Is it smart to carry a big, long mortgage?

[sweeps]

Came across this blog entry: 10 great reasons to carry a big, long mortgage

Do you agree or disagree?

[jIM_Ohio]

#9 and 10 contradict each other in my eyes

Reason #9: Long-term mortgages let you create more wealth.

Any time you can borrow at a low rate and invest at a higher rate, you can take advantage of the spread.

I agree, this is leverage.

Reason #10: Mortgages give you greater liquidity and greater flexibility.

Several commenters mentioned this yesterday. This is true. A 30-year mortgage does give you greater flexibility. If you are sick of paying on the mortgage and want to pay if off quicker, simply pay more towards the principal. In fact, you could pay off a 30-year mortgage in 15 years (or less) if you choose but you can’t stretch a 15-year mortgage out to 30 years if you decide you would like a smaller payment

leverage does not give flexibility. This contradicts first comment.

Nothing posted mentioned the risks of leverage.
The blog makes it sound like the person with a long mortgage has the ultimate goal of the highest net worth possible.

If the goal is "the highest net worth possible", I agree with this logic.

If the goal is something else (early retirement with little debt), the advice and logic used is much different.

[Fern]

if you're looking at it from a strictly financial viewpoint, sure, but most of us want to sleep well at night without a yoke around our neck.

[th_tan]

If you can afford a bigger, shorter mortgage, you should take it. Its much more comforting to know you own your own home, and don't have to worry about mortgage payments, just tax.

At a financial standpoint, you're saving loads of money with a shorter mortgage

[jIM_Ohio]

If you can afford a bigger, shorter mortgage, you should take it. Its much more comforting to know you own your own home, and don't have to worry about mortgage payments, just tax.

At a financial standpoint, you're saving loads of money with a shorter mortgage

I wouldn't say a "shorter mortgage" "saves you money". It probably costs you money. Shorter mortgage reduces risk, but does not save money.

In my case I pay close to $2500/mo on mortgage (30 yr fixed). I can pay an extra $1250 per year on the mortgage and have it paid off in 26 years.

The savings in this case is $2500*48 months=$120000. It cost me $1250*26 years=$32500. So net savings is $87,500

If I take the $1250 each year and invest it at 7% return, my numbers show me a savings of $118,000+. This cost me 4 years of interest payments at $12,000 total. I netted $106,000 not paying off mortgage sooner.

I assumed risk on the second scenario and I plan to pay off mortgage sooner (allows me to retire 4 years earlier). It is costing me money to pay it off, but I want to reduce my risk in this case, not maximize my return.

[MonkeyMama]

What became obvious to me during this last discussion was that I think it depends on how expensive an area is. I noticed those of us leaning towards keeping a mortgage and investing the money instead lived in high COL areas, and had a lot of equity. A big long mortgage is very good for us in this case. No matter how much I despise and avoid debt, growing up in such an expensive area it was drilled in my head that a mortgage was a necessary evil- but brought you great wealth over time.

I would feel differently if I Could buy a house for $100k. I Would reply to this thread and say I am paying my house off is a few years - or I paid cash - mortgages are stupid. Whatever I Would say. But this dynamic is just unique and strange and so terribly different where we are at. We have sunk way too much money into a house, we have bought some financial security that little see at our age in such a crazy market, and now I have other things to worry about than paying it off too soon.

All that said I would never buy a house I didn't think I could easily pay off in 15 years. But it is nice to have the choice. I think that was key in the article - the whole point was this is only valid if you have a comfortable mortgage. My mortgage is very comfortable and I will probably pay it off early, sure, but I don't really feel a rush, there are many benefits to keeping it a little longer and focusing on other financial goals. I would even consider a bigger mortgage. A bigger mortgage for a house that had more appreciation power. Sure. There are just so many factors to consider in this discussion. If I didn't live in such a crazy market, on the good side of it at that, then sure I would not see the point. If I had a $100k mortgage I'd be paying off that sucker fast. I would not feel so comfortable if I owed closer to the value of the house. But I only owe 1/3 the value in a down market... It just all depends I guess. Just something I kind of figured out since the last time we discussed this...

[disneysteve]

If you can afford a bigger, shorter mortgage, you should take it.

At a financial standpoint, you're saving loads of money with a shorter mortgage

My mortgage is at 5.875%, and that's before figuring in the tax deduction which brings the true rate down around 4.4%. Paying off my mortgage early would save me 4.4% on my money, equivalent to an investment earning 4.4%.

Last year, my best mutual fund gained over 39%. My worst fund gained over 9%. Even after accounting for taxes, all my funds outperformed the mortgage rate. Why would I possibly want to prepay my mortgage? It would cost me a fortune in lost investment opportunity.

[jIM_Ohio]

What became obvious to me during this last discussion was that I think it depends on how expensive an area is. I noticed those of us leaning towards keeping a mortgage and investing the money instead lived in high COL areas, and had a lot of equity. A big long mortgage is very good for us in this case. No matter how much I despise and avoid debt, growing up in such an expensive area it was drilled in my head that a mortgage was a necessary evil- but brought you great wealth over time.

I would feel differently if I Could buy a house for $100k. I Would reply to this thread and say I am paying my house off is a few years - or I paid cash - mortgages are stupid. Whatever I Would say. But this dynamic is just unique and strange and so terribly different where we are at. We have sunk way too much money into a house, we have bought some financial security that little see at our age in such a crazy market, and now I have other things to worry about than paying it off too soon.

All that said I would never buy a house I didn't think I could easily pay off in 15 years. But it is nice to have the choice. I think that was key in the article - the whole point was this is only valid if you have a comfortable mortgage. My mortgage is very comfortable and I will probably pay it off early, sure, but I don't really feel a rush, there are many benefits to keeping it a little longer and focusing on other financial goals. I would even consider a bigger mortgage. A bigger mortgage for a house that had more appreciation power. Sure. There are just so many factors to consider in this discussion. If I didn't live in such a crazy market, on the good side of it at that, then sure I would not see the point. If I had a $100k mortgage I'd be paying off that sucker fast. I would not feel so comfortable if I owed closer to the value of the house. But I only owe 1/3 the value in a down market... It just all depends I guess. Just something I kind of figured out since the last time we discussed this...

I don't think cost of living enters into equation.

I know someone which is an exectutive for a local company, easily clearing 6 figures. She gets hit with AMT every year. Our area is far from high COL.

She bought a much bigger house just to get some deductions which would keep her under AMT (she's a tax accountant, I don't know the details of how).

It's the "risk free" rate of return and pschological value of being debt free which enters into the equation. Relative to what someone can invest elsewhere.

For example Disney Steve is forgoing a 4.4% guaranteed return in hopes of more than doubling his return elsewhere. No guarantee he'll get 9% every year, but it's a chance he's willing to take.

I have a 5.875% mortgage, and probably around the 4.4% after tax rate as well and choose to take the guaranteed rate of return.

By being conservative in this regard, I feel I can take risks elsewhere-

less cash on hand
100% equities in 401k and IRAs
16% savings rate towards retirement

all which I consider to be highly aggressive.

[MonkeyMama]

Awww, well you may not agree but there is a big truth to it. I don't even know if I Can exactly explain why and get it across. But there is a whole different dynamic to it. I know too many people in other states, family and such, who just never will get what it is like to live out here.

I think it comes down to 2 things. Having so much equity that fear of falling values and owing more than the house is worth becomes pretty moot. Secondly, locking in the cost of your living space is so valuable, in a crazily expensive area, you don't look at your mortgage as the same noose as other debt. Frankly I love my mortgage. But #1 & #2 are not going to happen if you get in over your head either.

I would stress out if I owed $100 on a car or a credit card. But my $200k mortgage doesn't phase me psychologically in the least. I know plenty anti-debt people in this area who feel the same way. & I notice it on this board too. Don't get me wrong, we intend to pay it early and want to pay it early. That's the anti-debt in me. But no real rush either... People our age, out here, with such a small debt for the house we have is pretty unheard of as well, maybe plays into it. Know too many people looking at crappy $700k starter homes to get stressed out about our situation.

We really laid into our first morgage, but now that we have built such significant equity it just isn't much of a priority. It is on my list of financial goals to chip further away at the mortgage, but it is dead last on the list all the same. It's all relative - out here a $200k mortgage is jack squat and so that is about how it feels to us. Until you live somewhere where a starter 2-bedroom home costs $700k you probably won't feel that way though! When my next door neighbor is paying $2k/month rent for a house 1/2 the size - my 5-year-old mortgage feels pretty insubstantial.

[cschin4]

When we took out our original mortgage we took 30 yrs. rather than 15. The 30 yr gives you the flexibility of a lower monthly payment if you fell on hard times, illness, etc. So, in my opinion, it makes more sense to take the longer term for that flexibiliby. However, we fully intended to pay early. And, every chance we got we paid extra toward the principal. We ended up paying our 30 yr mortgage off in less than 6 years. Yes, we could have chosen the 15 yr, but our third child was due, we had 2 small children, etc.
But, so it makes sense to opt for the longer term in even if you plan to pay it off much sooner.

[LivingAlmostLarge]

Monkeymama I agree 100% it depends on where you live. When you can save $50k in one year then living somewhere that homes cost $100k it's a lot easier to justify paying a home off in 2 years. But where we live I have a $400k+ mortgage and it's a townhouse, not a SFH.

I live in an expensive area and it'll cost a lot for us to pay off the mortgage. By most people who are debt averse couldn't fathom paying that much, nor can they even imagine trying to pay it off. So that being said I guess we're just trying to manage the best we can in a high COLA.

[Scanner]

Once again, I agree with DisneySteve.

However, I will state one caveat - instead of bonds, I prefer to think of paying down debt as investing in the debt sector and even though there's indirect tax consequences (not getting as large as a tax deduction), with a bond that is non-sheltered, you have to pay Uncle Sam on the interest (except for muni's).

So, buy bonds or pay down mortgage, I prefer pay down mortgage - it's just as high as a return in this day and age and zero risk (well, inflation risk but let's not get technical).

[disneysteve]

Just to add to my earlier comments:

I choose investing in equities above paying down my mortgage. However, I don't rule out paying down my mortgage. Currently, I'm gradually feeding money into our Roth accounts for 2007. So far, I've put in $3,000 and will probably send off another $1,000 this week. Once I've sent in the full $8,000 probably in May or June, I will begin to use some of the extra money I have each month to make extra principal payments on my HEL. Once the HEL is paid off, I'll direct that extra money to our primary mortgage.

So you don't have to do one or the other - invest or pay down mortgage. You can do some combination of both.

[jIM_Ohio]

Just to add to my earlier comments:



So you don't have to do one or the other - invest or pay down mortgage. You can do some combination of both.

I second this.

1) Pay off debts'
2) invest for retirement (401k/Roth) to at least 10% of gross income
3) fund emergency fund
4a) pay down mortgage
4b) invest

4a vs 4b becomes an issue with "risk", vs rates of return, vs leverage

By the time a person hits this point, they are probably saving enough based on 2) and 3).

[disneysteve]

By the time a person hits this point, they are probably saving enough based on 2) and 3).

Exactly. I feel I am saving enough to reach my goals, so when I have additional funds available beyond that, I direct them toward home debt.