November 30, 2007

Tommy’s parents avoided being foolish

The other day, Burbed reader Tommy posted this comment:

“housing is the linchpin of our economy” – in NY [Burbed.com]
As for housing being considered retirement/rainy day funds: My folks felt that way and have refi-ed their way into $150K of debt. The funny thing is that their house originally cost something ridiculous like $25K in the 70s. I’m not looking to get into that kind of trouble and hope to have my house paid in full asap along with my cash hordes :)

Congrats Tommy! Your parents are sophisticated and not foolish. Let’s look at some advice from experts from 2005:

Home Equity at Risk

“If you paid your mortgage off, it means you probably did not manage your funds efficiently over the years,” said David Lereah, chief economist of the National Association of Realtors and author of “Are You Missing the Real Estate Boom?” “It’s as if you had 500,000 dollar bills stuffed in your mattress.”

He called it “very unsophisticated.”

Anthony Hsieh, chief executive of LendingTree Loans, an Internet-based mortgage company, used a more disparaging term. “If you own your own home free and clear, people will often refer to you as a fool. All that money sitting there, doing nothing.”

Congrats!

Comments (36) -- Posted by: burbed @ 4:40 am

36 Responses to “Tommy’s parents avoided being foolish”

  1. ex-sunnyvale-renter Says:

    Yeah!! What’s that book, The New Rules Of Money? You can find it in your local Barnes’n’Borders …. “No One Pays Their House Off Anymore” is I think one of the chapter titles, it’s one of the major ideas in the book – BAD ideas.

    The real future is frugal, freegan, pinchpenny-Amish but I didn’t say that, that’s only for you saps outside the Bay Area.

  2. 3rd Generation Says:

    Did I just read in the blog that dead broker Lending Tree’s ‘assets’ were ‘sold’ (taken over by someone even more stupid/greedy with MORE borrowed money) for $.26/dollar? Now THATS a really WELL run, sophisticated company. Their management should be lined up and shot so as not to poison society further.

    Meanwhile, I’m enjoying my 11th month of elected ‘sabbatical’ from the rat race while putting my feet up in my OWNED-MORTGAGE-FREE home acquired and paid for in full by my unsophisticated dedication to helping others get what they want. I miss it and will get back at it soon.

    Life sucks, doesn’t it? Enjoy your commute today. I hope you don’t get killed by an uninsured illegal alien on the freeway. I think I’ll play 9 this afternoon or take a ride on the streetbike. See ya at Alices’…

  3. et_tu_alt_a? Says:

    If Liareah said it, it must be true…

  4. hedda Says:

    Certainly it’s a dumb idea to pay your mortgage off early. If you have a fixed-rate mortgage, you know your mortgage payments aren’t going to go up. What you pay now is what you pay in 20 years. If you want to make money, take whatever you might’ve thrown at your mortgage and invest it instead. Sheesh.

    But once it’s paid off, at the end of that 30 years? Why would you risk the roof over your head? I don’t understand.

    And 3rd Generation, I’ll enjoy my commute – you enjoy your racism.

  5. ex-sunnyvale-renter Says:

    Hedda – agreed – pay off higher interest debt first. But, we will be forced to adopt the worldview of our 1st Great Depression-era forebears and hate to have ANY debt hanging over our heads.

  6. Sj Says:

    4/hedda – What’s racist about the term “illegal alien”? Nothing, you pc idiot.

  7. Terry C - Democratic Bitch Says:

    ““If you paid your mortgage off, it means you probably did not manage your funds efficiently over the years,”

    Ass-backwards thinking.

  8. Ken H. Says:

    Sj…

    Before you demonstrate your own shortcomings by calling anyone an idiot, apply some critical thought please.

    “I hope you don’t get killed by an uninsured illegal alien on the freeway” is implicitly rascist for obvious reasons. Why suggest that there is danger from an “uninsured illegal alien” versus the FAR more common “uninsured American citizen? Because the author wants to convey that we are all in danger from some ambiguous horde of brown-skinned folks who don’t have the responsibility or sense to insure themselves.

    Its not rocket science.

  9. Pope Ratzo Says:

    My parents (first-generation Americans, children of Italian immigrants) hated the idea of having debt. They were in their 50’s before they got their first credit cards that they actually used, and only got them so they could rent a car when they went on their vacations. They never carried a balance.

    It took me until middle age before I figured out they did things the right way, but now I’m really glad I’ve learned my lesson. I never carry a credit card balance, no home equity loans for me. It’s a wonderful feeling knowing that the building around me is mine and my wife’s. We don’t own a 42″ HDTV, but our fairly frugal life has allowed me to be semi-retired at age 51.

    I recently learned that my credit card company considers my wife and I “deadbeats” because we pay off our entire balance every month. That really made me determined to never pay them a penny in interest.

  10. G in INdiana Says:

    Already paid off all the higher debt, as in NONE! No credit card debt (we pay in full at the end of the month) all cars are owned free and clear, and we have nothing else left to do with our cash. We have more than enough for our retirement and medical expenses are already covered. We WANT to pay off the house as we were both raised to NEVER bite off more than you can chew.
    Anything we want, we buy IF we have the cash to pay for it, whether we use the credit cards for their freebies or pay in cash. We do not extend ourselves over our limit. EVER. No new cars, TVs or anything else unless whatever it is breaks and cannot be repaired.
    If you live within your means and do not “covet” what you see on TV and advertisements, you will be fine. If you fall into the “gotta have it cuz the Jones’ do” mind set, you are going to be lost sooner or later.

  11. Jonggmaster Says:

    If you are retired, living on a fixed income from your investments, you must evaluate your tax position, the rate of return on your investments, the interest you pay on your mortgage, and your projected cash monthly income with and without a mortgage throughout your life expectancy. (“Your” includes your wife or husband.) A relatively new mortgage means that you will be transferring your standard IRA withdrawals into payments that are largely interest. Under this condition, paying down the mortgage as quickly as possible may make sense. The interest deduction becomes less important, but you’ll move to a lower or lowest bracket. As for interest rates, you are likely paying more for your mortgage than you can get from safe CDs. And cheaper dollars due to inflation probably mean little over your remaining life span. Every case is different, but paying off the mortgage may make sense for many older folk. (And remember, you will still own a valuable asset for emergencies.)

  12. burbed Says:

    >G in INdiana

    Why do you hate freedom? Why do you hate America?

  13. Eric U. Says:

    I really have to control myself not to pay down that last 40k on the mortgage.

    One thing I wonder about is why the 42″ lcd is given as an example of consumer excess. The Hummer in the driveway is an example of consumer excess, the 42″ tv is a couple of months spending money for most people. Back when I was a kid, some people would take out a loan for their tv purchases. Now a 102″ tv, that’s consumer excess.

  14. Mooser Says:

    I paid off the house, cars, motorcycles and boat. Then my wife brought an illegal alien home and they kicked me out of my own house!
    When an 8foot tall creature is holding a ray-gun to your head, a guy who’s got warrants out for him all over the galaxy, you don’t argue.
    He’ll probably get my wife pregnant and then go back to his own planet.
    Illegal aliens! You can’t trust them!

  15. The Raven Says:

    Hedda is correct: Paying the mortgage off early is a foolish thing to do. Understanding why this is true, however, requires a great deal of study. It is not intuitively obvious, so you have people like Clark Howard on the radio exhorting people to get that mortgage paid off pronto!

    Here’s one way to think of it – and nothing I say here should be applied to anything but a 30-year fixed – the money you spend on your mortgage now is the same as the money you will spend in year 29. Now, looking back 30 years, I note that salaries were half or less than they are today. That means that due to inflation, what feels like $1500 a month (or whatever) will be half or less in the future.

    The mortgage interest deduction pays down your taxes. The money you aren’t double-paying into the mortgage can be invested and can generate a much better rate of return. Financial management isn’t easy, but understanding how your mortgage works and making it work for you is a smart move.

  16. Gus Says:

    The stock brokers already took people’s money in the ’90s, so bankers needed a new way to defraud people. The home equity loan and ARM mortgage of the ’00s is the “of course Netscape’s stock is worth $200/share, they don’t need a profit, it’s a new economy” of the ’90s.

  17. Brighid Says:

    It’s better to own the home outright and have no mortgage, trust me. We save 4 times the amount we would get in deductions on interest payments from the IRS. Not only that, but the IRS has the mortgage deductions wired right into the AMT. If you’re paying a mortgage on your home, whatever interest deductions you think you’re getting are automatically eliminated by the AMT. Do the research. Secondly, check for the full amount you’re paying for that home in your paperwork, folks! You’re actually paying much more than your 30-year-fixed mortgage, so that by the end of the 30 years, you’ve paid 3 times the amount of that mortgage for the house. Get the picture? You’re paying out all that money, even if you got a 5% mortgage rate. And, if it’s closer to 6 or 7%, you’re really getting screwed. Think how much that interest rate of 5% could mean to you if it was invested in S&P 500 over 30 years for your own portfolio–as opposed to going to the profits of your mortgage lender! Why would you give someone an extra $100,000 of YOUR MONEY to borrow a $150,000 mortgage? You think you’re getting all those “tax breaks” you say? Figure it out; are you actually getting your money’s worth from the IRS with that interest deduction, as compared to what you could save every month if you put that mortgage money into your own pocket? Do the math: You’re paying more in mortgage interest than you’re getting back in deductions. Don’t be penny-wise and pound-foolish. You aren’t making a “mortgage work for you” if you’re actually paying out twice or three times the money for a home with a $150,000 mortgage are you? If you can pay cash for a house; do it. If you can pay an extra payment each year and pay off your mortgage early; do it. Save the money you aren’t paying out to the lender in interest. Put it in safe, risk aversive investments. This country’s going into another depression.

  18. Emily Says:

    My husband and I retired in our mid-50’s. A paid off mortgage was part of our retirement planning. I realize it might not make much sense to pay off the last 5 years early, but you sure save a bundle by paying extra in the early years. After we got our mortgage paid off, we lived on one check and saved the other one. Do that for 20+ years and you’ll have quite a little nest egg. As for losing the mortgage interest deduction, just ask yourself “if I could deduct money I flushed down the toilet, how much would I flush?”

  19. rapier Says:

    Paying of a mortgage is not the best thing to do under most circumstances.Hell, virtually all circumstances in modern history. If there were actual price deflation however then having it paid off would be an excellent thing.

    Deflation is almost an impossibility but never say never. In deflation cash is king. A dollar today in hand is worth more tomorrow. If this were to happen however home ownership would be only a minor concern because there would be societal breakdown.

    So the idea of paying off to hedge against deflation is mostly just a theoretical exercise.

  20. sanfrantim Says:

    “Pay off your mortgage”?? Silly idea. I am gunning for retirement, and my home is going to finance my twilight years via reverse mortgage. When I hit 62, i’ll have about $1 m in home equity. Gonna borrow off that and live like a king at leisure. after all, i don’t need the house when i’m dead. sweet.

  21. sonarrat Says:

    Deflation is exactly what happened during the Great Depression. The same price would buy more food, a bigger car, a nicer house. Why? Because consumers cut back their expenditures by 10%, causing a downward spiral of poor business performance and lowering wages. So if you still had a steady income during that slump, your buying power went up.

  22. Corner Stone Says:

    G in Indiana –

    Don’t know you, will never meet you but I have to tell you – I don’t believe a word of your post. To me it sounds more like a mantra or meme than an actual lifestyle you are engaging in. It rings hollow and I’m calling BS on you.

  23. Palolo lolo Says:

    Mine’s paid off and I have no notes on it. There’s NO WAY I’m going back to large monthly payments,thank you very much.

  24. paul Says:

    Should you pay off the mortgage? What else are you going to do with the money? Will it yield as much after taxes as that amount of equity in the house (remembering that the first half-million of capital gain from a house is tax-free for a couple)?

    If you’re going to use that money for a better investment, that’s great. If you’re going to use it to finance current consumption, the best that can be said is that maybe it’s cheaper than financing current consumption with the same size credit-card balance.

  25. burbed Says:

    frankly you should not pay off your mortgage if you live in california because prices are guaranteed to go up. instead you should get a negative amortization mortgage and use the cash flow to invest in other assets such as harley davidsons, 100 inch lcds, granite countertops, and vacations!

  26. McLovin Says:

    I thought about that “uninsured illegal alien” crack. It could also refer to illegal aliens being denied access to drivers’ licenses and thus insurance. But I doubt it.

  27. W. Kiernan Says:

    “If you own your own home free and clear, people will often refer to you as a fool. All that money sitting there, doing nothing.”

    If you accept this axiom, then everything the mortgage brokers say follows with unimpeachable logic. But in fact this axiom happens not to apply to the one-and-only house which the majority of mortgage holders own. For the single-house crowd, “all that money” equals “the house you live in”. Thus the axiom can be restated as “you would be a fool, with the house you live in sitting there, doing nothing.”

    But the house you live in doesn’t just sit there doing nothing. Use your eyes! Your house is busy busy busy all day every day. It keeps the rain off your head. It provides a shady space with electric outlets for your refrigerator and stove. It defends your pawnable goods from the sticky fingers of the ethically derelict. It prevents passing cops from harassing you when you are trying to get some sleep. Do not forget the great blessing of a properly functioning private bathroom.

  28. Village Says:

    If it is such a good idea to have a mortgage, how come rich people pay cash for houses and cars.

    I have a paid for house and a paid for car. NO DEBTS. Got out of the stock market at 14,000. I am sitting on cash with a hope to buy some rental property for income.

  29. Village Idiot Says:

    Hey Village, I’m sorry that the rest of us are RICH like you. Us little people who are so inferior, we need mortgages since we weren’t SO SMART like you.

    I’m sure it must be nice to be an egotistical jerk. Your kids and 3 ex-wives adore you, I’m sure.

  30. densityduck Says:

    Yeah; lots of people here talking as though everyone in the world just has a million dollars sitting there in a trust fund, doing nothing but earning interest. If a big bag of money fell out of a Brinks truck and landed at my feet, then sure, I’d pay off the house. But I’m not going to beggar myself right now just to cut ten years off a thirty-year mortgage. My loans are fixed-rate, I can make the payments at my current income level, I don’t see a reason why I shouldn’t just plug-and-chug for the next thirty years.

  31. Sj Says:

    Ken H – Oh yes, let’s all pretend illegal aliens without SSNs and driver’s licenses have auto insurance and rainbows cover each road. You’re a typical bay area moron.

  32. DensityDuck Says:

    SJ: dose illegal immygrunts dun gonna tek are wimmin, cos ya know dose beaners is all crazy for white chicks amirite?

  33. rick Says:

    Very good discussion.

    I think the tax advantage on the mortgage interest is what helps drawing people in debt.

    I did some calculations. The tax advantage only plays to a certain extent – you have high (earned?) income and high mortgage debt.

    There is a lot of caveats:

    If your income is TOO high, then you don’t get any tax benefits.
    If your mortgage debt is too low, say below $100k. Then you’d better off not doing itemized return.
    blah blah

    The guy saying he mortgage his house to live at large probably has no clue, he will have no (earned) income and probably nobody wants to loan him money (certainly not true in these insane days).

    There are advertised services that will pay you to take your home equity, but I highly doubt that it won’t cause you an arm and a leg.

  34. Sj Says:

    32 – Nice try on the race-baiting, but I’m not white jackass.

  35. Lee Matthews - Financial Concepts West Says:

    “We’ll probably go full bore into paying it [our mortgage] off and drop about 10K a month into the payment and have it all paid off by about 2014-2016″

    What with the way the Real Estate market is today, folks can no longer count on appreciation to build equity. Those (like you) who realize that they need to pay down their current mortgage debt are looking for alternate ways to aggressively (yet safely) build equity.

    They’ve found that the Money Merge Account™ system is a perfect way to do that; they can focus on the wealth accumulation goals while accelerating their equity by using a Home Equity Line of Credit (HELOC).

    A typical 30 year loan (of whatever type) can be paid down in 1/3 to 1/2 the time; it’s a great way to save *huge* amounts of income by eliminating the front-end interest load of a mortgage amortization schedule. (On these million-plus dollar homes, I’ve personally seen where the Money Merge Account™ program will save the owner 3/4 million in interest charges!)

  36. burbed Says:

    Except these programs generally have higher interest rates.


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