Ric Edelman and having a big mortgage

[Gone4Good]

Finally decided to become unmoored, eh? Well, pay teh transfer tax as required by NY and you can wash your hands of it.

If I rent it out for another year I'll lose the residential mortgage capital gain exemption . . . so it's got to go.

 

[Gone4Good]

Well, one can never be free of costs associated with a house mortgage or not. There is always the carrying costs of taxes, utilities, upkeep, etc.

I see that Mr. Edelman makes that point. What I don't understand is how it influences the decision of whether to borrow money or not.

 

[Gone4Good]

Why would you have to pay off a mortgage from equity if you are selling Unless you are under water, wouldn't the money needed to pay off the loan come from the sales proceeds??

Technically I wouldn't have to repay the mortgage with the equity portfolio. But my time as a home owner is ending and the loan has to be repaid from some portion of my net worth. I can now calculate definitively whether I'd be richer, or poorer, had I followed the advice to "take out the largest mortgage you can afford and invest the proceeds." In my specific case, I'd be tens of thousands of dollars poorer. YMMV.

Edit to add:
It actually could have been a whole lot worse than that. If I had followed his advice to "Sell without selling" (Reason #7) I could have easily borrowed a couple hundred extra g's in 2007. Now I'd be significantly underwater on the property, and have an equity portfolio 15% below where I bought it, less my interest on all that borrowed money and whatever drag experienced by selling equities to make mortgage payments during all the recent volatility.

Sound financial advice.

 

[haha]

Mr. Ha, it wasn't clear to me if Ric Edelman's recommendation was really about buying real estate vs another type of investment, or just financing. Didn't mean to bother you.

No bother. I am sorry to seem short. I am always baffled by how much attention these gurus command, since they basically know nothing about most of these issues beyond what we already know.

Maybe it is hoping to get agreement with what a person already thinks, but he nevertheless seeks reassurance.

If Robert Shiller were comenting about RE and RE financing, that would be different, since he does know things beyond what most of us know.

Ha

 

[Letj]

I have been able to pay off my mortgage for the last ten years but I refuse. After factoring in the interest deduction, it's almost free money. I still have a sizable amount of equity in my house and I am thinking of refinancing and pulling some of it out. I am in the wealth accumulation phase and it just does not make sense for me to have all this money tied up in a house when I have reasonable good alternative investments. I think the trick is to carry a mortgage that you can comfortably afford. I feel a lot better knowing I have access to the cash very easily rather than have it tied up in a house. For me, cash is king. I would rather have it sitting in an investment account where I can see it and pay the off in one lump sum upon retirement, if I want to rather than being mortgage free right now. It might even make sense to continue with a mortgage in retirement as long as it's factored into my retirement plan.

 

[ripper1]

I have been able to pay off my mortgage for the last ten years but I refuse. After factoring in the interest deduction, it's almost free money. I still have a sizable amount of equity in my house and I am thinking of refinancing and pulling some of it out. I am in the wealth accumulation phase and it just does not make sense for me to have all this money tied up in a house when I have reasonable good alternative investments. I think the trick is to carry a mortgage that you can comfortably afford. I feel a lot better knowing I have access to the cash very easily rather than have it tied up in a house. For me, cash is king. I would rather have it sitting in an investment account where I can see it and pay the off in one lump sum upon retirement, if I want to rather than being mortgage free right now. It might even make sense to continue with a mortgage in retirement as long as it's factored into my retirement plan.

+1....Took the words right out of my post.

 

[MichaelB]

No bother. I am sorry to seem short. I am always baffled by how much attention these gurus command, since they basically know nothing about most of these issues beyond what we already know.

Maybe it is hoping to get agreement with what a person already thinks, but he nevertheless seeks reassurance.

If Robert Shiller were comenting about RE and RE financing, that would be different, since he does know things beyond what most of us know.

Ha

Got it. Agree on Shiller. He has been in the news lately, at least over the past few months. Nothing positive to say yet on residential real estate as I recall, and I would imagine him to be generally in favor of mortgages when used intelligently. If such a thing is possible.

 

[ERD50]

looks like the internet ate my earlier reply...

RE FIRECALC:

While there may or may not be "a better alternative", an alternative would just duplicate the same overreliance error. But there is no harm in adding other information like social wisdom from the ages, or intuition from the right brain, that may suggest avoiding overreliance on computer runs, or machines, or anythng else.

Agreed. I like FIRECALC for its fairly straightforward 'numbers' approach. But I must be applying some other information (whether wisely or not, I can't say), since I still shoot for something more conservative than its 100% success number. So it is just one factor (admittedly a big one for me).

RE - tax liabilities in pre-pay vs no pre-pay:

I am not sure I follow you here, but you seem to assume that everyone has mostly or only 401k or IRA funds. I and plenty of others who have lived a less corporate life have money in the bank. As best I can tell, one does not incur a tax liability in writing a check.

No, I'm thinking in terms of money outside tax deferred accounts also. If someone can pre-pay a mort with $100K that has a $100K cost basis (no tax liability), then can't they use that same $100K to make the monthly mortgage payments with no tax liability? Over time, they hope to have gains on that money (that's the whole point!), but those gains will represent only a portion of the mort payment, not the whole thing.

-ERD50

 

[haha]

No, I'm thinking in terms of money outside tax deferred accounts also. If someone can pre-pay a mort with $100K that has a $100K cost basis (no tax liability), then can't they use that same $100K to make the monthly mortgage payments with no tax liability? Over time, they hope to have gains on that money (that's the whole point!), but those gains will represent only a portion of the mort payment, not the whole thing.

-ERD50

Now I understand what you mean. Yes, that could be done. But there is a considerable mismatch between the cash flow needed to make the loan payments, and the cash that could be thrown off by a bond with the absolute security that many of us would want in retirement to fund the mortage loan liability. Even with a mortgage at 4%, which I don't think I could have gotten, if I funded it with an online savings account at 1% I am losing, and will be losing until who knows when. Meanwhile I am taking the standard deduction, and not paying any tax on interest to fund the mortgate payments. Another thing is the savings upfront, with fees and insurances that don't have to be paid, and hassles that didn't have to be endured.

But it certainly is not an open and shut case; there are many reasonable responses to this question.

Ha

 

[ERD50]

RE income taxes on mortgage payments:

Now I understand what you mean. Yes, that could be done. But there is a considerable mismatch between the cash flow needed to make the loan payments, and the cash that could be thrown off by a bond with the absolute security that many of us would want in retirement to fund the mortage loan liability. Even with a mortgage at 4%, which I don't think I could have gotten, if I funded it with an online savings account at 1% I am losing, and will be losing until who knows when. Meanwhile I am taking the standard deduction, and not paying any tax on interest to fund the mortgate payments.

But I never look at replacing the mortgage with something with 'absolute security', I add it to my overall AA. I'm talking about a mort of maybe 10%-20% of one's portfolio value, and that is not an amount I would be changing my AA over. So I look at total return of my entire portfolio, not some low-yield, secure bond. I think one would be unlikely to 'win' with that approach, other than gain liquidity.

No hassles either, it's a direct deposit, all automatic. One of the things that keeps me from paying it off, if I thought that might be a good thing, is that would be a (very minor) 'hassle' compared to what I do now, which is nothing (as I watch my payment go down, as I have an adjustable).

Another thing is the savings upfront, with fees and insurances that don't have to be paid, and hassles that didn't have to be endured.

But it certainly is not an open and shut case; there are many reasonable responses to this question.

Ha

I can't think of any fees or insurance that I'm paying now that I would not pay w/o a mort. Prop taxes are the same, I don't have PMI or any other fees.

Totally agree with your last comment. I only take issue with anyone who tries to make an extreme case for the potential benefit/loss with or w/o a mort.

-ERD50

 

[GrayHare]

Even with a mortgage at 4%, which I don't think I could have gotten, if I funded it with an online savings account at 1% I am losing, and will be losing until who knows when.

In nomimal value yes, but in real value no: the difference in your example is 3 percentage points, which is less than the CPI inflation rate last year, thus in real value you would have actually come out ahead if you had the mortgage.

 

[haha]

In nomimal value yes, but in real value no: the difference in your example is 3 percentage points, which is less than the CPI inflation rate last year, thus in real value you would have actually come out ahead if you had the mortgage.

Hey, you guys win. This argument does not appeal to me. In fact, most arguments do not appeal to me! My oldest and closest friend says he sometimes complains to his wife that he can't get me to argue politics or environmentalism with him. It interferes with the ancient Greco-Roman goal of equanimity.

BTW, the more I learn about it, the more I think that the ancients got most things right.

Ha

 

[Finance Dave]

I have not read EVERY post, so sorry if this has been mentioned. In general, I prefer to pay off the mortgage. However, in the county where I live, you lose the mortgage exemption on your property taxes if you pay it off. Whether that's enough to change your decision I don't know...you'd have to do the math.

In my case, I paid it off, then took a HELOC, thus preserving the exemption. The HELOC is to pay for rental property.

 

[Danmar]

I have been able to pay off my mortgage for the last ten years but I refuse. After factoring in the interest deduction, it's almost free money. I still have a sizable amount of equity in my house and I am thinking of refinancing and pulling some of it out. I am in the wealth accumulation phase and it just does not make sense for me to have all this money tied up in a house when I have reasonable good alternative investments. I think the trick is to carry a mortgage that you can comfortably afford. I feel a lot better knowing I have access to the cash very easily rather than have it tied up in a house. For me, cash is king. I would rather have it sitting in an investment account where I can see it and pay the off in one lump sum upon retirement, if I want to rather than being mortgage free right now. It might even make sense to continue with a mortgage in retirement as long as it's factored into my retirement plan.

Then why pay it off when you retire?

 

[Gone4Good]

But I never look at replacing the mortgage with something with 'absolute security', I add it to my overall AA. I'm talking about a mort of maybe 10%-20% of one's portfolio value, and that is not an amount I would be changing my AA over.

I have a technical question.

If you're overall AA has some fixed income component, isn't the cost of your mortgage higher than the yield on your fixed income allocation?

I understand borrowing to buy investments I think will earn more than my cost of borrowing. I don't quite understand why I'd allocate some of that borrowed money to investments that I'm relatively certain will not earn back my cost of funds.

 

[Letj]

Then why pay it off when you retire?

I may or may not. Frankly, even with the equity I plan on pulling out, my mortgage would be affordable in retirement based on my current plans. I frankly don't see much benefit in paying off a mortgage early. What happens if you do need the cash later? You can't eat your house. It's probably easy for me to say since I've not stayed in a house longer than 5 years and always made money on the move. I got my current house at the equivalent of a fire sale in a very desirable neighborhood. I knew of the pending foreclosure and approached the bank directly and low balled them. I got the house before it even went on the market - long long story but I was able to get it at an unbelievable price. When I closed I had a significant amount of equity.

 

[ERD50]

I have a technical question.

If you're overall AA has some fixed income component, isn't the cost of your mortgage higher than the yield on your fixed income allocation?

I understand borrowing to buy investments I think will earn more than my cost of borrowing. I don't quite understand why I'd allocate some of that borrowed money to investments that I'm relatively certain will not earn back my cost of funds.

Good question, and it would seem that technically, you must be correct.

I guess I'm just keeping it simple (perhaps too simple?), and saying that I have reasonable expectations that some moderately aggressive AA (60/40~70/30 range) will outperform these low interest rate mortgages over a 30 year time frame. I haven't looked specifically at how much of that return is from EQ and how much from fixed. It's certainly true that fixed income isn't beating mort rates now, but if you lock in today's rate for 30 years? I don't know, have fixed returns exceeded 4% over the long haul? I'm already on the aggressive side (~ 70/30), I guess I see it as a package deal, I'd be unlikely to NOT have some of both (though I would sleep better with 100% EQ than with 100% fixed).

I guess one could make the case that the mort amount could go towards those 'risky' EQs. A larger portfolio will still provide the same 'floor' at a higher volatility, so that essentially offsets the 'risk' (BTW - I keep using the 'scare quotes' around 'risk', as it can be defined so many ways - it's a kinda fuzzy thing).

-ERD50

 

[Gone4Good]

I guess I'm just keeping it simple

There is tremendous value in that.

I can also see that even at today's rates the 30-40% fixed income slice could possibly outperform your mortgage over a 30 year period, assuming intermediate duration and a return to "normal" yields over the life of your mortgage.

I'd probably opt to just stick the mortgage money in one specific equity fund and amortize the mortgage from that fund. It's simple enough and makes for easier accounting too. If the fund runs dry before the mortgage is repaid, I know I made a bad decision. And if I have money left over, I know exactly how much my brilliant stragegy returned.

As always, there is more than one way to skin a cat (although I never understood why anyone would need more than one way to skin a cat, or even one for that matter. Poor kitty.)

 

[beowulf]

I find some level of entertainment listening to Ric Edelman, Ray Luccia, etc. Not all the time, but, in between the pitches, there is an occasional nugget of useful information. The responses to callers, rather than any monologues is what interests me most.

I always thought the idea of getting a large mortgage just to invest the money made no sense at all. That's not what the purpose of a mortgage is. I know far too many people who refinanced and pulled a lot of money out of their homes when the values went through the roof in 2005 - 2006. All of them are underwater now and most of the investment money is gone also as much never actually made it to investments (cars, TVs, vacations, etc. - just too tempting - they thought it was free money).

Some people did get free money - there was a recent article in the Washington Post about a local couple who bought a $1.2M house with no money down about 5 years ago and have never made a single payment and are still in it . Most of us couldn't take the stress involved with that.

We are a few years away from paying off our primary home mortgage. Low 5 figures with a 3.75% interest rate (just lowered by our credit union without us asking with no costs). I don't see any reason to pay it off early - the cash flow is minimal and nearly all of it goes to principal. We have a rental property that we will probably never pay off (will sell it first) that yields a small positive cash flow. It's underwater (purchased in 2004) at the current time and I see no reason to throw money at it.

I understand that this is a really hard decision to make, but most people don't have the option (meaning assets on hand) to have any choice. All the opinions here are really interesting, as are the points of view.

 

[Dennis]

Have a big a Mortge as you can for another Reason?
-There will be Less $ to Spend on anything else..
-And what better Place to spend your $ on, than A Roof Over your head and into a TAX FREE Rtn . Investment
-And by the time It IS paid for? The Kids are Gone, Don't have to spend $ on them. And then you can Take that Former Net Mortge $ ( less Interest) and Start Putting into a 50/50 or 40/60 Portfolio or All Bonds if you like.
-And Like we also did? We Downsized at the Right Time- 2005.. a Few Yrs early, but we couldn't resist the Outrageous Price we got for our Bigger Home and made over $400k Tax Free!
-Got a Townhome for $200k to be our Retirement place and started out Retirement Savings portfolio off to a Great Start..
-No more Mowing , Raking Lawns, No more Cleaning Gutters and No More Shoveling driveways. Just Lock the Door and Go on a Cruise anytime we want..! It's heaven!

 

[Dennis]

BTW? Did a Comparsion I got from RE firm For 2 Ports they suggested for Post Retirement vs My Own More Simple 50/50 in VWINX and VBILX. As with Most FA firms? Theirs has Underperformed even the simplist of Ports.. vs using all the Positions they use, to probably Justify their Fee..and make it look complicated.

 

[njhowie]

However, in the county where I live, you lose the mortgage exemption on your property taxes if you pay it off.

Never heard of such a thing. Mortgage doesn't come into play with property taxes where we live.

 

[njhowie]

I always thought the idea of getting a large mortgage just to invest the money made no sense at all. That's not what the purpose of a mortgage is.

Agreed 1000%.

When we purchased our home, my employer had a relationship with JP Morgan for mortgages. What JPM was pushing takes your above statement to the extreme - interest only mortgage...essentially you never pay any principal, so you have more to invest, and you get a bigger interest deduction. This was 2001 and the markets were still going wild - who ever thought you couldn't make more money investing than the 7% to 7.5% current mortgages were going for...the comparisons being used were up in the 10% to 12% for long term market returns. Better yet they said "not paying any principal is no big deal - the value of the property is going to go up". In hindsight, we all know better now.

We paid off our mortgage a little over two years ago, and could not be happier. We had about 50% of the mortgage payoff balance invested in the market, the other 50% sitting in money market funds. As interest rates plummeted, it was easy taking the money market funds. As far as the stock investments - the timing was right.

With the mortgage gone, we've been in overdrive since, hypersaving lots and our savings and stock portfolio both eclipse what we had prior to payoff.

For us, the certainty of not having to ever think about the mortgage again was priceless.