Tyler wrote:
Regarding Moda's rational vs emotional argument, in my experience I've found that this is a topic that drives proudly rational people nuts because sometimes the math of mortgage/investment arbitrage causes them to lose perspective on whether the potential extra money from investing is really all that important in every life situation. It's like maximizing income and liquidity to four decimal points on a spreadsheet is somehow inherently noble and supersedes all other goals. Interestingly, their rational lizard brain makes them very upset when others discuss paying off their mortgage!
IMHO, the type of person who not only values paying off a mortgage early but also has the income to make it happen and the perseverance to follow through is very unlikely to come across a situation where they regret their decision. They're wired pretty well financially (light years better than the average person swimming in consumer debt), and will be just fine.
Both paying on a mortgage (investing the rest) and paying off a mortgage can work well in the right situations. There's no single path to financial success. The key is to make good decisions regardless of the path you choose. Like not buying such a stupid-expensive house to begin with.
Tyler,
A few things:
1) This topic of debt seems to make everyone a little nutty. It's definitely sensitive for some reason. I'm even going on long rants I don't normally do... just as Dave Ramsey does.
2) I CERTAINLY wouldn't put myself in the same corner as those who want to maintain (or go into) debt to maintain an unhealthy equity position in their portfolio thinking it will beat it. As I said, the best comparison is the choice between LTT's and the mortgage. Only in a case of VERY solid risk/reward opportunity would I recommend liquidating those assets to take advantage of it. The main reason I want to maintain said liquidity is RISK mitigation, not getting an extra 1.1% out of a portfolio vs your debt. I'm actually willing to ACCEPT the cost of the spread to maintain said liquidity.
3) The lizard brain isn't the rational part, but the instinctual/emotional part. If anyone's lizard brain is at work, it is the party using more emotions and less logic to make decisions, would it not?
4) Liquidity (let's not fool ourselves... we're not talking about decimal points here... we're talking about tens/hundreds of thousands of dollars in some of these analyses) is absolutely NOT "inherently noble" nor does it "supercede other financial goals." In fact, the entire term "financial goals" is sort of a distraction. Being "debt-free" is quite the arbitrary financial goal in the absence of overal life context. Being "debt free" with zero net worth at 60 is an AWFUL position to be in. What is more "noble" insofar as it actual creates economic horsepower that we can apply to our lives, is to have a meaningfully positive NET WORTH, and that this net worth can help us live our lives the way we want, and be prepared for an uncertain future, and acknowledgement that the more economic resources we lose, the more important it is to protect the rest. In that context, gaining a little bit of extra net income and improved cash-flow by paying down/off a mortgage with otherwise liquid dollars that could easily be invested in a similar duration T-bond/note is a FAIL. At best, it saves us the interest-rate spread. At worst, it costs us whatever we COULD have done with tens/hundreds of thousands of dollars.
5) You are right that a person who pays off a mortgage probably won't "regret" it. Most of them are gaining, slightly, from the decision to pay it off rather than do a PP or LTT with that same money. Many, regardless of whether they're gaining or not, "FEEEEEL" better because they don't have a mortgage. A few, however (and potentially far-more if we actually have a deflationary collapse) will be in a far more flexible economic scenario by investing in LTT's with the money instead of paying off the mortgage. Some of them won't admit to themselves that it was a mistake because 1) they don't know how LTT's work in a portfolio, or 2) they won't want to admit to themselves that they could have made a more rational choice considering an uncertain future. The remaining people will see it as a mistake.
6) Saying that both strategies
can work well in the right situations kind of white-washes over the degree to which strategies can "fail" you, and in what situations. To me, if I actually walk myself through various situations, the ones where I paid off the mortgage perhaps worked mildly better for me than investing in LTT's. The scenarios I can imagine where LTT's work out better, work out WAAAAY better than paying off the mortgage (mostly the risk-based ones... but also the potential for substantial opportunity). If money truly affects our happiness in a deminishing manner as our income increases, then LOSING money affects our happiness in an exponential manner as our losses increase. If I have to lose 1.5% on the spread to maintain liquidity, I think you're taking a small hit to avoid a POTENTIAL large hit.
I'm not trying to demand perfection here, but sometimes life gives us two choices with how to handle something that will have a negligable effect on our lifestyle, but WILL affect our scenario going forward. I really wish people would just walk themselves through those scenarios before making a decision about how to handle debt (though we both agree that buying too much house to begin with (and buying too much garbage on a daily basis)) is far-and-away BIGGEST problem in finance...
So we're probably purposefully arguing over one of the last little investing vestiges on this board where there isn't agreement
. I hope we can appreciate how much we agree on and remember how much respect we have for each other while you all listen to me back-hand your financial decisions.
Keep in mind, I'm an accountant at heart, so I have a relationship with balance sheets that's almost religious. I'm probably coming off as totally pompous. I don't mean to, but I really feel I must flesh out our positions on this beyond the superficial ones and actually dig into this topic. I could be way offe, btw. I just want to know for sure. I definitely appreciate you sounding-off on your perspective.
All-in-all, if being debt-free is such a noble goal that it trumps rational analysis around risk (and being without it provides such profound, unexplainable peace of mind), it should just be avoided at all-costs. It's either tool that should be used and actually admired for what it can do, or it's a toxic little financial Rumpelstiltskin that is going to poison your balance sheet and your mind. If it's the latter... I say rent an apartment, learn survival skills, and buy enough gold coins to move in with your survivalist uncle when the zombie apocalypze comes.
BTW, one practical argument for not having a mortgage is that it helps you avoid shady lenders. The bank that services my mortgage (a very large financial institution that bought it from my original lender) has contracted with a third-party company to monitor the insurance you keep on your house. The third party company conveniently offers their own homeowners insurance at THREE TIMES the market rate. Rather than simply contacting my insurance company that they have on file (perhaps they can't because they're really a competitor), they require me to log into a very scammy looking website once a year to upload my personal policy information. If I miss it by a day or do not do it to their satisfaction, they will immediately sign me up for their own expensive insurance as a "service" which I imagine is very difficult to cancel.
Being debt free frees me of this racket.
This is actually a very fair criticism. Having to hold insurance you don't want to hold is an additional cost, though it's more likely that you WANT to hold the insurance, but to do it on your terms. As long as
I get to pick the insurance company and can get good coverage, I think this is an annoyance that doesn't change the fundamentals of the downside risks and lost opportunities of not having enough liquidity.
But I do really appreciate your pissed-offedness here. Do you mind informing us who the mortgage servicer/provider was?
And keep in mind, this becomes FAR less important for people who've grown their net-worths to high numbers and have small balances left on their mortgages with short durations to pay-off. I'm thinking of this from the perspective of a 30-year-old with 25 years left on a mortgage, and not a lot of liquid money.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
