Ric Edelman and having a big mortgage

[veremchuka]

I listen to Ric Edelman each weekend because I like financial talk shows but he drives me crazy with his have a big mortgage advice. Whether you are 25 or 75 get as large a mortgage as you can afford just don't buy a house you can't afford. He claims that the extra money you have available for investing over 30 years (with him no doubts!) will grow so much that it makes no sense to pay it off early or give up the cash to buy it free and clear. It doesn't matter if you are 5 years from retirement he says get a big mortgage or keep the mortgage, don't make a big down payment though he may say 20% to avoid PMI.


I paid my mortgage off 2 years ago and I thought it was the best thing to do. It was a 5.25% fixed 30 year, 7 years old with a $123k balance. So I had to give up $123k in cash but I am getting a guaranteed return of 5.25% by not paying interest on the loan. I did itemize as my prop tax and mortgage interest was way above the standard deduction but that was decreasing as each year passed and it isn't a 1 for 1 deduction, I was in the 25% bracket when working and 15% when retired. In my case giving up the $123k did not mean I need to take distributions from any investments as my pension covers everything but when I was paying the mortgage I had to take cash from a taxable account to cover expenses each month due to a $1225 mortgage payment, that bugged me. But imagine if I had that $123k in the market with the rebound since 3/9/2009!


I think this is the type of thing that you have strong feelings one way or the other. So is it better to keep the cash and pay the mortgage each month or be free and clear if your monthly expenses are covered like mine by a pension? Too late to change it but I am curious what others think. Like I said I hear this every week as Ric and his 2 parrots squawk about this endlessly.

 

[heirloom]

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.

 

[RetireBy90]

There was a recent thread where this was discussed, and I believe it was a very personal decision with strong beliefs on either side. Search
"Paying off the mortgage early grows in popularity "
If you want to read the comments. Sorry, I don't know how to post it as a link yet

 

[justplainbll]

I prefer Consuelo Mack. Edelman's show sounds like an infomercial.

 

[MichaelB]

There was a recent thread where this was discussed, and I believe it was a very personal decision with strong beliefs on either side. Search
"Paying off the mortgage early grows in popularity "
If you want to read the comments. Sorry, I don't know how to post it as a link yet

Is the the thread? http://www.early-retirement.org/for...mortgage-early-grows-in-popularity-60090.html

 

[Badger]

Once it got to the point where the interest on the mortgage was too low to itemize and I had to take standard deduction on taxes I made double payments to get rid of the loan. It was just as important to us to get rid of as many monthly payments as possible. Just to much hassle. Only 3 for about 10 years now - pay off credit card each month, electric bill and water bill.

 

[Danmar]

This one has been done to death. By keeping a mortgage you effectively create a personal bank. Some may succeed but as a long time banker I think it is not as easy or as risk free as you might think.

 

[Gone4Good]

There is one thing we know with absolute certainty: higher fixed expenses increase the likelihood of financial stress. Whether the potential for reward outweighs the risk is open to individual interpretation. But the financial landscape is littered with the wreckage of people who've guessed incorrectly.

 

[Danmar]

There is one thing we know with absolute certainty: higher fixed expenses increase the likelihood of financial stress. Whether the potential for reward outweighs the risk is open to individual interpretation. But the financial landscape is littered with the wreckage of people who've guessed incorrectly.

+1

 

[teejayevans]

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

 

[MichaelB]

I listen to Ric Edelman each weekend because I like financial talk shows but he drives me crazy with his have a big mortgage advice. Whether you are 25 or 75 get as large a mortgage as you can afford just don't buy a house you can't afford. He claims that the extra money you have available for investing over 30 years (with him no doubts!) will grow so much that it makes no sense to pay it off early or give up the cash to buy it free and clear. It doesn't matter if you are 5 years from retirement he says get a big mortgage or keep the mortgage, don't make a big down payment though he may say 20% to avoid PMI.


I paid my mortgage off 2 years ago and I thought it was the best thing to do. It was a 5.25% fixed 30 year, 7 years old with a $123k balance. So I had to give up $123k in cash but I am getting a guaranteed return of 5.25% by not paying interest on the loan. I did itemize as my prop tax and mortgage interest was way above the standard deduction but that was decreasing as each year passed and it isn't a 1 for 1 deduction, I was in the 25% bracket when working and 15% when retired. In my case giving up the $123k did not mean I need to take distributions from any investments as my pension covers everything but when I was paying the mortgage I had to take cash from a taxable account to cover expenses each month due to a $1225 mortgage payment, that bugged me. But imagine if I had that $123k in the market with the rebound since 3/9/2009!


I think this is the type of thing that you have strong feelings one way or the other. So is it better to keep the cash and pay the mortgage each month or be free and clear if your monthly expenses are covered like mine by a pension? Too late to change it but I am curious what others think. Like I said I hear this every week as Ric and his 2 parrots squawk about this endlessly.

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?

 

[misty57]

The only reason that I can see for keeping a mortgage these days is the likelihood that inflation will rear its ugly head and the rate on your mortgage will be lower than what you might get in a MM or CD. Ain't gonna happen for at least a couple of years, but I think it IS likely to happen before many of today's low rate mortgages are paid off.

OTOH, cash flow is a big concern for many people. They'd rather know that they don't have that payment anymore. It might not be the most financially efficient thing to do, but I can certainly understand it.

 

[ERD50]

emph mine:

I paid my mortgage off 2 years ago and I thought it was the best thing to do. ...

I think this is the type of thing that you have strong feelings one way or the other. So is it better to keep the cash and pay the mortgage each month or be free and clear ...

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'?

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.

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

 

[Gone4Good]

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.

A question that may, or may not, have been addressed in the gazillion times this topic has come up. How applicable is FIRECalc to this analysis?

It seems most (all?) of FIRECalc's data runs are not useful. In this analysis we're borrowing at a specific market interest rate and then through FIRECalc we're assuming that same money is reinvested into a market offering very different yield characteristics.

I'd think if we want to know whether someone in 1970 could have borrowed "the most he could afford" and done well by investing in the market, we'd have to assume he borrowed at then prevailing rates . . . not current ones. FIRECalc meanwhile assumes I would have made a fortune borrowing at 4% and using the money to invest in 15% treasury bonds, but that opportunity never existed in the real world.

 

[easysurfer]

I listen to Ric Edelman sometimes during the weekend. He gives some sound advice at times (like stressing to only see a fee-only planner instead of one compensated by commissions, for example). Sometimes though, he gets a bit too self congratulatory, like this past weekend when he spent about 20 minutes talking about how he is rated the top advisor in his state.

 

[youbet]

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.

In most cases, it's a subjective thing ERD50. Many financial bad habits or mistakes revolve around the mis-use of debt and financially savvy folks avoid them with a religious zeal. Carrying large amounts of debt on credit cards, pulling equity out of your house via a heloc or refinancing and spending that money on discretionary wants, using one of those payday loan places because you can't wait for Friday's paycheck to arrive, etc., etc. All bad stuff for died in the wool accumulators such as most folks who frequent this board.

These feelings carry over to traditional mortgages even though the mortgage might be a good or bad deal at the time depending on how the numbers have changed since you initiated the mortgage. Certainly someone who begins a 30 yr 4% mortgage today and finds that 10 years from now interest rates have jumped and CD's are paying 6% would be silly to pay off the loan IMHO. But the "good feelings" associated with debt avoidance are strong and many would pay off the low interest mortgage just to avoid being cuddled up with "debt."

I don't see it as a big deal one way or the other for the folks who frequent this board. Everyone is too smart to do something extreme like borrow at high rates while they're holding lots of cash earning very low rates or paying off a low rate mortgage while their cash is earning very high rates.

In my own case, I never saw my mortgage as a big contributor or detractor to my FIRE savings/investments. I haven't had a mortgage for a long time, but as I recall during the beginning years I carried it, interest rates were increasing so it seemed prudent to continue to hold it. Later when rates dropped, I investigated refinancing but decided to pay it off since the balance was a tiny percentage of my financial net worth and the cash was at hand. Of all the things that contributed to the positive outcome of my accumulation phase, I don't see where paying off that mortgage when I did, as opposed to sooner or later, made much difference. Certainly, there is a long list of things that were more impactful.

I'm surprised the "pay off the mortgage or not" discussions are so charged. Emotions about debt run deep I guess.

 

[ERD50]

A question that may, or may not, have been addressed in the gazillion times this topic has come up. How applicable is FIRECalc to this analysis?

It seems most (all?) of FIRECalc's data runs are not useful. In this analysis we're borrowing at a specific market interest rate and then through FIRECalc we're assuming that same money is reinvested into a market offering very different yield characteristics.

I'd think if we want to know whether someone in 1970 could have borrowed "the most he could afford" and done well by investing in the market, we'd have to assume he borrowed at then prevailing rates . . . not current ones. FIRECalc assumes I would have made a fortune borrowing at 4% and using the money to invest in 15% treasury bonds, but that opportunity never existed in the real world.

OK, good point, one I had not thought of.

I can't think of anyway to 'trick' FIRECALC into using a fixed mortgage payment that would reflect the rates in effect at that time. And the payoff decision would be affected by available rates. That said, I actually did take out a mortgage at historically absurd rates (in 1981), but it still worked out for me as I did one of those 'crazy' (at the time) ARM mortgages - my payments dropped every month for years and years, and my rate was soon far below historical averages (the ARM was always some fixed % point below some benchmark).

OTOH, I wonder if it is really that big an issue? With a typical AA that 15% bond rate wouldn't be such a huge effect, and mortgage holders can re-finance to lower rates over time.

Anyone have a good source for mortgage rates over time? That might shed some light on this?

-ERD50

 

[Gone4Good]

OTOH, I wonder if it is really that big an issue? With a typical AA that 15% bond rate wouldn't be such a huge effect, and mortgage holders can re-finance to lower rates over time.

True. The mortgage refi option is super valuable in a declining rate environment.

But what happens when starting rates are really low? Right now I'm borrowing at ~4%, which sounds great. But that is still about 400bp more than what risk-free assets return, so I'm starting with a considerable drag. Sure I can increase my risk to earn more (which is the point), but by doing so I'm also increasing duration and interest rate sensitivity. My fixed income allocation will certainly get punished if rates rise. Considering I can't currently earn my cost of capital (4%) in the fixed income market, a 100% equity portfolio seems like the only rational route. But P/E's on my stocks may also fall with rising rates.

I think these coorelations are why you'd need to do a separate run for each year in the data set to get a meaningful answer.

Weather it significantly changes anything is anyone's guess. But I suspect that FIRECalc runs will be more relevant the closer current market conditions are to the norm. Right now, we're pretty far from the norm.

Edit to add:
Hopefully equities will do better than 4% from here forward (plus some to make up for volatility). But John Hussman (who admittedly has been wrong on an awful lot of stuff lately) "presently estimates that the S&P 500 is likely to achieve an average (nominal) total return of just 4.3% annually over the coming decade."

 

[ERD50]

True. The mortgage refi option is super valuable in a declining rate environment.

But what happens when starting rates are really low? Right now I'm borrowing at ~4%, which sounds great. But that is still about 400bp more than what risk-free assets return, so I'm starting with a considerable drag. ...

The way I look at this, the return on 'risk-free' assets is irrelevant to me. I keep only a fixed amount of money in 'risk free' accounts, essentially 3-6 months of cash flow. It's more convenience than a risk issue, I don't want to deal with cap gains on my regular spending cash.

What is relevant IMO, is the expected return of my AA over 30 years. If that can reasonably be expected to be higher than the 30 year mortgage rate I can get, then it is a reasonable 'bet' that holding the mortgage will be positive financially. So I guess we cannot know that a low mortgage rate would be available for the 'bad scenarios' in FIRECALC w/o more digging.

-ERD50

 

[Gone4Good]

What is relevant IMO, is the expected return of my AA over 30 years. If that can reasonably be expected to be higher than the 30 year mortgage rate I can get, then it is a reasonable 'bet' that holding the mortgage will be positive financially. So I guess we cannot know that a low mortgage rate would be available for the 'bad scenarios' in FIRECALC w/o more digging.

-ERD50

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.

 

[Danmar]

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.

 

[veremchuka]

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.

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.

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.

 

[veremchuka]

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!

 

[MichaelB]

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.

 

[mystang52]

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."