A lifetime of debt? Really? Apparently so...

[Calico]

I paid off my mortgage as soon as I could. I didn't like the risk of having a big debt while I tried to invest my way to a better situation. In retrospect most years the investment would have done better, while only a few would have done worse. On the whole, paying down the mortgage slowly but investing the extra payment money I would have done much much better. But I'm not regretting my choice. It all turned out well. It might have been better, but at least I was assured it wouldn't be worse. I'm content with my choices.

At my workplace, many well paid engineers and managers have discussed their personal situations. Occasionally the question of paying down a mortgage early has come up. Universally the consensus was to pay down the mortgage as slowly as possible, but the reason was not to do other investments. The consensus opinion was that mortgage money was so relatively cheap that the debt should be kept and the money then because available for consumption, vacations, lots of current living expenses. No one ever suggested using it for savings or investments.

Sounds like we work with exactly the same people.

 

[Ally]

By my observations of others' lifestyles and comments made to me when I said I can retire early because we have no debt, I think the majority of families carry debt throughout their lives.

It felt good today for us to pay cash for a new big screen tv, while noticing others asking about credit on the same tvs.


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[RunningBum]

There's a certain appeal to borrowing to the hilt during highly inflationary times, like the 1970's. The money one borrows is paid off later in dollars that are worth less and less each year. I am reluctant to borrow at all, and right now inflation is not high enough to persuade me to borrow to the hilt.

I think the appeal is the reverse, because when inflation is high, interest rates are high. Unless you think inflation will stay that high or higher for the life of your loan, you are essentially "buying" high and "selling" low, aren't you? With inflation low like it has been recently, you can get a low interest rate, and there's at least a reasonable chance that inflation and rates will go higher. (The exception seems to be credit cards, where interest rates stay very high even during low inflation.)

I'd much rather borrow when interest rates are very low and I might be able to pay it back when inflation jumps and I'm paying back in dollars that are worth much less than today.

Like you, though, I don't need to borrow and would rather just avoid debt and the associated risk.

 

[gcgang]

I think the concept of having tax deductible debt (mortgage), and investing, while adding to your risk, over time will usually result in financial benefit. In addition, having a fixed rate mortgage seems a way of diversifying, allowing you to benefit in case of inflation.

On my house purchase two years ago, I intended to have a mortgage even though there was sufficient cash to buy without debt. I applied at least two months prior to closing. The mortgage company kept screwing around, and when the closing date came, they weren't ready. Rather than extend the closing, I felt an obligation to follow through and paid cash on the scheduled date. Couple weeks later, the mortgage company says they're ready now. I say ok. They say, however, since I already own the house this is now a "cash out refi" and they are raising the rate 1/2%. I argue that no, this is just a completion of the process I started two months ago that they've been messing up, and it's a new purchase. No, a cash out refi. I ask, I thought a property had to be "seasoned" at least 60 days to qualify for refi. They agree that's true, but say since I already own the house...ARGHH! Repeat up thru 2-3 levels of supervisors, I finally say, Screw it, keep your money, I'm done! In retrospect, I think they did me a favor, as I have other cash I've been sitting on that I haven't put in the market, and I'm sure I wouldn't have invested all that mortgage money. Just goes to prove my life motto, I'd rather be lucky than smart.


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[Independent]

Thanks a lot for doing the research, estimates, and math.
Since the "tile" wasn't footnoted, we'll never know where the figure came from. I'm guessing the $600K vs $225k discrepancy is likely a combination of:
1) Household total vs individual totals (though, by the words of the "tile" they should have used a number for an individual)
2) Retrospectively, CC, car loans, and mortgage rates were higher than today. They probably used those rates.
3) Inflation: Who knows what kind of "dollars" they are talking about.
4) The need for a high number in order to grab eyeballs and links.

I'm guessing it was mostly (4).

But, I can believe (1) and a non-precise definition of "average".
Let's say "A slightly above average income couple, who both went to college and had student loans, and who borrowed for a slightly above average priced house".

 

[Independent]

Some facts on when people pay off mortgages

Percent of Households by home ownership:

Age of RP ..	Renter ..	HO-w-M ..	HO-no-M ..
00-24 …	86	7	7
25-34	60	33	7
35-44	38	51	11
45-54	31	50	19
55-64	21	43	36
65-74	18	32	50
75-99	21	12	67

This is from the Consumer Expenditure Survey.
Each row totals to 100. Not surprisingly, people start out as renters, transition to home owners with mortgages, then (often) become home owners without a mortgage.

The "RP" in the first column is the "reference person". That is the person who answered the survey, it is not necessarily the older or the younger spouse.

 

[ArkTinkerer]

At my workplace, many well paid engineers and managers have discussed their personal situations. Occasionally the question of paying down a mortgage early has come up. Universally the consensus was to pay down the mortgage as slowly as possible, but the reason was not to do other investments. The consensus opinion was that mortgage money was so relatively cheap that the debt should be kept and the money then because available for consumption, vacations, lots of current living expenses. No one ever suggested using it for savings or investments.

I agree unless you have children applying for, or in college. If you are sitting on cash the funds are as good as gone. The federal aid forms say that that cash is available for education. So either putting them toward paying down the house or into retirement accounts is one of the few ways to shelter them. You have to make such moves at least 2 years before college though. Then they look just at your income to measure how much you can pay. Or you can make sure your kids get full academic scholarships! I prefer the later but we'll see if it works for our second child in a couple years!

 

[samclem]

Age of RP .. Renter .. HO-w-M .. HO-no-M ..
00-24 … 86 7 7
25-34 60 33 7
35-44 38 51 11
45-54 31 50 19
55-64 21 43 36
65-74 18 32 50
75-99 21 12 67

Wow. So well over 1/2 of people over age 65 own their home free-and-clear. I wonder if that includes HELOCs, etc. Regardless, I would have guessed the number was lower than that, esp with so many people refinancing in the last 10-15 years, etc.

 

[Walt34]

Wow. So well over 1/2 of people over age 65 own their home free-and-clear. I wonder if that includes HELOCs, etc. Regardless, I would have guessed the number was lower than that, esp with so many people refinancing in the last 10-15 years, etc.

Probably you don't hear of the ones paid off because they make boring magazine or web site articles.

 

[marko]

My Granddad bought a foreclosed home during the Depression for peanuts.

He once told me, "there's nothing sadder than someone who has to get rid of something they wanted because they can't afford it anymore...if you own something outright, nobody can ever take it away from you!"

 

[mtheulen]

I work around a group of guys who make very serious money year after year.Hourly workers they gross 125,000 - 200,000 every year.While talking to our lady in payroll she informed me that no less than once a month, one of them comes in for a cash advance on their pay. House payments, truck payments, Harley payments etc. etc. So sad

 

[growing_older]

I agree unless you have children applying for, or in college. If you are sitting on cash the funds are as good as gone. The federal aid forms say that that cash is available for education.

Maybe it's the case that any system will be flawed, but some of this creates strange incentives. A parent on the cusp of financial aid may be better served to avoid saving. Likewise making a tax inefficient choice between Roth and Traditional IRA and 401k may effectively move more money into "retirement" accounts that don't count towards education contributions vs saving the same money in a longer term more tax efficient way that exposes more of it in non-"retirement" accounts. And not surprisingly many people respond to this by gaming the system. I've heard this as justification for folks who spend as much as they can and avoid savings as well.

 

[harley]

House payments, truck payments, Harley payments etc. etc. So sad

Hey! How do you think I got the money to retire early? Don't mess with my payments.

In my case I have my mortgage because 1) Home is worth in excess of $1M, and that's a lot to have tied up in a illiquid asset. 2) My rate is so low that with the tax break I can actually make money even invested in bonds. Since it's been invested mostly in equities I've actually made a nice profit on the arb. Too bad the value of my house (built in 2008) is pretty much negating that. Oh well, you win some, you lose some.

 

[bssc]

I used to work for a Financial Services company. And, even though, everyone should know better, there was still a group that were always in debt, paying 18% interest.

 

[jkern]

$600K in interest sounds a little high for an average American, but not high at all for an average SF Bay Area resident. Mortgages in the $400K to $600K range are extremely common and would yield over $750K in interest over the life of the loan.


My 23 year old daughter purchased her first 1 bedroom condo last March for $327K with a $255K mortgage. As she moves up the ranks, it will only go up from there.

 

[mpeirce]

$600K in interest sounds a little high for an average American, but not high at all for an average SF Bay Area resident. Mortgages in the $400K to $600K range are extremely common and would yield over $750K in interest over the life of the loan.

My 23 year old daughter purchased her first 1 bedroom condo last March for $327K with a $255K mortgage. As she moves up the ranks, it will only go up from there.

Back in 1986 I bought my first condo (840 sqft 1Bed/1Bath) for $95K in San Jose (20% downpayment). Zillow reports the same unit is valued at $420K today. Last sold in 2007 for $403K, so the "zestimate" may or may not be too far off...

Using the US inflation rate makes that $95K equivalent to $205K in current dollars. One of many reasons I now live in a lower cost of living area.

 

[W2R]

$600K in interest sounds a little high for an average American, but not high at all for an average SF Bay Area resident.

One of many reasons I now live in a lower cost of living area.

It sure helps with housing in retirement.

Back in 2002, I bought my home for $160K, about the median price for my area at that time. I had already saved up almost half of it via LBYM, and by doing some even more serious LBYM I managed to get it paid off in 2006. It would have been 2005, but 2005's hurricanes including Katrina messed up that plan a little bit.

Anyway, the total interest paid on this house added up to $17,401. Whether or not that was a good financial decision is debatable, but be that as it may, I cackle in glee when I think of how I gypped Chase Mortgage out of all the additional interest they thought they would get from me.

I haven't paid any other interest since 1998. I hate paying interest. People with my mindset probably skew the statistics a bit.

 

[Walt34]

Anyway, the total interest paid on this house added up to $17,401.

When we (the ex and I) bought a house in 1979 included in the paperwork on the 30-year mortgage was an amortization schedule. That was the first time I'd ever seen one and was shocked to learn that at the 11 7/8% interest rate if we let the loan run 30 years we'd pay more in interest than we did for the house itself! I already knew cc interest was a bad deal but I'd never thought of mortgage interest that way.

After the divorce when I bought a house by myself it started out with a 30-year loan just to get in the door but it was paid off in 14 years.

 

[marko]

When we (the ex and I) bought a house in 1979 included in the paperwork on the 30-year mortgage was an amortization schedule. That was the first time I'd ever seen one and was shocked to learn that at the 11 7/8% interest rate if we let the loan run 30 years we'd pay more in interest than we did for the house itself! I already knew cc interest was a bad deal but I'd never thought of mortgage interest that way.

.

Reminds me of :
"The percentage you're paying is too high a price
while you're living beyond all your means
And the man in the suit has just bought a new car
from the profit he's made on your dreams"

(Low Spark of High Heeled Boys--Traffic)

 

[Walt34]

Reminds me of :
"The percentage you're paying is too high a price
while you're living beyond all your means
And the man in the suit has just bought a new car
from the profit he's made on your dreams"

(Low Spark of High Heeled Boys--Traffic)

Well, it was a point on my financial education. At the time I was 29 and "everyone had a mortgage" so I didn't know there was another way to do it. I'd heard of the occasional outlier who paid cash for a house but no one I knew had that kind of resources available.

It was also in a high COL area, not far behind Boston or NYC.

 

[marko]

Well, it was a point on my financial education. At the time I was 29 and "everyone had a mortgage" so I didn't know there was another way to do it. I'd heard of the occasional outlier who paid cash for a house but no one I knew had that kind of resources available.

Sorry, I wasn't being critical. You're right "everybody had a mortgage" and a car payment!!

But I always think to those lyrics...should be the theme song of this site!

 

[Amethyst]

Actually I suspect those lyrics are about money - and lifespan - spent on drugs, but your point is taken.

A.

Reminds me of :
"The percentage you're paying is too high a price
while you're living beyond all your means
And the man in the suit has just bought a new car
from the profit he's made on your dreams"

(Low Spark of High Heeled Boys--Traffic)

 

[harley]

Actually I suspect those lyrics are about money - and lifespan - spent on drugs, but your point is taken.

A.

I don't think so. I am pretty sure it's about Steve Winwood fighting with his record company and how they try to control the artists and take the money. Pretty much every successful band has one of these songs somewhere in their catalog. Welcome to the Machine (Pink Floyd) and Zanz Kant Danz (John Fogarty) jump to mind.

But since only Winwood knows for sure, everybody will just have to have their own interpretation.