More on Mortgages: 10 Great Reasons to Carry a Big, Long Mortgage

Since we have been talking about mortgages, I thought I would share this article with you by Ric Edelman titled 10 Great Reasons to Carry a Big, Long Mortgage. Here’s Ric’s ten reasons along with my commentary:

Reason #1: Your mortgage doesn’t affect your home’s value.

This is true. The value of your home will go up or down, regardless of whether or not you have a mortgage.

Reason #2: You’re going to build equity anyway.

Again, this is true. Equity is built in two ways:

  • Through the principal paid monthly
  • Through the increase in the value of your home

Reason #3: A mortgage is cheap money.

This is true as long as mortgage rates are low.

Reason #4: Mortgage interest is tax-deductible.

Another plus to a mortgage as long as you can itemize your deductions. For more on this, check out this post from last October.

Reason #5: Mortgage interest is tax-favorable.

I’m not quite sure why Ric listed this separately (maybe because he didn’t want a “9 Reasons…” post). This just seems to be a repeat of Reason #4.

Reason #6: Mortgage payments get easier over time.

This is VERY true. When we first bought our house over 7 years ago, we were strapped for cash. Now our mortgage note is very affordable due to raises. The main thing here is to not buy more house than you can reasonably afford.

Reason #7: Mortgages let you sell without selling.

In other words, you can take out a new mortgage to capture any equity. I’m not an advocate of this.

Reason #8: Large mortgages let you invest more money more quickly.

He’s talking here about making the choice between plunking down a large down payment or a smaller down payment and investing the rest. Again, this is a function of how much the loan is going to cost you. The higher the interest rate, the more advantageous it is to put down as much as you can on the house.

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.

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.

I don’t agree with everything Ric says but when it comes to this topic, I do agree with him for the most part when it comes to mortgages.

Now it’s time for you guys to comment. Which of the above points make sense to you? Which ones don’t?

36 thoughts on “More on Mortgages: 10 Great Reasons to Carry a Big, Long Mortgage”

  1. Reason #4 is not true even if one itemizes deductions. You did this example last year. A $13,000 mortgage interest in a year generated only $5,700 in deductions. The interest is deductible on the margin, but as a whole, only 44% is deductible in that example. When you have a large part of the mortgage being non-deductible, while investing in a taxable account, the spread will have to be calculated differently.

  2. HOLY COW you have a good memory. I had forgotten about that post. You are correct, tax deductibility MUST be put into perspective.

  3. All 10 points have their merits. However its a lot easier to retire if your house is free & clear. Fewer bills require less income.

    I’m paying extra on my mortgage so I have more flexibility as I get close to D-Day…….

    Signed, Old Fashioned……

  4. I generally agree with all of them and disagree with EPL. Over the long term your money will grow faster invested in the stock market not only because of the return but because capital gains taxes are deferred (not to mention the benefits of a 401k or IRA). Thus it would actually be EASIER to retire by not paying your cheap mortgage down because you would have significantly more assets overall in the end. Paying down the mortgage just FEELS like it’s easier to retire because psuchologically the gains you are giving up don’t feel like a loss.

    I do disagree with JLP on one thing – it doesn’t seem logically consistent to me to say that you should defer paying down your mortgage but that you should never borrow back amounts that you have already paid down. To me they are really the same thing and if one is right then so is the other. All things being equal, I don’t know why anybody would pay down a mortgage – interest only is the best option. Of course all things are rarely equal, as an interest-only mortgage typically has a higher rate.

  5. And TFB is correct but it is also true that in many parts of the country (like where I live), $13,000 in annual mortgage interest is not very realistic for anything but a one bedroom condo.

  6. I’m an old-fashioned kind of guy that prefers to be out of debt. I like to follow the words of Proverbs 22:7 “The rich rule over the poor, and the borrower is servant to the lender.” I can’t refute any of the 10 points you list above, but for me the peace of mind that come from being out of debt is much better than a few more bucks that you might get from taking out a large mortgage and investing the difference.

    In my opinion, sometimes people can become too clever in these borrow-to-invest plans, and get themselves into financial trouble. To borrow a phrase from a TV ad: “Life comes at you fast.” But that is just me. If it doesn’t bother you, then by all means go for it.

  7. FYI, the I believe the standard deduction is not allowed under AMT, however mortgage interest is one of the few deductions that is allowed. I’m an AMT payer, so in my situation, mortgage interest is fully deductible – which goes to show just how specific you need to get when thinking thru these kinds of PF issues.

    Agree with all the #’d points, except there is an exception to #6. Payments get easier over time, until RETIREMENT. So, while holding a mortgage makes a lot of sense, there comes a point where it might be better to pay it off in order to lower overall living expenses.

  8. Reason #2: You’re going to build equity anyway is true only in the event that you’re taking out a loan that amortizes over the life of the loan, and if the value of your home rises over time. Without speaking to the question of rising values, the amortization is the kicker here. Many loans written in the past year years have been adjustable-rate mortgages or interest-only mortgages. With these products, a homeowner could pay for years without making a dent in the principal; therefore, no equity would be built at all.

  9. Miguel,

    The AMT sucks, doesn’t it? Why the hell they set it up and then didn’t index it for inflation is beyond me. There should also be a clause in there somewhere that states that if federal income tax brackets decrease, AMT brackets will be adjusted proportionally.

    The AMT has got to go…

  10. Jay,

    Good point. Of course, I am not recommending people use anything other than a fixed-rate mortgage.

  11. Ah now, speaking of ARM’s, I use a 7-year ARM at a fantastic rate and still have a few years to go in the fixed rate period. So, I am using a hybrid strategy – aggressively invest the savings during the 7-year fixed period, and if I cannot refi/roll into a new loan at an advantageous rate before loan enters the adjustment period, then I will make a sizable reduction in principal (enough to keep payments level).

    I think this is a decent example of how having substantial financial flexibility can permit one to optimize strategies and adapt as you go along depending on the options and the prevailing environment.

  12. FYI, these posts on mortgage strategies have caused me to rethink a few things – and it ain’t easy to get me to do that – and that is why I love this blog!!!

    Thanks JLP.

  13. Doesn’t all this invest vs. pay the mortgage depend on your mortgage rate? Really now, if you have an 8% mortgage, would you rather invest your spare buckets of cash in the stock market, making, let’s say, 0%-20%, averaging 10%, or lock in your 8% savings paying down your mortgage, albeit losing your tax deduction?

    Oh wait, 30-year t-bond rates just skyrocketed to 12%! Does that change your opinion?

    What about the 5 or 6% mortgages many of us now have? Current T-Bills pay more than some mortgage rates.

    Where do YOU draw the line between cold-hard money calculations and the warm-fuzzy emotional decisions?

  14. Before I get started, I do think a house is a good investment, I do think that the price of capital is very cheap right now, and I do believe in investing in the market. However, I have a slightly different take on things.

    OK, my $0.02 …

    #2 — Equity building is not guaranteed, it depends on the market. People in Michigan who have to sell their homes are getting 25-50% less than they paid instead of getting nothing at all.

    #4, 5 — Your IRA/401K/Roth 401K is tax deductable as well. If your mortgage were paid off you could still use these to shelter your money. The deductability of a mortgage is a nice feature, but it does not make up for the interest that you pay each month.

    #6 — This makes me think of the Mike Tyson quote, “Everybody has plans, then they get hit.”

    Mortgage payments get easier over time if your income increases faster than your costs. This can be an issue if you have to change careers or have some sort of crisis that is difficult to recover from. My guess is that the person writing this has never been saddled with obligations and trying to work in a difficult economy. And no, I don’t consider the post 9/11 economy to be difficult. I am thinking of the economy of the late 70’s or early 80’s.

    Personally, I have been poor and watched my parents struggle through an incredibly difficult time. The economy turned and they were stuck in a city with few decent paying jobs, a large house payment in a stagnant housing market, and kids in school who didn’t want to move. We made it, but not by much.

    Personally, I invest 15% of my salary into IRA/401K and use any extra funds to pay off the house. I would prefer to have the flexibility in the bad times instead of the good times.

    #8,9,10 — So, how many people are going to re-fi from their current 30 year mortgages to a nice 40 or 50-year mortgage? By this argument, you could invest more, create more wealth, and have even more flexibility.

    If you aren’t already on the phone with a mortgage broker to begin the refinancing then I would say that there is probably a valid reason why you are hesitating.

    In my experience, the reason that people are unwilling to do a 50-year mortgage is because they are unwilling to take on that type of psychological burden. So, if a 30 is better than a 50 (even though the numbers don’t bear it out), then I would argue a 15 would be better for the same reason.

  15. Morgan,

    A 50-year mortgage would ONLY make sense if the interest rate were low enough. I have run the numbers and the math just doesn’t favor going beyond a 30-year because as the length of the mortgage increases, so does the interest cost.

  16. Hmmmm …. as I look at for my area (Austin, Texas) a 30 year is 5.6% and a 40 year is 5.9%. By the logic I have heard so far you should easily be able to outperform the market by 0.3% over a 10 year period. Surely this would add dollars to your pocket, which must be a good thing.

    So, why not give your broker a call? Any takers? OK, why not an interest only mortgage? That way you get the ultimate flexibility, and can pay off your principal as you want to. How wonderful 😉

    [I don’t mean to sound like a commercial for sub-prime lending, hopefully my sarcasm will come through.]

    Seriously, thinking about moving your mortgage from 30 to 40 isn’t attractive to most people because it makes them consider the risk and the personal cost of debt. Thinking about 40 years of bondage or never paying any principal will put a knot in your stomach. Trust this feeling, it is your brain telling you that there is something dicy going on! This feeling doesn’t appear because the 30-year mortgage is an accepted term in the US. But the sentiment is exactly the same.

    A 30-year mortgage isn’t a crime, by any means. But, I believe that most people are better off in the long run with a 15-year payoff. A great way to understand how much you

    Good discussion, JLP.

  17. Morgan – I believe the 40 year mortgage product is fairly well-known in parts of Europe. There really is nothing sacred about 30 years, it’s just what we are used to.

    As to interest-only, (and yes I did get the sarcasm), I’m here to tell you that I will consider it next time I refi. There’s nothing inherently evil about interest-only. Since my income is very lumpy, it could better help me manage my cash flow.

    This all goes back to the question of what’s right for individual situations. Any financial product in foolish hands can cause trouble – that doesn’t mean it’s inherently bad. Would concede, however, that I would not recommend I-O for the financially impaired. The amortizing mortgage forces people to build some equity – and for somebody otherwise lacking in discipline, that could be the one place they actually build up any NW, which is not a bad thing.

    Me – I am wayyy long in real estate and trying to aggressively build NW in other areas over the next few yrs, so I-O would free up cash flow to do exactly that.

  18. If the rates were favorable I’d do a 40 year mortgage. I earlier meant to say Arms aren’t evil. I have one and love it. I planned on staying in the house no longer than 7 year fixed period and even if it adjusts I can manage the mortgage easily. I didn’t buy too much house. But more so I love the flexibility of more time to pay off the house and invest outside.

    15 year mortgages just aren’t flexible. I have three aunts who all have 30 year mortgages and they just paid them off in 15 years. They all said the same thing, when times got rough they could pay less, when times got better(raises/promotions) they paid more.

  19. @ JLP: you said “In other words, you can take out a new mortgage to capture any equity. I’m not an advocate of this.”

    Would you mind posting about why you’re not an advocate of taking out a HELOC (or at least clarify). If your HELOC were at 5%, you wouldn’t use it to invest in the market at 8%. We can forget about taxes here as well.

    I’m just curious about what to me seems to be an inconsistency between these very popular mortgage posts.

  20. Re: #6 it’s not only raises that make payments easier, but also inflation (which is very likely). Your $1,000 mortgage payment today (assuming fixed rate) will only cost $970 in today’s money next year, $940 or so in the following year’s money, etc.

    Some of the others (#2, #4, #5, #9) are perhaps true today. But the rules can change at any time. Tax deductibility of mortgage interest is only there as long as it’s not repealed from the tax code. And given how fast house prices have risen recently, I’m not gonna bank on #2.

  21. JLP,

    You said, “The AMT sucks, doesn’t it? Why the hell they set it up and then didn’t index it for inflation is beyond me.”

    I hold politicians responsible even for the unintended consequences of legislation. But in this case, I can’t even assume it was unintended. Inflation is an increase in the money supply relative to the supply of things that money can purchase. Increases in prices and wages are a downstream consquence of that. The money supply in controlled by the folks with the printing presses and control over key interest rates. Milton Friedman established that decades ago.

    Anything that Congress legislates that isn’t indexed for inflation is intended to suffer from the hidden tax that it represents. Any legislator claiming otherwise is lying.

  22. There are some inacuracies in the comments. Most glaring is that the AMT does not cancel the mortgage interest deduction. Acquisition indebtedness is still a deduction regardless of the AMT.

    Some key points that are worth mentioning here:

    1) When interest rates go higher, typically so does rate of return in the market. So it is more accurate to say that as long as the relationship between the mortgage and the return in the market maintain a positive relationship, mortgages are better not paid off.

    2) Safety is a huge factor. However the issue of safety can be counterintuitive. If you lost your home in Katrina and you had paid off your mortgage, paying off your home was actually a liability. If you had instead kept an interest only mortgage and paid the difference between interest and principle into a side account the bank would have been in the risky position.

    3) Liquidity is usually desired at a time when it is least accessible. If you lose your job, it is very difficult to access the equity in your home. However, if you pay only interest into a loan and keep the principle payments as stated in #2, you are in a stronger position to weather storms.

    4) What we at our company, Mortgage Coach software (we provide tools to Loan Professionals), advocate is seeking a freedom point. A point at which your assets and equity exceen your debt.

    5) For some individuals, the discipline of saving into a side account is not acheivable. If they free up cashflow they will likely spend it. For these individuals it is safe to say that paying off their mortgage might be the best choice to forced savings. There are other ways to accomplish the same result, but for certain parts of the homeowner population, this is really the best way to go.

    This is really a timely topic. I believe that one of the best authorities in this are is a gentleman named Todd Ballenger.

    He wrote Borrow Smart, Retire Rich… an incredible book for consumers and financial professionals alike.

  23. Wait, in the overall calculation, you forget to subtract the interest you paid. In other words even though you still have equity what about the interest that you ended up overpaying for the house!?!?! How could you leave that out of the equation? Makes no sense. Subtract how much in overpayment you made in interest!!! I agree that the goal is to buy as much house as only reasonable people can afford but that house

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