11 Reasons to Carry a Big Long Mortgage - Reason 3
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
REASON #3: A MORTGAGE IS CHEAP MONEY.
Mortgages, in fact, are often the cheapest money you will ever be able to borrow. Unlike high-interest credit cards or personal loans, mortgages typically have a lower rate and even a fixed rate, helping to ensure that money remains cheap for the next 10, 15, 30 years.
TOTALLY AGREE: Mortgages become bonds. Lower risk, lower return. Borrowing for 30 years with a house (that typically appreciates) is solid collateral and therefore more secure, it offers a lower rate to the borrower.
In the debt stack, about the only lower cost of borrowing is a student loan. Mortgage money will typically be the cheapest money you can borrow.
Source: Borrow Smart Repay Smart Book
This allows you the opportunity to put funds elsewhere, such as savings or retirement accounts, which could be growing in value at a higher interest rate than it’s costing you on the mortgage. But more on that later in this article.
TOTALLY AGREE: There cost of debt above helps explain a key concept about Rate and Return. Rate is what you pay, Return is what you earn. They are the same thing from two different perspective. If you borrow $400,000 from a lender and pay 5% interest, that 5% interest is your rate. If you invest $400,000 in a long term treasury that pays you 5% interest, that 5% interest is your return.
Rate and return are the same thing from two different perspectives.
The LAG - liability asset gap - is the difference between the two. If you borrow $400,000 from a lender and pay 5% interest, that 5% interest is your rate. If you invest $400,000 in a long term ETF that over time pays you 10% interest, that 5% interest is your additional return or LAG - your higher return for taking higher risk.
I borrow at 5% rate, and earn 10% on investments = 5% LAG Return
Here's a chart from my book, showing the average return on various instruments:
Source: Borrow Smart Repay Smart Book
TIP: Mortgage money is cheap, meaning it costs less to borrow it than what you can typically earn - therefore using other peoples money is often a solid wealth creation tip over time. In our course we prove that with several examples. This mistake will cost the typical home owner far more than the cost of their house.
TIP: Resource for stock, bond and market returns: https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
