Mortgage advice deja vu

[Malthus]

In a thread on another board, someone posted this article:

http://www.ricedelman.com/cs/education/article?articleId=232

Basically, advocating taking out as big a mortgage as you can handle, not paying it off fast, but rather using that cheap money to invest in equities. Those who nattered about risk were dismissed as follows:

First, understand that everything you know about mortgages — and particularly what you fear about them — is wrong. The myths you believe were told to you, bless their hearts, by your well-meaning parents and grandparents. They told you that mortgages are dangerous, that having one means you can lose your home. They told you this because they remember the Depression era, a time when millions of Americans lost their homes. Although mortgages were indeed dangerous in the 1930s and 1940s, the rules of money have changed and, unfortunately, your elders don't realize this. So, by learning why your elders were correct in their desire to pay off their mortgages, you'll come to understand why you should keep yours.

I was overcome with nostalgia. This advise used to be everywhere pre-recession. Obviously, during the recession, with people losing theior jobs, homes, and shirts in the stock market and house prices tumbling, it looked like a bad joke.

Is its tentative re-appearance, like the first tender green shoots of spring, a sign of returning normalicy - or only that some people have very short memories? 

[Ed Anger]

I've always done the 30 year mortgages. I'd rather have a lower payment in case I was temporarily unemployed and I could maintain payments for longer.

[Malthus]

I've always done the 30 year mortgages. I'd rather have a lower payment in case I was temporarily unemployed and I could maintain payments for longer.

You make it sound like you are older than Methuselah. Just how many 30 year mortgages have you had? 

[Brazen]

I always overpay as much as I can when I can, for which I am exceptionally grateful at times of low to zero income. Like now.

[Ed Anger]

I've always done the 30 year mortgages. I'd rather have a lower payment in case I was temporarily unemployed and I could maintain payments for longer.

You make it sound like you are older than Methuselah. Just how many 30 year mortgages have you had? 

3

[Razgovory]

Grumbler can get 300 year mortgages from his bank.

[Richard Hakluyt]

Early green shoots I'd say 

Once more round the cycle of boom-and-bust, it's always the same whilst also being different each time. I would say that taking out a large mortgage and holding onto equities is likely to be more profitable than paying the mortgage down over the next couple of years or so. OTOH, faced with that choice quite recently I payed the mortgage down rather than increasing my equities. The security is more important to me. Where your chap in the quoted post goes wrong is in not admitting the risk. Also, the easy gains in stocks have just been made in the past year; they are arguably at "fair value" atm, so he is behind the curve.

[grumbler]

Also, the easy gains in stocks have just been made in the past year; they are arguably at "fair value" atm, so he is behind the curve.

I think that this is an important caveat:  one is playing the stock market of the future, not the one of the past.

[DGuller]

In a thread on another board, someone posted this article:

http://www.ricedelman.com/cs/education/article?articleId=232

Basically, advocating taking out as big a mortgage as you can handle, not paying it off fast, but rather using that cheap money to invest in equities. Those who nattered about risk were dismissed as follows:

First, understand that everything you know about mortgages — and particularly what you fear about them — is wrong. The myths you believe were told to you, bless their hearts, by your well-meaning parents and grandparents. They told you that mortgages are dangerous, that having one means you can lose your home. They told you this because they remember the Depression era, a time when millions of Americans lost their homes. Although mortgages were indeed dangerous in the 1930s and 1940s, the rules of money have changed and, unfortunately, your elders don't realize this. So, by learning why your elders were correct in their desire to pay off their mortgages, you'll come to understand why you should keep yours.

I was overcome with nostalgia. This advise used to be everywhere pre-recession. Obviously, during the recession, with people losing theior jobs, homes, and shirts in the stock market and house prices tumbling, it looked like a bad joke.

Is its tentative re-appearance, like the first tender green shoots of spring, a sign of returning normalicy - or only that some people have very short memories? 

My ears are very sensitive to retarded real estate wisdom, and all the various bogus reasons for investing in it, but I'm not detecting any BS here. 

If you have a mortgage on an over-valued house, and it takes a large portion of your income to make payments on, then you already made the mistake.  If you have a mortgage that is manageable, and you have sufficient safety funds tucked away like everyone should, then the question about the wisdom of paying it off becomes much more complicated. 

In many cases it is indeed wise to not prepay the mortgage, and instead invest the surplus funds.  Pre-paying the mortgage is a safe, but low-yielding investment, and in US it also reduces your subsidy from the US gov't known as interest tax deduction.  If you're very risk averse and don't want to invest the borrowed funds, no matter at how favorable the terms are, then go ahead and prepay.  However, there is such a thing as too much risk aversion, and prepaying a safe mortgage is IMO a sign of it.

[DGuller]

Also, the easy gains in stocks have just been made in the past year; they are arguably at "fair value" atm, so he is behind the curve.

Not a fan of efficient market theory?

[Malthus]

Early green shoots I'd say 

Once more round the cycle of boom-and-bust, it's always the same whilst also being different each time. I would say that taking out a large mortgage and holding onto equities is likely to be more profitable than paying the mortgage down over the next couple of years or so. OTOH, faced with that choice quite recently I payed the mortgage down rather than increasing my equities. The security is more important to me. Where your chap in the quoted post goes wrong is in not admitting the risk. Also, the easy gains in stocks have just been made in the past year; they are arguably at "fair value" atm, so he is behind the curve.

Heh, I'm reasonably certain that the article itself was written before the recession. 

But yeah, I totally agree: the advice downplays risk to a degree that looks, with benefit of hindsight, to be even more charmingly naive than the author is accusing "aged parents" of being. 

[Malthus]

In a thread on another board, someone posted this article:

http://www.ricedelman.com/cs/education/article?articleId=232

Basically, advocating taking out as big a mortgage as you can handle, not paying it off fast, but rather using that cheap money to invest in equities. Those who nattered about risk were dismissed as follows:

First, understand that everything you know about mortgages — and particularly what you fear about them — is wrong. The myths you believe were told to you, bless their hearts, by your well-meaning parents and grandparents. They told you that mortgages are dangerous, that having one means you can lose your home. They told you this because they remember the Depression era, a time when millions of Americans lost their homes. Although mortgages were indeed dangerous in the 1930s and 1940s, the rules of money have changed and, unfortunately, your elders don't realize this. So, by learning why your elders were correct in their desire to pay off their mortgages, you'll come to understand why you should keep yours.

I was overcome with nostalgia. This advise used to be everywhere pre-recession. Obviously, during the recession, with people losing theior jobs, homes, and shirts in the stock market and house prices tumbling, it looked like a bad joke.

Is its tentative re-appearance, like the first tender green shoots of spring, a sign of returning normalicy - or only that some people have very short memories? 

My ears are very sensitive to retarded real estate wisdom, and all the various bogus reasons for investing in it, but I'm not detecting any BS here. 

If you have a mortgage on an over-valued house, and it takes a large portion of your income to make payments on, then you already made the mistake.  If you have a mortgage that is manageable, and you have sufficient safety funds tucked away like everyone should, then the question about the wisdom of paying it off becomes much more complicated. 

In many cases it is indeed wise to not prepay the mortgage, and instead invest the surplus funds.  Pre-paying the mortgage is a safe, but low-yielding investment, and in US it also reduces your subsidy from the US gov't known as interest tax deduction.  If you're very risk averse and don't want to invest the borrowed funds, no matter at how favorable the terms are, then go ahead and prepay.  However, there is such a thing as too much risk aversion, and prepaying a safe mortgage is IMO a sign of it.

You seriously think that the paragraph I quoted could have been written with a straight face today, rather than a couple of years ago?

Someone poo-pooing worries about mortgage risk in that cavalier manner is hard to take seriously, and the "historic gains" from the stock market are looking awfully limited these days. It certainly isn't an *automatically* good strategy to invest mortgage money in equities.

[MadImmortalMan]

He has a point--but only so far. If you have to get a mortgage anyway, it's usually the cheapest money most people can get. And the US tax code makes it very useful as a way to offset other incomes. If you have a lot of equity and can afford the payments, then getting a mortgage and using the cash to invest in something with a yield as high or higher than your mortgage interest kinda makes sense on paper. You take on the obligation, but you also take on assets with an offsetting return that is more than the obligation. Even for Canadians, if the yield is high enough. If the assets you invest it in are fairly liquid, then there's always the option of cashing them out and eliminating the mortgage if you have to.

There's always going to be that sense of putting your home at risk--I wouldn't do it if that makes the person uncomfortable. Being afraid makes people make bad decisions with their investments.

It's something I might consider under certain circumstances, maybe. I'm not doing it now though. Whatever equity I have is still in my house.

[DGuller]

You seriously think that the paragraph I quoted could have been written with a straight face today, rather than a couple of years ago?

No, no one would write this today, but the reason would the fear of looking ridiculous for unjustified reasons. 

The people who lost their houses in the recent recession didn't lose them because they invested their suprlus funds instead of prepaying the mortgage.  Most people lost their houses because they bit off more than they could chew when buying a house, and would not have been able to keep their houses even without recession, due to all the funny business with ARMs.  They also lost their house because they bought one for way too high a price, falling under the sway of religion that told them that it's always better to own than to rent.

Make no mistake, my main advice to someone buying a house would be to make sure that you can safely handle the mortgage, even after a couple of shocks to your personal finances.  However, if that's satisfied, my second advice would be to not pay too much towards equity unless you're extremely risk averse.  There are just so many better options to someone who doesn't mind a little risk (and by risk I mean risk of losing money, not losing a house).

[viper37]

In a thread on another board, someone posted this article:

http://www.ricedelman.com/cs/education/article?articleId=232

Basically, advocating taking out as big a mortgage as you can handle, not paying it off fast, but rather using that cheap money to invest in equities. Those who nattered about risk were dismissed as follows:

First, understand that everything you know about mortgages — and particularly what you fear about them — is wrong. The myths you believe were told to you, bless their hearts, by your well-meaning parents and grandparents. They told you that mortgages are dangerous, that having one means you can lose your home. They told you this because they remember the Depression era, a time when millions of Americans lost their homes. Although mortgages were indeed dangerous in the 1930s and 1940s, the rules of money have changed and, unfortunately, your elders don't realize this. So, by learning why your elders were correct in their desire to pay off their mortgages, you'll come to understand why you should keep yours.

I was overcome with nostalgia. This advise used to be everywhere pre-recession. Obviously, during the recession, with people losing theior jobs, homes, and shirts in the stock market and house prices tumbling, it looked like a bad joke.

Is its tentative re-appearance, like the first tender green shoots of spring, a sign of returning normalicy - or only that some people have very short memories? 

that's very simple actually.
If you take the mortgage, invest the money and lose it all, are you in deep shit? (i.e. will you be unable to make the payments and lose your home?)
If the answer is yes, don't do it.
If the answer is no, by all means do invest that money.