash for the cars. Of course there was an obvious timing advantage to those dates now, but we did take out car loans near the bottom of the market both times.

Not for everyone, but if you can get a long-term loan for 3.25% the odds are decent that you can do better than that with your normal AA. Kind of like taking a withdrawal rate of 3.25% from your retirement portfolio.

 

[ERD50]

Mortgage vs. paid off house. What a great new topic! This should be interesting.

Having said that, Ric Edelman is a typical self serving FA scumbag.

I just watched the video (I HATE videos for this kind of info - I can't skim, copy/paste - argghhhh! But it's <2 minutes...).

Now, I've been vocal about not being afraid of low cost mortgage debt, and to look at the numbers, but IMO, this was SCARY!

So he thinks nothing of putting just 10% down (doesn't that incur PMI payments?). And he says his clients were glad they followed his advice to pull the equity out of their houses (refinance to the max) when housing was at its peak! Isn't that what gets people in trouble if they need to sell and they are underwater? Whoah!

I hear ads from this guy on the radio all the time. I got the impression he probably had a reasonable approach for people who need some hand-holding - but this video changed that. Run!

edit/add - and he cheerfully assumes an 8% return on investments, no dips, just a straight 8%. Nice!

-ERD50

 

[RetiringAt55]

I would like to hear your opinion on what specific counterarguments people have to his advice.

I can understand that an 8% return is no longer a reasonable expectation. But what other specific problems do you see with someone holding a large mortgage, especially during retirement.

We are considering selling our home and buying a new smaller home right before retirement. Instead of putting money in the home and buying it outright, we are thinking of only putting 20% down and financing the rest, assuming interest rates stay relatively low and still less than our expected rate of return on investments. At that time, it would give us some taxable funds that we could use for Roth conversions of our IRAs, which we want to maximize before RMDs kick in. It would also give us the tax deductions which would help with our taxes during that time and some extra funds for the kids' college education.

We are thinking we would carry the mortgage until DH or I pass away, and the tax rate changes to single. At that time, the survivor could use life insurance proceeds to pay off the mortgage and probably take the standard deduction on taxes instead of itemizing.

For us, I think there is a case to be made for carrying this mortgage even though we could pay for the home in cash. Although it feels "good" to have the home paid off, it might be smarter to get the flexibility to use the cash during that time period to do the Roth conversions.

What do you think?

 

[Al in Ohio]

I cannot overstate the satisfaction of waking up each day with zero debt. When I use to mention to others ( when the topic arose) that I paid my mortgage off while still in my forties, the reaction was priceless.

Plus it allowed us to increase our savings/investment rate to a whopping 40+% of income.

 

[RetiringAt55]

Al, that is an emotional reason and I understand that. It feels good. But I am interested in hard financial reasons. Like you, I am an engineer and can feel just as good doing whatever is smartest financially, instead of just what intuitively feels good.

We are already saving 40% of our income: maxing out all tax-deferred we can, doing our Roths, and saving extra in taxable. We have a mortgage at 2.8%. Financially I don't believe it would make sense to pay off the house, especially since we are downsizing in 6 years.

 

[gozer]

Al, that is an emotional reason and I understand that. It feels good. But I am interested in hard financial reasons. Like you, I am an engineer and can feel just as good doing whatever is smartest financially, instead of just what intuitively feels good.

We are already saving 40% of our income: maxing out all tax-deferred we can, doing our Roths, and saving extra in taxable. We have a mortgage at 2.8%. Financially I don't believe it would make sense to pay off the house, especially since we are downsizing in 6 years.

I'm more along these lines. I paid off my previous house, but took out a mortgage when I built my current house. This was because the mortgage rate is less than my muni bond fund pays. I have the cash from the sale of my old house sitting earning more than the new house is costing me. If conditions change so that I am no longer in this situation, I'll just pay the house off.

I just bought a truck and a travel trailer. At both places I told them if they could beat 3%, I would finance, otherwise I pay cash. I ended up paying cash for the travel trailer and have a loan for the truck. After so many years of paying cash for everything, it feels kind of strange. But, I do whatever the math tells me to do.

On a side note, I calculated what percentage of my invested net worth was earmarked for these interest payments. It came to 0.23%. I figure I save more than that in management fees by investing with Vanguard.

 

[gcgang]

Increased Debt=Increased Risk.
Nothing wrong with that.
If you are in accumulation mode, and have a long time horizon, borrowing and investing in higher risk/return assets makes sense.
If you have retired, probably doesn't make sense.
Only argument I've considered to take on long term mortgage was to further diversify my holdings, providing a hedge against inflation.

 

[harley]

I am a big fan of arbing a mortgage, assuming the right conditions. And a 3.75% 30 year loan (mine) is a good enough bet for me. I'm retired, so this runs against gcgang's thoughts. But leaving a large amount of equity in a house that I plan to live in for a long time doesn't make sense to me. I'm willing to bet that over the next 10/15/20 years the interest rate on the loan will be totally eclipsed by the income gained by investing it in a different asset, whether it be cash or my normal investment AA. But I'd never give any of it to Ric Edelman.

Edit: As far as the great feeling of not owing money on the house, I get the equally great feeling of knowing I can pay the loan off any time I want to. I've had paid of mortgages in the past so I know both feelings. They feel the same to me.

 

[daylatedollarshort]

We refinanced the house at 3.5% and took out a HELOC. That way we can live off that money, keep our MAGI low, pay zero income taxes, get more financial aid for college and get thousands in health care subsidies for next year.

We end up with more money by having a mortgage than without one right now.

 

[Meadbh]

I am a big fan of arbing a mortgage, assuming the right conditions. And a 3.75% 30 year loan (mine) is a good enough bet for me. I'm retired, so this runs against gcgang's thoughts. But leaving a large amount of equity in a house that I plan to live in for a long time doesn't make sense to me. I'm willing to bet that over the next 10/15/20 years the interest rate on the loan will be totally eclipsed by the income gained by investing it in a different asset, whether it be cash or my normal investment AA. But I'd never give any of it to Ric Edelman.

That makes total sense in the US, where mortgage interest on your home is tax deductible and the interest rate lasts for the full amortization period.

In Canada, mortgage interest on your home is not tax deductible, and on a fixed mortgage, a new interest rate is negotiated at the end of the term (which is most commonly 5 years). Furthermore, if you have a downpayment of <20%, your mortgage must be insured by the Canada Mortgage Housing Corporation, and this limits your maximum amortization to 25 years. All of this is an incentive to pay off your home mortgage ASAP.

OTOH, mortgage interest payments on investment property are tax deductible. I have three of those. The first one will be paid off within the next two years, generating a nice income stream. The interest rates are in the 4% range, but when the other two terms expire in 3 years or so, interest rates may be higher. At that point I may pay off the smaller one, mortgage #2, generating another income stream, even if I have to increase the mortgage on #3. Or I could get a HELOC on #3. We'll see.

I was also fortunate to find a very low interest car loan (0.99% for 3 years). I figured that the cost of the car would be better invested in the markets.

 

[Chuckanut]

Nothing wrong with a mortgage if it fits into one's financial plans. But, this guy talks a bit to fast for me. My instincts tell me to not follow this advice.

Taking one's equity in the form of a larger mortgage may make sense if prices go down. If one does it before the price decline, one can use the cash to perhaps buy properties at distressed prices and make a handsome profit when the market recovers. But.... one has to know when the market is going to go down. Lots of luck.

 

[rodi]

I've taken out HELOC's, used <1% car financing twice, and drawn out our mortgage, including a large cash out in the second to last refi, and invested the proceeds. So far my "HELOC" brokerage account where I invested the HELOC and mortgage money is up about $80k after subtracting out the $100k cash out still in there and about $20 in interest paid so far. That's $80k from nothing, just taking the mortgage/investment risk and investing in my normal AA for 12 years. And the two cars, purchased in 2001 and 2009, ended up costing us less than half price as we made money on what we would have paid in cash for the cars. Of course there was an obvious timing advantage to those dates now, but we did take out car loans near the bottom of the market both times.

Not for everyone, but if you can get a long-term loan for 3.25% the odds are decent that you can do better than that with your normal AA. Kind of like taking a withdrawal rate of 3.25% from your retirement portfolio.

Do you just have a HELOC or do you have HELOC and mortgage? Your statement above implies that you've only paid $20 in interest - and that would have to be a really small loan for that to be the interest on even one months payment. (Maybe you haven't made your first mortgage payment?)

I'm just trying to figure this out.

We're likely to get a HELOC before I retire... just for cash flow purposes or at least options of cash flow.... But we're also likely to pay off our mortgage at the time my husband retires - but it's getting close to done already... so that's more the peace of mind thing.

I'm not trying to pick a fight - just trying to figure out how you can have a mortgage and HELOC invested - and only be paying $20 in interest.... What period of time is this $20?

 

[haha]

I would like to hear your opinion on what specific counterarguments people have to his advice.

I can understand that an 8% return is no longer a reasonable expectation. But what other specific problems do you see with someone holding a large mortgage, especially during retirement.

We are considering selling our home and buying a new smaller home right before retirement. Instead of putting money in the home and buying it outright, we are thinking of only putting 20% down and financing the rest, assuming interest rates stay relatively low and still less than our expected rate of return on investments. At that time, it would give us some taxable funds that we could use for Roth conversions of our IRAs, which we want to maximize before RMDs kick in. It would also give us the tax deductions which would help with our taxes during that time and some extra funds for the kids' college education.

We are thinking we would carry the mortgage until DH or I pass away, and the tax rate changes to single. At that time, the survivor could use life insurance proceeds to pay off the mortgage and probably take the standard deduction on taxes instead of itemizing.

For us, I think there is a case to be made for carrying this mortgage even though we could pay for the home in cash. Although it feels "good" to have the home paid off, it might be smarter to get the flexibility to use the cash during that time period to do the Roth conversions.

What do you think?

I think your idea is as good as anyone else's.

 

[Animorph]

Do you just have a HELOC or do you have HELOC and mortgage? Your statement above implies that you've only paid $20 in interest - and that would have to be a really small loan for that to be the interest on even one months payment. (Maybe you haven't made your first mortgage payment?)

I'm just trying to figure this out.

We're likely to get a HELOC before I retire... just for cash flow purposes or at least options of cash flow.... But we're also likely to pay off our mortgage at the time my husband retires - but it's getting close to done already... so that's more the peace of mind thing.

I'm not trying to pick a fight - just trying to figure out how you can have a mortgage and HELOC invested - and only be paying $20 in interest.... What period of time is this $20?

Not $20, that was a typo for $20k. The $80k and $100k were correct, and the difference was the $20k.

The HELOC was simultaneous with the mortgage, up to $160k initially I think. I had to keep dropping the amount to get the last two refis. Now I have no HELOC until I can get something at a decent rate, though some of it was taken care of with a cash-out refi.

It can be difficult to get any loan after retirement, so it might be wise to hang on to the mortgage if that works for you. We've had a few threads on that. Home purchase interest is also easier to deduct (and is the only home equity interest deductible for AMT) than HELOC interest. I have to divide up my current mortgage into purchase/$100k equity/investment in order to deduct it on regular taxes, and purchase/investment for AMT.

 

[bld999]

Not $20, that was a typo for $20k. The $80k and $100k were correct, and the difference was the $20k.

The HELOC was simultaneous with the mortgage, up to $160k initially I think. I had to keep dropping the amount to get the last two refis. Now I have no HELOC until I can get something at a decent rate, though some of it was taken care of with a cash-out refi.

It can be difficult to get any loan after retirement, so it might be wise to hang on to the mortgage if that works for you. We've had a few threads on that. Home purchase interest is also easier to deduct (and is the only home equity interest deductible for AMT) than HELOC interest. I have to divide up my current mortgage into purchase/$100k equity/investment in order to deduct it on regular taxes, and purchase/investment for AMT.

How is that division achieved, if you don't mind?

 

[frayne]

On the surface his advice may make some sense for those with the savvy to really understand what he is advocating. However I think his spiel is aimed more at those young people just starting out with little money for a down payment and probably lack the discipline to follow through and invest or save the money. His 8% market return is a bit Pollyannaish as well for those who know nothing about the market and investing.

 

[RetiringAt55]

I agree that his advice could be very dangerous for those who are using their mortgage as a way to finance excessive spending. In our case, we have the cash to pay off our mortgage but are making a conscious decision that it is better to use that cash in other ways.

I found his most compelling argument for carrying a mortgage to be liquidity and flexibility. I think many people focus on paying off their mortgage at the expense of an emergency fund. I have seen too many people who had a lot of equity in their home but didn't open HELOCs and then were scrambling for cash when a crisis hit and they couldn't get one or their line was cancelled.

 

[Bestwifeever]

This group is probably unusual in that many who have mortgages also have assets they could shift into real estate (paying off the mortgage). I wonder, outside this group, how many refinances go to pay for cars, tuition, travel, etc., but there is no liquid nest egg that could have been used either to pay for those had there been no refinance or heloc, or to pay back the loans.

 

[Animorph]

How is that division achieved, if you don't mind?

The IRS has rules for this, of course. Roughly, having been months ago since doing taxes, you have to pool all your home mortgage/equity loans. You calculate the monthly principal due to your home purchase loan. This is generally your original home purchase mortgage amount. You calculate the monthly principal due to up to $100k of home equity loan. The proportion of interest expenses of the pooled loans due to those principal amounts are deductible on your normal federal taxes. The $100k home equity loan interest is not deductible for AMT. You calculate the principal used for investing, and its interest. This, with some restrictions (must have enough income, not invested in tax-free securities, documentation) is separately deductible as an investment expense. The AMT calculation is independent of the standard tax calc, so the $100k home equity portion can be investment interest for the AMT. The interest on any loan principal not included in those three categories is "personal" and not deductible.

As with other pooled allocations like this, the IRS specifies which categories are assumed to be paid off first: personal is first, then investment, then $100k equity, then home purchase.

I have a mortgage spreadsheet that I drag out once a year to do all the calculations. Turbo Tax helps some, but could be better with the AMT.

Look up the IRS instructions on this for the details, I didn't verify my memory of any of this, and I'm not a tax pro.