6 Mortgage Myths

Perceptions are funny arent they?

I was starting to think you're trolling me for bringing this much beaten dead horse up so often.

I've ALWAYS said that everyone should do their own math. I've even on occasion presented scenarios in support of both decisions. So far I've never seen you air a scenario that isnt pro-mortgage, although you do give lip service to "do your own math".

I've only stated facts as facts, and tried not to muddy the water or use extreme examples. For example, calculating this as a 30 year scenario when hardly anyone in the US stays in a home for more than 10 years. Or fudging in mortgage interest savings without factoring in income tax on the increased withdrawal.

I didnt read the article, but I'm betting the writer had non retirees in mind, and I agree with him if thats the case. If you're drawing a big salary and paying a lot of income tax, pulling a mortgage and putting your money into the stock market makes a world of sense. If you're increasing your withdrawal rate 30-50% to pay a mortgage, and you're paying taxes on that increased withdrawal, and support of that higher withdrawal is dependent on after tax rates of stock return that are higher than 5-6%, then I question that decision.

If you're retired and have a substantial heap of money and investments, and you're paying 5-6% on a mortgage (the national average right now), while making 3-4% on a similar amount of bonds, you're crazy. Thats a fact. 5>4. 5>3. 6>4. 6>3.

Azanons point is quite valid. If you're issuing a bond to the bank with your house as collateral, and then using the free cash gained from the bond to invest in the stock market, you're investing on margin. Gambling. Historically over a 30 year period, that is a winning proposition. Thats a fact. Historically over a 10 year period, its not always so. Thats a fact. In the meanwhile, if you're using part of that gain to buy bonds or bond funds, you're losing money in the arbitrage. Thats a fact. But investing in stocks and keeping a bond on your home is far riskier than not. Thats a fact. Therefore, comparing paying off a mortgage to investing in stocks is not an equal comparison. Thats a fact.

If you want to put the mortgage money in the market and hope that the expected average annual 6-8% pretax earnings beats your mortgage, and that risk feels good to you, then do it. But thats an opinion on where the future markets are going. Considering Morningstar has the overall market 12% overvalued, and that is the highest its been since early 2000...I wouldnt want to make that bet right now.

If you can find a low risk instrument that gets you a quarter or half percent after taxes to offset your mortage and squeak a few dollars out of that arbitrage, then do it.

However, it is my OPINION that for most ER's with a large investment portfolio and a mortgage, they'd probably be better off paying the mortgage from their bond portfolio and reducing their SWR. I ran those numbers for myself, and I've posted a lot of reasonable scenarios using firecalc that showed that in the vast majority of cases you're better off without the mortgage. In fact, I proposed a scenario where someone without a mortgage can retire on $100k less than someone with one, maintaining the same lifestyle. With no more or less risk than having the mortgage, according to the historic numbers you rely on.

So what we're saying is we'd rather have to get more money before retiring, then put a home and the portfolio at considerable increased risk in hopes of ekeing out a marginally higher long term rate of return? I'm afraid I've misjudged this whole thing, because that just sounds way too enticing for me to pass up. Fortunately its monday and my credit union is open so I can call them up and get me a mortgage.

As far as calling in the risks of homeownership and saying that paying off the mortgage is not risk free...well, you have those risks with or without a mortgage, there is no difference. Hence they cancel on either side of this equation. Unless you want to suggest that you might default on the mortgage if something bad happened to home values or godzilla steps on your house. You can also always take out a mortgage. You can also hold a HELOC like I do, just in case. More muddying of the waters...

May I propose that the reason you keep bringing it up is because you're uncomfortable with your own decision and are looking for some support and validation, rather than some problem with my reasoning? :)
 
What I've been struggling with is whether I should be considering the effect of inflation when I do my payoff vs. not payoff analysis. The dollars I would spend in the future to make the mortgage payments would have less purchasing power than the dollars I would spend today to pay off the mortgage. But is that a relevant consideration?

If inflation is running at, say, 2.3% wouldn't I just need to make another 2.7% on my investments to offset the 5% I'm paying on the fixed rate mortgage? And if I'm able to itemize deductions on my taxes, the reduction in taxable income from the mortgage interest would exceed the increase in income from the 2.7% earnings on my investments. That could be an added benefit.

But maybe this is just voodoo economics?

Thanks,
Ish
Click to expand...


Inflation has different effects. Essentially for a retired person you dont need to compensate for inflation to pay the mortgage. For someone drawing a paycheck, which indexes upwards faster than inflation (on average), a mortgage payment smells pretty good after 15 years when its still the same amount as it was originally, while your take home pay has gone up 2-3% a year.

In the latter case, consider your paycheck a zero value bond that generates your annual salary as a dividend, inflation adjusted, while the mortgage is a sliding value bond you issue to the bank and pay a fixed dividend to (the interest rate), callable by you, non inflation adjusted.
 
Seems like you think margin accounts can only be used to buy individual stock.  That's incorrect.   You can buy whatever you want with the borrowed money actually, including you guys beloved index funds.   And isnt that the real investment you're saying is so much better than paying off a loan first?  Or name one you like?  Yep, you can use a margin loan for that too.  Its almost a crime how easy a loan is to get.
Investing borrowed money is margining.  That's a fact, Jack.  Just because you have a loan over here, and an investment over there with a different name doesnt make it all of a sudden, not margining.
<snip>
I think people are forgetting why banks and the like are willing to give you a loan anyway, of any type.  Because they think they'll come out better in the end that you by lending you the money and you taking the risk for them.  There is no win/win scenario with lender vs borrower. Risk and Reward is a balance scale, and when someone loans you money, they set the rate such that they think the scale will come out in their favor by the time its all said and done.
Click to expand...

Azanon, if I understand you, you are saying that a home mortgage is functionally equivalent to a margin loan.This assertion is flawed on several counts. One, you can't fix the rate on a margin loan while you can on a home mortagage loan. Two, a home loan is only callable in a few instances-eg, you sell the house, or you fail to make a certain number of timely payments. As long as the physical collateral (your home) still exists, it doesn't matter what its market value is, your loan cannot be called. Not so with a margin loan. That is why experienced people have a healthy respect for margin calls.

Additionally, there are safeguards for mortgage borrowers on a primary residence, for example rules about forclosure. Ask anyone who got caught with margin debt in the 1987 equity downturn how fair a deal he thinks he got from his broker/lender.

Your second point, about how the lender and borrower cannot have a win-win deal is also flawed because you evidentally have forgotten or do not know that there is third party to this tranaction in most cases. The lender merely originates the loan, and then sells it to any number of repackagers, who then resell in securitzed form to individuals and instituions who for whatever reason want securities with these characteristics. These low interest loans are hot-potatoes. Without the ability to pass them on, most would never be made, at least by a banker older than 30.

But with securitization the originator can benefit from fees and the borrower can benfit from a low cost loan. Truly a win-win. :)

Mikey
 
Mikey - you're arguing fine points. Azanons point is that they ARE functionally equivalent where it matters, and I agree. You're borrowing money at one rate for investment purposes in the hopes that your investment returns will exceed the borrowing rate.

However your points on the increased risks and issues associated with borrowing on margin are well taken.

As far as mortgages callability...you might go back and re-read the fine print on yours. If there is no clause that allows the mortgage company to "call" your mortage, then its a rare one. Many mortgages do in fact allow the mortgage company to bail on you. That its done infrequently is why most people arent aware of it.

The reasons for enabling a cancellation are varied, and the time frame before cancellation becomes effective is usually plenty to get a replacement mortgage.
 
Well I'm really glad I paid off my 9 year 5.25% Motgage last year. Yes it saved me a few bucks as my portfoilio is only up about 3.4% this year.

But the real reason, is I hate people telling me what to do. As long as there is a string attached to your house (debt) - There always seems to be paperwork arriving in my mailbox telling me which Hoop I have to jump through.

I'm 53 years old and sick of jumping through hoops! :mad:
 
Wanna send me all your old hoops then so I can jump through them until I'm sick of it? ;)
Click to expand...


TH,

You mean you didn't have to jump through hoops at your former employer? :confused:

- One more sexual Harrassment training seminar would have put me in the funny farm. :(
 
They didnt send me to any of those. Apparently I was already good enough at it to not warrant it ;)
 
But the real reason, is I hate people telling me what to do. As long as there is a string attached to your house (debt) - There always seems to be paperwork arriving in my mailbox telling me which Hoop I have to jump through.

I'm 53 years old and sick of jumping through hoops! :mad:
Click to expand...
Cut-Throat, we paid off our mortgage years ago. In view of the thoughtful analysis provided on these pages by both TH and SG, I'm ashamed to admit why we paid it off, but I will anyway...

We were paying 9%, which was higher than the going rate at the time; we were busy and it just got away from us. One of the bank's loan officers got snotty with my wife over a small fee they tried to add to a savings account that was set up to receive our mortgage payments. So we paid off the mortgage in full - just for spite.

A bank VP called and tried to dissuade us, and he forced that snotty loan officer to call and apologize, etc. I never did the math, but if we did lose money, it was worth every penny. If there was a contest for the dumbest reason to pay off a mortgage, we'd be serious contenders. :D
 
Mikey - you're arguing fine points.
Click to expand...
TH, mea culpa. I apologize to you and anyone else who feels this way. I just can't help myself from being more interested in demonstrable facts than blanket assertions.

But I really cannot see how the difference between a floating margin loan and a fixed mortgage can be called a fine point. If so, the difference between a man and a woman is a fine point. After all, the margin loan and the mortgage loan are both loans, and a man and a woman are both people. And the other things I said are simple facts, that were ignored by the original poster. Whether they are important differences or fine points I think might depend more on the situation of the borrower, rather than on your opining one way or the other.

I wonder too if you may feel that readers of this forum can't make up their own minds about what is meaningful and what isn't, without being told by TH. As helpful as you are on many topics, I imagine that as ERs they probably are capable of that task on their own. In fact, I would even expect as experienced men and women of the world, most of us probably already know much of the broad aspects of many of these topics. What is left are details. Or we can just ignore data and argue.

I also have doubts about what you assert is the callability of home mortagage loans, absent nonperformance on the part of the borrower. I am not a real estate attorney, so I really can't comment on when this might be true. If you can supply some instances of what you are talking about, I and possibly many others would be very interested in these "details".

However, it seems to me that if your idea on this were broadly true, we would never have experienced the S&L breakdown of the 80s. The banks that could no longer fund their 7% mortgages except at a loss would just call the loans. If fixed loans were callable in the sense that you are suggesting, what is the difference between a fixed and a floating rate home loan? Why would anyone take a fixed loan? Why in fact are they called fixed loans? :)

Mikey
 
Please allow me a little repetition.

I never really did the math for our situation, but
I believe I could come up with reasons to go either
way (pay off vs. keeping a mortgage). We carry no mortgages on any
of our real estate (50% of net worth). It keeps things simple and helps to protect me from myself in making the
cash a little harder to access, if only psychologically.
Taxes are not a factor with me as I pay no federal income taxes at any level.

John Galt
 
TH, mea culpa. I apologize to you and anyone else who feels this way. I just can't help myself from being more interested in demonstrable facts than blanket assertions.
[...more hostile blah blah]
Click to expand...

Gee mikey, I thought I was pretty nice in my response to you, since we were talking about the analogy in terms of borrowing money to invest...which a margin loan and taking out a mortgage to invest both are. I said your points were well made, but in fact they had nothing to do with that core point. They almost seemed argumentative rather than adding anything to the discussion.

As far as the rest of your rant, I'm not sure where you're coming from or what your problem is. I certainly dont need your hostility when I havent been hostile to you. So shove it back into your pampers and keep it, m'kay?
 
 So shove it back into your pampers and keep it, m'kay?
Click to expand...
Sorry big guy. But I reread my post and I can't see anywhere that I veered from the topic at hand. OTOH, your hostility, or need to prevail, is written all over your post as is pretty clear by the invective above quoted.
 
I think that's the best reason for paying off a mortgage I've heard yet.
Click to expand...
I agree, Bob. If I could pick the person my payoff would spite, I would pay it off tomorrow . . . and maybe the day after too. :D
 
. . . OTOH, your hostility, or need to prevail, is written all over your post as is pretty clear by the invective above quoted.
Click to expand...
Forget about it, mikey. TH feels a lot of stress from his need to time the markets and apparently from eating too much fish oil. But he gets over it. :)
 
C'mon, guys.

I time the markets, I eat fish oil, and we have a huge whompin' mortgage for investment purposes.

As TH has pointed out before, I think that we're all agreed that a mortgage held for investment purposes should have a lower interest rate than any other bonds in the retirement portfolio. Otherwise you're effectively taking out a higher-interest loan to buy lower-interest bonds. No matter how good it makes you feel, you're losing money.

I don't remember who made the point first (SG?), but investing the cash generated by having a mortgage gives you a larger "retirement portfolio" (if you will). And that larger portfolio is demonstrably more survivable in FIRECalc's database, which theoretically makes a retirement portfolio more survivable in the future. But taking out a mortgage requires accepting those odds, and not everyone is comfortable with doing so. Either decision is valid and neither is "wrong".

Ishmael makes a good point about inflation, too. With the Fed ensuring that we never see "deflation", we get to pay off a fixed amount for 30 years with dollars that are worth less every year. Great deal! But very difficult to quantify.

Because a portfolio based on mortgage debt has a higher percentage of stocks (or at least riskier bonds paying more than the mortgage costs), it's more subject to volatility risk. Not everyone is willing to endure a volatile portfolio. And there's no risk-free guarantee that the invested mortgage money will even come close to outperforming the cost of the mortgage. Although the odds are on our side, that doesn't guarantee any future performance. Once again, sounds like a personal choice whose validity is not subject to question.

So, nothing new here, having a mortgage (or paying it off) is an extremely personal choice. Do the math for your situation, evaluate the odds and your risk profile, and consider how well you'll sleep at night. If it makes you feel better and you won't be losing money, then do it. If you're attracted to investing mortgage dollars because the odds are better than 50/50, then do it.

If you want to know why we're carrying such a big mortgage, then read the "Mortgage/ass(ets)" thread on the subject and PM me with more questions. If you can poke a hole in my logic then I'll thank you for saving us from a grievous error and we'll pay that puppy off tomorrow. However, if you're going to tell me that it's too volatile or that it's too hard to sleep at night-- well, that's a personal choice.

But let's not call each other dumb for doing so-- if we're so firm in our convictions then we should be loaning each other the money!

I have to point out, SG, that you could be accused of trolling TH-- he rises to the bait every time you bring up a post containing the word "mortgage". And, TH, I can understand setting the hook once or even twice. But every time? You know better than that.

I enjoy reading the links & ideas posted on these subjects. But there's no need to let controversial subjects degenerate into endless reciprocated diatribes...
 
And then there's rent. That's the first thing I'd do - should living in Hurricane Alley make me an offer I couldn't refuse. I would be hard pressed to take money out of my ER portfolio to buy something frivolous like a house. But that's just me.
 
Interesting. I didn't know mortgage can be such an exciting topic.

I thought about this a while back and realized the numbers can go both way. The wild cards are inflation, real estate rate of return and my portfolio return rate. And I decided (being a little risk averse maybe?) that I don't like the wild cards offered so I decided that I would like to pay my mortgage early (7 years).

I think mortgage (like many other investment vehicles) depends on each individual's discipline, investment knowledge, time horizon, level of comfort etc, etc and it is hard (though many finance writers always seem to try) to make a sweeping generalization. If you think you can come out ahead by investing the cash instead or paying the mortgage, then go ahead. If you think money saved by paying mortgage early is better than distant 30-year something market payout then pay your mortgage. There is no myth either way.

There is a lot of clamouring and song and dance in financial reporting community (they do have to churn out articles to put food on their table). There are very few financial concepts that work for everyone (LBYM is one of them) and lots of noise in between.

Jane
 
Azanon, if I understand you, you are saying that a home mortgage is functionally equivalent to a margin loan.This assertion is flawed on several counts. One, you can't fix the rate on a margin loan while you can on a home mortagage loan.
Click to expand...

What difference does that make?  At the point you think the margin interest rate becomes unacceptable, you simply give them their money back either with the money you borrowed, or god-forbid, with another loan.  You make it sound like after the point you margin, you can't undue it for whatever reason you deem necessary (such as the interest rate going up).

Two, a home loan is only callable in a few instances-eg, you sell the house, or you fail to make a certain number of timely payments. As long as the physical collateral (your home) still exists, it doesn't matter what its market value is, your loan cannot be called. Not so with a margin loan. That is why experienced people have a healthy respect for margin calls.
Click to expand...

Again, what difference does that make? First, its not like you lose anything of substance if the margin loan is called.  Second (Mikey), I am one of those that does not distinguish between a paper loses and real loses.  What "changes" if you get called on a margin loan?  They simply sell you out to cover the loan.  Your net equity before and after the margin call is the same.    
.....  Thus, for all practical purposes, the risk being taken in my analogy is still the same;  you're intentionally investing borrowed money to try to exceed the interest rate on the note.

Additionally, there are safeguards for mortgage borrowers on a primary residence, for example rules about forclosure. Ask anyone who got caught with margin debt in the 1987 equity downturn how fair a deal he thinks he got from his broker/lender.
Click to expand...

I imagine they paid back the exact amount owed at the time of the call.  They cant tack  on a few thousand for good measure Mikey, lol.

Your second point, about how the lender and borrower cannot have a win-win deal is also flawed because you evidentally have forgotten or do not know that there is third party to this tranaction in most cases.
Click to expand...

If anything, that strengthens my argument.  You're telling me two people (or more) are profitting from me agreeing to take a loan, and i'm supposed to believe the loan is good for me as well?  Me, and David Ramsey, smell a rat.

Again, for clarily, i'm not advocating not getting a loan for a personal residence.  But, I do think its a good idea, for personal investing, to avoid loans in all other instances by being proactive and planning expenses AND paying off the mortgage ASAP.  The way i see it, if you owe "Jack" 100K, and you have 30K in the bank, that's Jack's 30K, not yours.
 
I also have doubts about what you assert is the callability of home mortagage loans, absent nonperformance on the part of the borrower. I am not a real estate attorney, so I really can't comment on when this might be true. If you can supply some instances of what you are talking about, I and possibly many others would be very interested in these "details".


Mikey
Click to expand...


Most home lenders use what is called the Fannie Mae mortgage form. This form is used for loans that are sold on the secondary market. Each state has its own variant of the form so that the mortgage complies with state law requirements.

Under this form, the mortgage is in default if the borrower fails to comply with a terms of the mortgage. For example, the borrower doesn't make payments, doesn't pay property taxes, doesn't maintain insurance, sells the property, doesn't use the property as his residence for at least a year (yeah, that's what the form says), allows the property to deteriorate, lies on the loan application, etc. There must be a breach by the borrower of a term in the mortgage for a default to occur. Most states also require a time period where the borrower can cure the default.

On commercial property, many mortgage forms provide that the lender can call the loan in default if the lender "deems itself insecure". These "insecurity" clauses needless to say are disliked by commercial borrowers and sometimes they are able to negotiate out of them. I never have seen an insecurity clause in a home mortgage. Even in commercial loan, a lender is unlikely to start foreclosure just because it deems itself insecure.
 
Good post Martha! Re. "deemed insecure", there is a school of thought in business that if you get deep enough into a lender's pockets and things get ugly, you are better off than if you had borrowed little. The theory is
if you are way overborrowed (and thus the lender
is way overcommitted) they don't dare foreclose, but must ride out the storm with you.
I know from personal experience this can work,
but here is the standard disclaimer: I am not suggesting
this path to anyone.

John Galt
 
"...if you are way overborrowed (and thus the lender
is way overcommitted) they don't dare foreclose, but must ride out the storm with you..."





I read a story in the Wall Street Journal a couple years
ago about the "world's poorest man:" a Japanese
business man who owned lots of Tokyo real estate,
purchased with borrowed money, that
had depreciated to the extent that he had a negative
net worth of several billion dollars, hence his ranking
as the world's poorest man.

The banks holding the notes did not want to forclose as
they did not know what to do with the property, so they
let him continue to manage it.

He lived in a penthouse and had a chauffered limo drive
him around. Lived like a king.
 
Under this form, the mortgage is in default if the borrower fails to comply with a terms of the mortgage.  For example, the borrower doesn't make payments, doesn't pay property taxes, doesn't maintain insurance, sells the property, doesn't use the property as his residence for at least a year (yeah, that's what the form says), allows the property to deteriorate,  lies on the loan application, etc.  There must be a breach by the borrower of a term in the mortgage for a default to occur.  Most states also require a time period where the borrower can cure the default.
Click to expand...

Yeah, IIRC this wasn't always the case but it was laws made by society for the greater good after the experiences of the great depression where lenders were calling mortgages that weren't in default. Because of the tight lending at the time they couldn't get a replacement mortgage or sell it and so defaulted losing whatever equity was built up. It really exacerbated the already bleak conditions at that time.
 
I paid off the mortgage because my bond portfolio was paying significantly less interest than my mortgage (what I was paying to the creditors). I didn't have to touch the stock portion in order to pay the remainder on the mortgage. Although the interest on the mortgage payments was partially tax deductible, the interest on the bond payments was taxable. The interest on the bond portfolio didn't even come close to making the monthly mortgage payments.

My analysis leads to the following general rules:

a) if the interest rate on your mortgage is low relative to long term interest rates, keep the mortgage.

b) if you are a conservative or moderately conservative investor, and the remaining balance on the mortgage is less than ~20% of your portfolio, and you have a significant bond allocation that's paying less than your mortgage, it probably make sense to pay it down.

c) If you are an aggressive investor and don't use a significant bond allocation to reduce the volatility of your portfolio, then consider the mortgage as a tax deductible margin loan.

d) If you are just starting out, and you don't have significant assets yet, then keep the mortgage and keep saving until you have a significant portfolio, then see a&b above.
 
You must log in or register to reply here.

Similar threads

M
Gift or bridge loan for son house purchase
Replies
2
Views
394
mf15
M
D
Sold Position - How to send the IRS a check?
Replies
9
Views
779
Sunset
Sunset
Tranquility Base
Borrowing Against Investment Portfolio For Home Purchase
Replies
15
Views
463
pb4uski
pb4uski
N
Mortgage into retirement?
Replies
6
Views
495
pb4uski
pb4uski
dirtbiker
Bank is refusing to remove PMI on 78% LTV mortgage without a home inspection
2
Replies
42
Views
2K
athena53
athena53

Latest posts

Back
Top Bottom