mortgages

[givememyleg]

why would anyone want a mortgage if you could avoid it?

EDIT - Ok just so people aren't confused I did not just start a thread in the commune saying only this one sentence. There was a thread in the high stakes forum about ilikeaces saying he wanted to buy a house straight up. Courtie then politely split our discussion from that thread so it could continue. And if you want to add to the discussion I strongly suggest reading it first because a lot has already been said - esspecially from Moe.

[mcatdog]

Real-estate is a good investment. Taking out a mortgage on a house isn't a bad idea because by the time it's paid off, your house will probably be worth a ton more than it's worth now, so the fact that you're paying a lot of interest isn't a disaster. Plus you get to live in a baller house in the meantime. I probably won't buy a house for a few years still, but when I do, I'll definitely take out a mortgage and get about as nice of a house as I can reasonably afford. On the other hand, I would never take out a loan on a car, because it's retarded to pay interest on it when the car is losing value so quickly anyway.

[chardrian]

why would anyone want a mortgage if you could avoid it?

Because in the U.S. a mortgage = tax deduction.

[givememyleg]

why would anyone want a mortgage if you could avoid it?

Because in the U.S. a mortgage = tax deduction.

So? Having a mortgage for a house you're living in is not an investment. Having a mortgage that is not an asset is just a liability and I don't understand why someone would pay 2x or more for the same house over 20-30 year period when they could pay for it straight up. There is no guarantee it will be worth more 30 years from now and even if it is it still isn't a real long term investment. Real-estate is a great investment but not in those terms.

[Galapogos]

why would anyone want a mortgage if you could avoid it?

Because in the U.S. a mortgage = tax deduction.

So? Having a mortgage for a house you're living in is not an investment. Having a mortgage that is not an asset is just a liability and I don't understand why someone would pay 2x or more for the same house over 20-30 year period when they could pay for it straight up. There is no guarantee it will be worth more 30 years from now and even if it is it still isn't a real long term investment. Real-estate is a great investment but not in those terms.

Real estate right now is roughly estimated to go up on average 5% a year over the next 25 years. That's also a modest calculation.

[givememyleg]

why would anyone want a mortgage if you could avoid it?

Because in the U.S. a mortgage = tax deduction.

So? Having a mortgage for a house you're living in is not an investment. Having a mortgage that is not an asset is just a liability and I don't understand why someone would pay 2x or more for the same house over 20-30 year period when they could pay for it straight up. There is no guarantee it will be worth more 30 years from now and even if it is it still isn't a real long term investment. Real-estate is a great investment but not in those terms.

Real estate right now is roughly estimated to go up on average 5% a year over the next 25 years. That's also a modest calculation.

Well that may be, but you're still paying nearly twice as much (sometimes more) for the same house over 25 years. So how is it an investment when the value will go up by 5% when you will be paying 100%+ extra?

[jackvance]

Well that may be, but you're still paying nearly twice as much (sometimes more) for the same house over 25 years. So how is it an investment when the value will go up by 5% when you will be paying 100%+ extra?

I think this hinges on the assumption that having lots of $$ at your disposal (because you didn't have to put it all in the house) will allow you to make more of it. If you're just gonna keep your savings under your matrass that is obviously not true.

[givememyleg]

Well that may be, but you're still paying nearly twice as much (sometimes more) for the same house over 25 years. So how is it an investment when the value will go up by 5% when you will be paying 100%+ extra?

I think this hinges on the assumption that having lots of $$ at your disposal (because you didn't have to put it all in the house) will allow you to make more of it. If you're just gonna keep your savings under your matrass that is obviously not true.

Any true investor has a lot of money to invest because this is how an investment looks:

$ = $$$

A pool full of money might feel nice to swim in (or having it under your bed :P ) but it does little for growth.

[koolmoe]

Well that may be, but you're still paying nearly twice as much (sometimes more) for the same house over 25 years. So how is it an investment when the value will go up by 5% when you will be paying 100%+ extra?

This is a very narrow minded way of looking at a mortgage. Basically, the problem with buying a house outright is that there is a huge opportunity cost associated with tying up that much capital when you can (usually) get the money pretty cheaply from the bank.

Given the facts that most mortgages are under 7% right now, are long term (15-30 years), are tax deductible, and that making 8% long term in equities is very achievable, one would be foolish to park 200K or more in a house. Run the numbers over 30 years, and you'll see that you come out well over 1 million dollars ahead(*incorrect, see end of post) by taking a $200K loan at 7% and investing the $200K at 8% versus buying the house outright, and this analysis doesn't consider the tax implications.

($200K*1.08^30 = 1,812,531 while 30 years of payments totals $479,018)

Now, you could argue that there is no guarantee that 8% is achievable, so there is some risk associated with investing over paying off the mortgage. In general, though, it is a sound strategy.

Also, you should consider the leveraging aspect of your real estate investment. If you put 10% down on a home whose value increases 20% over 5 years (fairly reasonable in most markets), you will have earned 200% on your money. If you bought the house outright, you will have earned 20%. The net gain is the same either way, but by investing less, you have freed up capital for other endeavors. The danger with leverage is getting overextended.

<edit>In retrospect, I should assume that you can invest the payments you would otherwise be making, in which case, you would be better off paying for the house outright and investing the monthly payment in the same investments that will earn you 8% a year. However, as the mortgage rate decreases and the investment rate increases, this relationship tilts in favor of investing over buying a house outright.

Payment on a 200K loan at 7% = $1330.60
Invested each month at 8% APR for 30 years = $1,874,224
</edit>

[mcatdog]

Nice post koolmoe, but people usually don't have a choice between taking out a mortgage on a house and buying that house outright. I don't know any statistics here, but I'd imagine that the vast majority of first-time home buyers in the US are buying a home that they could never afford to purchase with cash.

The point of life isn't to have a huge pile of money in your bank account when you're 70. I'd rather spend that money and enjoy my life, and a big part of that would be to live in a decent house when I eventually raise a family. It sure would suck to raise your family in a shithole because you stubbornly refused to take out a mortgage for economic reasons. Besides, as koolmoe showed in his post, you don't even lose that much money in the long run by taking out a mortgage. Seems like a no-brainer to me.

[koolmoe]

Besides, as koolmoe showed in his post, you don't even lose that much money in the long run by taking out a mortgage. Seems like a no-brainer to me.

You had some very good points, but I would like to address this one specifically. In my off-the-cuff analysis, I made some limiting assumptions that aren't really reflective of current reality. First, the mortgage rate I assumed was a bit high. It certainly depends on your credit, but the rates for most 30 year fixed mortgages are closer to 6% than 7% right now (e.g., Wells Fargo lists 6.125% as their current rate today). Secondly, the ROI of 8% I assumed is slightly conservative. Over the long haul 9% or 10% is certainly achievable, particularly if the investor can tolerate some risk. Finally, the tax advantage is not included, which would amount to a few thousand dollars a year that could be invested, and that would make a big difference in favor of getting a mortgage.

There are a couple of other reasons that I don't like the idea of plunking a huge chuck of change down on a house.

First, it is an extremely illiquid investment. If you have an emergency or an investment opportunity arises, you can only get to the money in your home via a home equity loan or line of credit, which are almost universally higher interest than a first mortgage. Depending on how you spend the money, the interest may not be tax deductible. There are many potentially high-yielding investment opportunities (stocks, for example) which are virtually immediately liquid.

Second, I think that human nature might make it difficult to invest the equivalent of a house payment every month after buying a house outright, but most home owners faithfully pay their mortgage. In my own experience, even automatic investment plans that deduct the investment automatically from your bank account or paycheck can be problematic, because you always have the option of suspending the payments for a while. The last time I suspended payments, I was planning to do so for 6 months, and that turned into 30 months. Of course, other individuals may have trouble investing the entire 200K, but those same people probably wouldn't be the type to pay for a house outright, either.

[givememyleg]

I'm not dissing the whole idea of having a mortgage. I would rather have one in a decent house then live in a shit hole as well. My point is if the money is available, it won't effect how you live to spend it, why would you borrow? Having a mortgage is having a liability. Liabilities create debt, whether or not you can afford to pay it each month. I want to someday be financially free and having a mortgage for the house I'd live in would not acheieve this. I am by no means any expert in anything in real estate or investing, but I strongly suggest reading some books by Robert Kiyosaki. Esspecially the one I just finished a few weeks ago, The Cashflow Quadrant. He is a very bright self-made millionaire and it's a good read for anyone interested in Big Business / Investing.

[koolmoe]

My point is if the money is available, it won't effect how you live to spend it, why would you borrow? Having a mortgage is having a liability. Liabilities create debt, whether or not you can afford to pay it each month. I want to someday be financially free and having a mortgage for the house I'd live in would not acheieve this.

Suppose you have 200K, and you have two choices for this money:
1) Pay off your 6% home loan. Monthly payment is $1199.10.
2) Invest the money and get 8% return. Suppose that you receive your 8% as income each month ($1333.33).

Isn't it obvious that option 2) neatly handles your need to be "finacially free"? You can simply take the income generated by your investment and pay your mortgage payment. And you have $134 left over to boot. And you haven't considered the tax implications yet.

The idea of paying off a mortgage for freedom is a mirage in some cases (particularly when it can be shown to reduce your monthly cash flow over other alternatives).

I am by no means any expert in anything in real estate or investing, but I strongly suggest reading some books by Robert Kiyosaki. Esspecially the one I just finished a few weeks ago, The Cashflow Quadrant. He is a very bright self-made millionaire and it's a good read for anyone interested in Big Business / Investing.

No offense, but Kiyosaki is pretty much a charlatan that spouts a few bromides, makes ludicrous claims, gives some bad (and potentially illegal) advice, and sells it to you for $14.95 . While the intent of his books is good, there are much better books out there than RK's.

What the following link lacks in style, it more than makes up for in intelligent analysis of RK's work:

http://www.johntreed.com/Kiyosaki.html

[givememyleg]

Suppose you have 200K, and you have two choices for this money:
1) Pay off your 6% home loan. Monthly payment is $1199.10.
2) Invest the money and get 8% return. Suppose that you receive your 8% as income each month ($1333.33).

Isn't it obvious that option 2) neatly handles your need to be "finacially free"? You can simply take the income generated by your investment and pay your mortgage payment. And you have $134 left over to boot. And you haven't considered the tax implications yet.

The idea of paying off a mortgage for freedom is a mirage in some cases (particularly when it can be shown to reduce your monthly cash flow over other alternatives).

Like I said, all of this is new to me. You're obviously much more experienced/informed than I am. I wouldn't even know how to go about doing option 2 yet. What I am trying to do is become as informed as I possibly can to all of this. I appreciate all of your posts and this discussion. Right now, being financially free or having a passive flow of income does seem like a mirage to me. But I have some ways that in time, I hope I can pursue this.

No offense, but Kiyosaki is pretty much a charlatan that spouts a few bromides, makes ludicrous claims, gives some bad (and potentially illegal) advice, and sells it to you for $14.95 . While the intent of his books is good, there are much better books out there than RK's.

What the following link lacks in style, it more than makes up for in intelligent analysis of RK's work:

http://www.johntreed.com/Kiyosaki.html

I don't really know much about Kiyosaki's background, and I have only read 2 of his books. The thing in the cashflow that made the most sense to me was the ESBI quadrant. He does seem to have some interesting ideas and I don't really know the whole truth behind his work or himself personally, but there are definetly things in this book worth reading. The website was pretty informative, but just seemed like critic bashing RK's work to make his own book sell. That being said, I will probably check out Reed's book as well.

[pokerroomace]

koolmoe is a genius. don't understand half of it tho. and cba to read it all.

just want to say:
even people with a load of cash in their bank accounts still take out a mortgage when they buy property. and i'm sure koolmoe has explained the reasons (which i don't really know btw)

[koolmoe]

Right now, being financially free or having a passive flow of income does seem like a mirage to me. But I have some ways that in time, I hope I can pursue this.

In general, I think you are on the right track. Becoming debt free is extremely useful, especially of credit card debt, auto loans, all those goofy no-interest promos from retailers, etc. But hopefully you can see that mortgage debt is in a class of its own and is among the last debts you should eliminate.

I don't really know much about Kiyosaki's background, and I have only read 2 of his books. The thing in the cashflow that made the most sense to me was the ESBI quadrant. He does seem to have some interesting ideas and I don't really know the whole truth behind his work or himself personally, but there are definetly things in this book worth reading. The website was pretty informative, but just seemed like critic bashing RK's work to make his own book sell. That being said, I will probably check out Reed's book as well.

Reed does have books to sell, but if you check out his recommendations page, you'll see that he recommends several other books besides his own. Regardless, some of the points that Reed makes about Kiyosaki are indisputable.

For example, RK suggests having rich friends so you can make money trading stocks based on insider information. This is illegal and can land you in jail (see Martha Stewart). He also gives a lot of dubious tax advice about incorporating and writing off a bunch of things like Rolexes, vacations to Hawaii, and meals in restaurants. You might get away with it, but if you do these things, you are liable to get busted by the IRS. In a lot of cases, RK's advice can end up costing you money.

Anyway, the advice in Cash Flow Quadrant is contrary to becoming debt-free. He basically suggests that leverage yourself to the gills to generate income from rental properties. In a declining real estate market or in a situation where you can't rent out your properties, you could be in big, big trouble blithely following RK's advice.

For the opposite end of the spectrum, you might read some of Dave Ramsey's work (Financial Peace, for example) if you haven't already. Ramsey was a heavily leveraged real estate investor who lost everything when the real estate market turned south. He blamed his leveraged positions for his downfall and now preaches a message about cutting your spending and eliminating all your debt. I don't agree with everything Ramsey says (he suggests you pay off your mortage as soon as possible), but his ideas are a lot more sound than RK's. More or less, the places where I disagree with him center around making sub-optimal financial decisions for the sake of psychology or spiritual well being.

Good luck with it. You are definitely a step ahead of most people your age.

[givememyleg]

In general, I think you are on the right track. Becoming debt free is extremely useful, especially of credit card debt, auto loans, all those goofy no-interest promos from retailers, etc. But hopefully you can see that mortgage debt is in a class of its own and is among the last debts you should eliminate.

I'm definetly starting small. I'm not even thinking about buying a house with cash or having no mortgage yet. (Esspecially considering the way you described a mortgage). But I am now starting to break out of some habits I have learned over time. Things like "I can't afford it but I can afford to pay for it over 2 years," or "eh, I'll just toss it in my cc." These are so damaging and become overpowering. I feel bad for my parents and I think this is where many of the bad habits come from.

Reed does have books to sell, but if you check out his recommendations page, you'll see that he recommends several other books besides his own. Regardless, some of the points that Reed makes about Kiyosaki are indisputable.

For example, RK suggests having rich friends so you can make money trading stocks based on insider information. This is illegal and can land you in jail (see Martha Stewart). He also gives a lot of dubious tax advice about incorporating and writing off a bunch of things like Rolexes, vacations to Hawaii, and meals in restaurants. You might get away with it, but if you do these things, you are liable to get busted by the IRS. In a lot of cases, RK's advice can end up costing you money.

Anyway, the advice in Cash Flow Quadrant is contrary to becoming debt-free. He basically suggests that leverage yourself to the gills to generate income from rental properties. In a declining real estate market or in a situation where you can't rent out your properties, you could be in big, big trouble blithely following RK's advice.

For the opposite end of the spectrum, you might read some of Dave Ramsey's work (Financial Peace, for example) if you haven't already. Ramsey was a heavily leveraged real estate investor who lost everything when the real estate market turned south. He blamed his leveraged positions for his downfall and now preaches a message about cutting your spending and eliminating all your debt. I don't agree with everything Ramsey says (he suggests you pay off your mortage as soon as possible), but his ideas are a lot more sound than RK's. More or less, the places where I disagree with him center around making sub-optimal financial decisions for the sake of psychology or spiritual well being.

I will definetly check out that book by Ramsey. I'm just trying to become as informed as I can right now and I really appreciate your help here. Like I said above, my parents are just so far in debt they don't think they have a way out. It hurts seeing them go through that and I just feel like I have to do something, because they won't. I think my breaking point was seeing them trying to refinance everything for another 30 years. They're 45 years old. Life just wasn't meant to be lived like that.

Good luck with it. You are definitely a step ahead of most people your age.

Thanks, I really appreciate it.

[donkbee]

{split from high stakes forum thread}

[givememyleg]

{split from high stakes forum thread}

you da man!

[uscheese]

But how many people can drop $300,000 to buy a house and not have a mortgage? I don't know any

[givememyleg]

But how many people can drop $300,000 to buy a house and not have a mortgage? I don't know any

For those who don't know, this discussion started when ilikeaces said he wanted to buy a house straight up.

Plus, just because you don't know any doesn't mean there aren't people out there that can't. That's basically what I was getting at.

[Fimanoid]

why would anyone want a mortgage if you could avoid it?

I haven't read the responses in the thread yet, but I'll chime in.

What do you mean by avoid it? Does that mean paying rent? Renting is just throwing money away - especially in the long term. Buying a house is a good investment, because real estate prices go up in the long run, so even the amount ppl. pay in interest, still makes it a good investment for the future.

If by "avoid it" you mean paying for the house straight up - sure there is no need for a mortgage if you can afford to pony up that much $ right away. But most people can't, and the mortgage makes it affordable to own a home by spreading out the time period to pay off the house.

[givememyleg]

why would anyone want a mortgage if you could avoid it?

I haven't read the responses in the thread yet, but I'll chime in.

I strongly suggest you do.

[uscheese]

But how many people can drop $300,000 to buy a house and not have a mortgage? I don't know any

For those who don't know, this discussion started when ilikeaces said he wanted to buy a house straight up.

Plus, just because you don't know any doesn't mean there aren't people out there that can't. That's basically what I was getting at.

Oh...I get it

I do know some people who can afford it that like to keep a small mortgage for insurance reasons? I think that's why...basically so that the house isn't 100% theirs.

[dzeanah]

The tax deduction's part of it.

In our case we timed things well and got a fixed-rate mortgage that's got an insanely low rate -- banks pay more interest on CDs than we're paying on our mortgage.

Why in the hell would you pay off a mortgage in that situation. We're better off making the minimum payments.

[jyms]

Leg, I haven't the time now to read all, and it may ahve been mentioned already, basically in the states, you can get a tax deduction on the mortgage, thereby making it a small cost per dollar owed in interest. The money you put into a house, be it a small down payment, or a full purchase, only makes you money if and when you sell the house. the money can and usually will make more per dollar when invested properly, than a tax reduced mortgage would incur. It is a balancing act, depending on available funds, costs of the home, income and mortgage rate. But Long story short, your investing of the money, instead of placing it in the equity of the home, can and will make you more long term money.

"It depends"

[Warpe]

There are ways to make your mortgage tax deductible in Canada, too.

http://www.smithman.net/

[gingerwizard]

There are many financial reasons that make mortgage borrowing optimal, but as Moe has covered these things (mainly well though interest is usually compounded monthly ), I'll say something different.

You have to live somewhere, and if you can't afford to pay for a house outright, you either rent or take a mortgage. I pay £500 rent p/m for my house. My friend who has a £90,000 mortgage pays the same per month.

I can't have pets etc/etc /etc plus landlords can put rent up each year.

Now in 2 years my friend and I will have paid the same. He has equity in a property in a nice area, and could sell now for £30k profit. I have nothing.

Now if you had a choice between those, would you really rent?

[givememyleg]

Now if you had a choice between those, would you really rent?

It's not about renting vs a mortgage. I can see that logic and I would never rent. I was mainly trying to bring up the fact that if one could, why not avoid a mortgage all together. Granted I know this is something that very few people have the ability to do, but some still can. As Moe said, I am starting to learn that avoiding a mortgage really isn't all that important. That should be the last step to worry about in becoming "financialy free."

I am beginning a new journey into business/investing/systems and am reading all the information I can get. I want to develop a passive flow of income to have not only money, but time as well. To some (including myself at first) this seemed like a pipe dream, but it's possible. There are people out there who make money "while they sleep" because of the systems they have created. I believe it's foolish to think I can't pursue this and someday (with hard work and study) accomplish it. Some people see this as being naive, I see it as being committed. The information is out there.