11 Reasons to Carry a Big Long Mortgage - Reason 1
This article has been around since I was originating loans and it was recently updated on Ric's site. I thought I'd take each one of his comments as a single post and share a few comments for those of you not familiar with this article or Ric's original claims about keeping the biggest and longest mortgage you can afford.
"His words in Blue", my words in white. I'll deconstruct his key points.
SHOULD I PAY OFF MY MORTGAGE?
11 great reasons to carry a big, long mortgage.
Ric Edelman – Edelman Financial Services
"Many people misunderstand or misrepresent the benefits of mortgages, and they get the key points wrong. But if you read this article with an open mind, then by the time you finish, we believe you will shift your thinking from “Should I pay off my mortgage?” to “How can I get a bigger mortgage?”
REASON #1: YOUR MORTGAGE DOESN’T AFFECT YOUR HOME’S VALUE.
Most people buy a home because they think it will rise in value over time. If you were certain it would fall in value, you might not buy it and possibly rent instead. In fact, your home’s value will rise and fall many times during the next 30 years – you just won’t get monthly statements showing you how it’s doing.
Yet, the eventual rise (or fall) in value will occur whether you have a mortgage or not. Your house’s value will be unaffected regardless of whether you’re paying off your mortgage or carrying a bigger one."
TOTALLY AGREE: the house will go up in value and down in value and the market doesn't appreciate (pun intended) if you have or don't have a mortgage. As you can see in the example, absent appreciation, owning a house only creates financial wealth to the extent you spend less owning the house as compared to renting.
Source: Slide 13 - CLA Course - Borrow Smart Conversation
Thought experiment: If two brothers buy houses next door to each other, and one pays cash and the other borrows 100% of the purchase price, will their house values go up or down the same each year?
"That’s why owning your home outright is like having money buried under a mattress. Since the house will grow (or fall) in value with or without a mortgage, any equity you currently have in the house is, essentially, earning no interest. You wouldn’t stuff $10,000 under your mattress, so why stash $400,000 in the walls of the house? Having a long-term mortgage lets your equity grow while your home’s value grows."
TOTALLY DISAGREE: Money buried under a mattress provides no return, but it does provide liquidity. As to money that is 'in the house' it does reduce the interest that you would have paid if that money was in the mattress. Equity growth is a function of appreciation and principal repayment. If there is no appreciation then equity growth is only principal repayment. If you have $10,000 under your mattress and you put it in the house, you save (EARN) a return equal to that current mortgage rate.
Thought experiment: I take $10,000 from my mattress and pay down my $100,000 mortgage to $90,000. My mortgage rate is 6%. On my next payment I pay the same payment I would have paid, but the lender is charging me 6% on $90,000. The 6% on the $10,000 is savings to me, and savings is as good as earning. I think Ric's statement above is very misleading.
We'll be doing some analysis using our Simple Savings Analysis Tool: