Ric Edelman and having a big mortgage

[MichaelB]

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.

 

[Gone4Good]

This real question looks to me to be is home ownership an investment or an expense.

Courtesy of Matt Yglesias:

Lots of people buy RVs, but nobody “invests” in them. And what’s a house but a giant RV with no wheels?

 

[ERD50]

... 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. ...

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.

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

 

[Gone4Good]

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.

 

[veremchuka]

8 and 9 are what bugs me, more money to invest with Ric!

Article | Ric Edelman

 

[FANOFJESUS]

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

 

[2035]

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.

 

[haha]

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

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

 

[teejayevans]

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

 

[mystang52]

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.

 

[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.

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.

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.


-ERD50

 

[brewer12345]

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.

 

[Texas Proud]

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.

 

[marko]

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.

 

[brewer12345]

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.

 

[Gone4Good]

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 agree it is foolish to completely drawdown your liquidity to accelerate mortgage payments. But a prudent emergency stash is all you probably need.

Ultimately, it comes down to whether you're alternative uses for that cash are more productive than the cost of carry on the mortgage. Proponents of having a big mortgage always conclude that they can get returns that exceed their cost of capital. Maybe, maybe not.

In my case, I'm confident that repaying my 9.75% second mortgage in Feb 2001 (SPX ~1,300) and my 7.5% 1st mortgage in June 2007 (SPX ~1,500) was a far better financial move than plowing that same money into equities. Leveraging equities may be a better bet today than it was then, but it certainly isn't as much of a slam dunk as many like to think.

 

[brewer12345]

I agree it is foolish to completely drawdown your liquidity to accelerate mortgage payments. But a prudent emergency stash is all you probably need.

Ultimately, it comes down to whether you're alternative uses for that cash are more productive than the cost of carry on the mortgage. Proponents of having a big mortgage always conclude that they can get returns that exceed their cost of capital. Maybe, maybe not.

In my case, I'm confident that repaying my 9.75% second mortgage in Feb 2001 (SPX ~1,300) and my 7.5% 1st mortgage in June 2007 (SPX ~1,500) was a far better financial move than plowing that same money into equities. Leveraging equities may be a better bet today than it was then, but it certainly isn't as much of a slam dunk as many like to think.

Not a slam dunk, but never discount the value of flexibility and having options. I think that is the bigger value for someone in the accumulation phase rather than any purported gains from leveraging equities at any given point in time. There are LOTS of ways to leverage equities aside from using a mortgage.

 

[FIRE'd@51]

Not a slam dunk, but never discount the value of flexibility and having options. I think that is the bigger value for someone in the accumulation phase rather than any purported gains from leveraging equities at any given point in time.

Yep, when I was working I had a fairly large adjustable rate mortgage. Rather than paying off the mortgage, I kept an amount equal to the mortgage balance in Treasury bills, so the rates more or less floated up and down together. I looked at the after-tax cost of the spread as being liquidity insurance, should I lose my job and become unemployed for a significant length of time.

 

[FIRE'd@51]

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?

There are instances where the higher AGI necessary to make the mortgage payment can increase taxes, e.g. a retiree on Medicare where the higher AGI may trigger Parts B and D means testing.

 

[haha]

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?

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.

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.


-ERD50

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.

It is still not clear if Ric Edelman is advocating leverage or real estate, or both.

Perhaps even less clear is why this should matter to anyone?

 

[MichaelB]

Perhaps even less clear is why this should matter to anyone?

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.

 

[Gone4Good]

Not a slam dunk, but never discount the value of flexibility and having options.

Agreed. Flexibility and options are important.

Now that I'm in the process of selling my property, I can fully appreciate the flexibility I have in doing so without having to repay a large mortgage from an equity portfolio that would be worth far less today than the loan outstanding.

Someday when I have time, and am feeling blue, I'll cheer myself by calculating just how many thousands of dollars richer I am because I had never heard of Ric Edelman until now.

 

[Texas Proud]

Agreed. Flexibility and options are important.

Now that I'm in the process of selling my property, I can fully appreciate the flexibility I have in doing so without having to repay a large mortgage from an equity portfolio that would be worth far less today than the loan outstanding.

Heck, I can understand paying off a high rate mortgage and some of the other ones here, but this comment has me stumped...

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??

 

[brewer12345]

Agreed. Flexibility and options are important.

Now that I'm in the process of selling my property, I can fully appreciate the flexibility I have in doing so without having to repay a large mortgage from an equity portfolio that would be worth far less today than the loan outstanding.

Someday when I have time, and am feeling blue, I'll cheer myself by calculating just how many thousands of dollars richer I am because I had never heard of Ric Edelman until now.

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

 

[ripper1]

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.