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Old 03-05-2012, 12:30 PM   #21
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Originally Posted by Gone4Good View Post
I go on to address this.

My basic view is that low present discount rates generally mean low future returns. High discount rates lead to high returns. So yes, my hurdle rate is low. But so too are my expected returns on risky assets.
Yes I agree. You sound like a banker. the bottom line is there is no possible way to " guarantee" a positive spread over current mortgage rates. Interest rate risk, equity risk, etc. Are usually ignored by the mortgage fraternity.
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Old 03-05-2012, 11:56 PM   #22
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I prefer Consuelo Mack. Edelman's show sounds like an infomercial.
You are absolutely correct, Edelman's radio show is an infomercial to invest with his company, there is absolutely no doubt of that. I have listened to Ric for a few years and while he does give good advice on some issues, his advice on mortgages is flawed IMO.

When you are younger, say less than 45, then a mortgage allows you to use your income to invest and over decades that allows you to grow a nest egg. My issue with his "get the biggest mortgage you can afford" is that he says it applies to everyone whether 25 or 75. He does stress don't buy more house than you can afford, which I agree with, but I have heard him tell a 75 or 78 yo man to get a big 30 year mortgage! Like how much should/would a person of that age want to have in equities? Sure it varies and there are factors that may allow for 60 even 70% allocation to equities but that would be an exception typically.

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Don't forget that it's in his interest for you to have a big mortgage, because that means he'll have more money to manage and will earn a higher fee.
TJ
Yes, that's clear as crystal to anyone that listens to his show and has a decent understanding of financial matters. From what I hear, the majority of people that call in are not in that camp. I think they could do a lot worse than allowing Ric to handle their investments but I also believe that I and no doubts the vast majority of us here can do it ourselves and save that 1% or 1.5% fee he charges.

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Is he saying buy the most house one can afford and then borrow the max, or is he just saying borrow as much as possible?
The former NOT the latter. At least he is correct on that - latter that is. He is not for buying a house you barely can afford and then having a huge mortgage due to it's cost. He would say to get a low to mid range priced house based upon your income and then mortgage as much as possible to free up as much money as possible to invest. And surprise, he wants you to invest it with him!

I know there are strong feelings on this topic on both sides. I can make a case for both sides but the case for the mortgage is when you are young and have the time to allow money to grow for decades and to plow as much as possible into investments, this is how we all managed to FIRE. What drives me crazy is every week listening to this same BS he tells everyone that asks about mortgage payoff or paying it down or whether to pay if off before retiring in say 5 years or buying a 2nd or new home elsewhere in retirement and whether to carry a mortgage and how much and he always stresses how it is a HUGE mistake to NOT have as large a mortgage as you can afford. You MUST carry a BIG mortgage! It just bugs me that he says this like it is the 11th commandment! It depends upon your age, financial condition, how you feel about debt etc. I miss my $123k but my expenses are low, I can bank a good amount of my net pension, zero distributions from investments since retiring almost 5 years ago so why would I want to pay the bank 5.25% when I can pay it off? That is a guaranteed 5.25% return. Now if you get a mortgage today at 3.8% or 4.2% the day will come when rates on cd's are back in the 4's, 5's even 6% and you'll be better off with that low interest rate but that day isn't now.
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Old 03-06-2012, 12:10 AM   #23
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emph mine:



There have been numerous threads on this subject over time.

I'm confused as to what you are asking. When you ask 'is it better', do you mean strictly financially based on historical data (since no one can predict the future)? Or do you mean is it better if it makes you 'feel better'?


-ERD50
Sorry I missed your comments when I multi replied. It's either or both. If I keep my $123k then I have a large cash position for expenses but I am paying $6500, $6300 etc decreasing each year in interest, remember this loan was just 7 years old so the interest was applied against a large sum. So I get 1% on $123k in a cd but pay 5.25% on that $123k in the mortgage, sure sounds like a bad choice, at this point I wouldn't put the $123k into equities. So I see the value of paying it off but I give up the money. Historically rates for cd's would be higher and my 5.25% rate would be considered a low rate and not paying it off may well make sense.

I used to think all that interest that was deductible was saving me money. It was a help before I could pay it off but why would anyone willingly pay 5.25% interest especially when you are now in the 15% bracket and think that 15 cents of each dollar you paid in interest you are getting a good deal, what about the 85 cents you paid the bank. I'm happy with not having a mortgage and that's what counts but at times I wish I had the $123k, you can't have both!
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Old 03-06-2012, 05:27 AM   #24
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The former NOT the latter. At least he is correct on that - latter that is. He is not for buying a house you barely can afford and then having a huge mortgage due to it's cost. He would say to get a low to mid range priced house based upon your income and then mortgage as much as possible to free up as much money as possible to invest. And surprise, he wants you to invest it with him!
It doesn't make sense. If he wants you to invest as much surplus money with him as possible' this way to do that would be to either rent or buy the smallest, least expensive home possible. Buying a big home ties up so much future income in upkeep, insurance, taxes, etc, there may be little left over to invest.

Either that, or his message is to a select group of high income / net worth people that can afford expensive housing and little or no mortgage and listen to the radio over the weekend.
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Old 03-06-2012, 07:17 AM   #25
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At any given point in time prevailing mortgage rates will always be higher than "safe" savings returns. From an admittedly simplified financial perspective, that means paying off the mortgage - or making additional payments to principal - will almost always [always?] yield a better return.
Then there's that great emotional feeling, like that bumper sticker says: "don't laugh, it's paid for."
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Old 03-06-2012, 08:11 AM   #26
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It is still not clear if Ric Edelman is advocating leverage or real estate, or both. At a recent social gathering there was such a discussion, with someone energetically pushing the idea of buying (he said investing) the biggest house - but in this case the advice was to his own family members and he urged them to really push the limits of affordability. A real no brainer, and contemptuous of contrary opinions.

This real question looks to me to be is home ownership an investment or an expense. I have always seen it as an expense, but others seem to hold a passionate belief that it is the greatest hard asset investment out there for the average joe, and leverage only makes it better, and people that do not agree are stupid.
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Old 03-06-2012, 09:04 AM   #27
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This real question looks to me to be is home ownership an investment or an expense.
Courtesy of Matt Yglesias:

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Lots of people buy RVs, but nobody “invests” in them. And what’s a house but a giant RV with no wheels?
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Old 03-06-2012, 09:12 AM   #28
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... So I get 1% on $123k in a cd but pay 5.25% on that $123k in the mortgage, sure sounds like a bad choice, at this point I wouldn't put the $123k into equities. ...
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At any given point in time prevailing mortgage rates will always be higher than "safe" savings returns. From an admittedly simplified financial perspective, that means paying off the mortgage - or making additional payments to principal - will almost always [always?] yield a better return.
Clearly, it is not going to help you to borrow money @ 5% to earn 1%. I am certain that no one who says 'run the numbers before you decide a payoff is a great thing' would advocate that. What we are saying is if you stick to a reasonable AA overall - the numbers seem to say that there is an (probably slight) advantage to holding a mortgage (with the caveat that Good4Gone pointed out - FIRECALC doesn't model available mort rates), or at least that there is no great advantage to a pay-off.

It's a long term view - over 30 years, it is reasonable to expect our overall AA returns to exceed those fixed mort payments? That is a risk I'm willing to take. You can chose not to, but I doubt it will make a big difference either way.

And if you are so focused on the 'guarantee' of not losing money to the market by tying it up in a not-very-liquid asset, why not just keep sticking more and more of your portfolio into a money market? You don't need a house to park money, there are other ways. If it's good for that amount, wouldn't it be better for more? Your mort pay-off money is not 'invested' in the house (that's no guarantee anyhow), the person with a mort has the same amount tied to the house, so that's a wash.

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Then there's that great emotional feeling, like that bumper sticker says: "don't laugh, it's paid for."
Well, I can't see any reason to publicize my financial situation/decisions, but if I did, my Bumper Sticker might read "Don't laugh - I'm borrowing money @ 3% with some tax benefits and keeping it invested for the long term." But why should anyone care?


Getting back to FIRECALC - I think you can use the spreadsheet output to look at the few failures, or the few worst outcomes, and see what years those were, and if there were opportunities for low mortgage rate arbitrage. If mort rates are not attractive, one would not choose this route - it's an option, and one that allows for 'do-overs' (re-fi).

-ERD50
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Old 03-06-2012, 09:19 AM   #29
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I don't understand the distinction between "the biggest house you can afford" and "the biggest morgage you can afford." They're the same thing. The constraint is "what you can afford." To "get the biggest mortgage you can afford" you have to have a large enough house to borrow against. Therefore, the "biggest mortgage you can afford" requires "the biggest house you can afford."

Bad advice, in my view.
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Old 03-06-2012, 05:57 PM   #30
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8 and 9 are what bugs me, more money to invest with Ric!

Article | Ric Edelman
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Old 03-06-2012, 07:14 PM   #31
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Here is another good financial show on Sundays from 9:00 to 11:00 AM.
It is an interactive show and takes questions from the listening audience on 1020 AM.

They post their shows on Tuesdays, but like I said, you can listen on teh radio too at 1020 AM.

www.hefren.com

Jim is very experienced and knows his stuff.
That is quiet a good show Thanks. The questions are all over the map which is neat. Here is a good link for it Podcast Archive


Hefren-Tillotson Financial Advisors - Podcast Archive
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Old 03-06-2012, 09:02 PM   #32
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I actually dislike Ric Edelman more than Suze Orman and that's saying a lot. I never agree with his advice. Like Suze, he assume his audience is stupid and doesn't tailor his advice to the individual. His worst advice besides take out a 30 yr mortgage: get long term care insurance as a teen.
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Old 03-07-2012, 12:23 AM   #33
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Run your numbers in FIRECALC. I have yet to see any reasonable scenario where paying off the mortgage at current interest rates provided a better financial result. And FIRECALC tests against the worst times in our history.
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I am confused how people can run those numbers, and then say the 'feel better' paying off the mortgage, or run the numbers on a 100% fixed AA and say they 'feel better' w/o equities.
-ERD50
I recommend studying the First Commandment. There is a reason why the Israelites (a survivor group if there ever was one) made a big deal about false gods. Firecalc is not divine.

I always thought that a mortgage at today's rates should not be passed up. I used cash to bargain hard, and intended to get a loan afterward. But not having that monthly payment is huge. My cash was earning 1%. Now I can invest in a wider range of securities because I really don't need cash flow from everything. My taxes will fall because of this. Also, the world is dangerous. I am perhaps not as safe as I could be if I lived in a shack on the river and ran a trot-line for my food, but I am about as stable as a middle-class homeowner can be.


Ha
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Old 03-07-2012, 06:11 AM   #34
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I actually dislike Ric Edelman more than Suze Orman and that's saying a lot. I never agree with his advice. Like Suze, he assume his audience is stupid and doesn't tailor his advice to the individual. His worst advice besides take out a 30 yr mortgage: get long term care insurance as a teen.
He definitely shoots from the hip. I remember a caller asked if he thought an HSA plan was a good idea. He answered the question without asking about the person's general health and their tax bracket.

That said, I thought this book "The truth about money" was very good.
TJ
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Old 03-07-2012, 07:06 AM   #35
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I had the dubious pleasure of losing my job twice - once at age 50 and again at 58. I learned quickly that 50 was old, when looking for a job. 58? Heck, I presumed I was forcibly retired. I was fortunate that I landed a job both times, relatively quickly.
Difference was that the second time I didn't care. My house was already paid off, and forcibly or not retirement was a viable option. I have friends my age who must continue to work, in no small part due to the fact their largest legal financial obligation is that f^$#&! mortgage payment. Not having a mortgage gives one more options.
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Old 03-07-2012, 08:46 AM   #36
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I recommend studying the First Commandment. There is a reason why the Israelites (a survivor group if there ever was one) made a big deal about false gods. Firecalc is not divine.
Of course it isn't 'divine'. But running the numbers in FIRECALC gives a perspective that I can't get otherwise. Is there a better alternative?

If I go through runs to hit the edge of 100% success, I don't believe that means I won't fail. Of course the future could throw us something worse than the past, and of course my expenses could go up or some other issue. But it tells me something about how I would have fared in the worst of times we have seen. I move a bit more conservatively from that point.


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Now I can invest in a wider range of securities because I really don't need cash flow from everything. My taxes will fall because of this.
A formerly active poster would use this line. I don't think it holds water (but maybe I'm not looking at it right, and I am on my first cup of coffee). Money was used to pay-off the mortgage, so that would be taxed right? Isn't it a wash? If that money was tax free, it could be pulled tax-free over the life of the mortgage. If it wasn't, wouldn't it take a big tax hit to pull it to pre-pay? Esp in the case where people are doing this during working years where taxes might be higher.


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Old 03-07-2012, 08:51 AM   #37
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I used to make heavy prepayments and try to progress toward no mortgage. In retrospect, I did it wrong. If you want to be mortgage free, the optimal way to do so is to pay the minimum and accumulate assets until you are ready to pay it off in one fell swoop. To do anything else imprints on liquidity and at today's rates probably loses you a lot of money over time. I hate to even bring it up, but another consideration is that the conscientious fool that did a partial patient is in a much worse bargaining position with their lender than the wily fully leverage homeowner.
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Old 03-07-2012, 09:01 AM   #38
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I had the dubious pleasure of losing my job twice - once at age 50 and again at 58. I learned quickly that 50 was old, when looking for a job. 58? Heck, I presumed I was forcibly retired. I was fortunate that I landed a job both times, relatively quickly.
Difference was that the second time I didn't care. My house was already paid off, and forcibly or not retirement was a viable option. I have friends my age who must continue to work, in no small part due to the fact their largest legal financial obligation is that f^$#&! mortgage payment. Not having a mortgage gives one more options.

All it means is that your friends did not save up so they could pay off the mortgage...

Look at it from a balance sheet point of view...

#1 with mortgage and the assets liquid.

Assets $1,100,000
Liabilities $100,000
Net is $1,000,000

#2 without mortgage and the assets liquid.
Assets $1,000,000
Liabilities $0
Net is $1,000,000


How is #1 going to force you to continue working to pay off a mortgage How does #2 give you more options

What your friends probably have is:

Assets $10,000
Liability $350,000

No way to pay off the mortgage.
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Old 03-07-2012, 09:26 AM   #39
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IMHO: No mortgage = lower cash flow requirement = lower withdrawals = lower tax rate = portfolio longevity = more money for you = "living well"

There's more than one way to skin this cat, but keeping it simple is seldom a bad approach.
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Old 03-07-2012, 09:41 AM   #40
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IMHO: No mortgage = lower cash flow requirement = lower withdrawals = lower tax rate = portfolio longevity = more money for you = "living well"

There's more than one way to skin this cat, but keeping it simple is seldom a bad approach.
Throw in a giant HELOC available at need and I think we are in agreement, at least in the decumulation phase.
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