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]

Quote:

Originally Posted by 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

Is the the thread? http://www.early-retirement.org/foru...ity-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]

Quote:

Originally Posted by 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.

+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]

Quote:

Originally Posted by 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.

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:

Quote:

Originally Posted by veremchuka 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]

Quote:

Originally Posted by ERD50 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]

Quote:

Originally Posted by ERD50 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]

Quote:

Originally Posted by Gone4Good 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]

Quote:

Originally Posted by ERD50 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]

Quote:

Originally Posted by Gone4Good 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]

Quote:

Originally Posted by ERD50 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.