Why do some people not classify mortgages as debt?

[Franklin]

If you think of your personal financials as a "business" would, you need to consider the following:

Debt and Liabilities
Assets
Risk versus Return on your Investment, and
CASH FLOW

The thread so far has discussed the first three, but no one has mentioned CASH FLOW, which, as we know, is VITAL for most business' success.  Even if you are earning more on your investments than you pay on your mortgage, it means little, if it ties up your cash flow beyond a comfort point.

I expect that many of us who opt to paying off a mortgage while talking about lowering risk, are also thinking about the flexibilty of available cashflow, versus tied-up investment commitments that may take 1 month to 5 years to free up.   Obviously case by case dependent,  but think about it.  Sometimes cash flow and flexibilty is more important that absolute returns.

I would definitely agree with all the "invest" arguments, if the investment created fixed income or dividends at a rate higher than the mortgage, with similar risk as real estate.

Your house is about as unliquid an asset as you can get vs stocks that i can sell tomorrow.  so Cash flow is better in a world with the money invested. your cash flow arguement holds no water in this context as the alternative to being invested in stocks is invested in a building that you would have to sell and vacate. 

and dont even start the dividend arguement on here we dont need to get that going about how much you lose by trying to chase dividends.  they arent printed out of thin air.

Your not backing your less risk argument -  besides not having access to a 30 year 4% mortgage there hasnt been one argument that holds water.


Cash flow
 
Case A paid off house 200k in house.  i think we can all agree this is a concrete asset

Case B invested in VTSAX taxable account.  - 200k that can be taken out at any time and be in your bank in less than a week.

Agreed that a house is a sunk cost, for all intents and purposes...   but whether you have a mortgage or not, you are still committed to the same "sunk cost" of the house purchase, for the same duration.

Again, thinking like a business --

You can choose to carry a loan on your property versus buy it outright  -- this is done when you want to keep capital available for other investments (which may be more or less liquid, but with the intent to have a better rate of return)   -- this is essentially your argument about the bottom line value of keeping a mortgage to allow more investments.  This reduces your cash flow by increasing your monthly expenses, for a longer term gain.

OR

You can choose to eliminate / pay down mortgage, eliminating that monthly EXPENSE, and freeing up CASH FLOW, probably at the cost of reduced overall investment income (assuming you make good choices and don't have a bad year!).  This is the choice if you want available monthly cash flow, for items such as making payroll, or on a personal side, for club memberships.  --As most investments are rarely going to yield the same monthly / dividend income as eliminating the mortgage payment....   Over the long term it is less $$ to your balance sheet to pay off mortgage, but for some businesses, CASH FLOW is much more important, and I am willing to guess that there are personal situations where that holds true as well..

What's that you say -- why would you not just sell your investment a little every month to cover the cash flow --??   because some of the better investments don't do that well, cost a bit, or it is cumbersome / time delayed.


Just say'n -- Short term cashflow availability can be more important than overall returns, depending on the situation.

THANK YOU! I can't comprehend how selling an asset would be a sound cash flow strategy. << MBAs lined up in high-five formation.>>

[MrFancypants]

If you pay it down, all it does is lower your costs.

But depending on your situation, there can be a lot of value in lowering your costs.

if you have a 30 year fixed rate mortgage you lose the security ie increase risk of running out of money before you die.  its a plain and simple fact based on historic markets. 

You keep saying this like it applies to everybody.  It doesn't.

If you have passive income from anything other than the stock market, your equation doesn't work.  Some of us have worked to create passive income streams from multiple sources to increase retirement security and have found that in our specific equation that lowering shorter term costs to the detriment of long term gains works better for us when there's no risk of completely running out of money.

Man, your approach here is fine.  You've obviously done your research and you're making the numbers work for you.  But your path is not the only one to take, and telling people they're "incorrect" when you don't seem to understand that there's more than one way to reach this goal is flat out rude.  Then to go out and drop passive aggressive insults about "feelings" and "facts" is just disrespectful.

I'm not surprised by how you're behaving here given your age, but something you may learn in the future is that no matter how right you may be on any given subject, people are more likely to ignore your words than take them to heart if they're being insulted by the person presenting it to them.

[boarder42]

If you pay it down, all it does is lower your costs.

But depending on your situation, there can be a lot of value in lowering your costs.

if you have a 30 year fixed rate mortgage you lose the security ie increase risk of running out of money before you die.  its a plain and simple fact based on historic markets. 

You keep saying this like it applies to everybody.  It doesn't.

If you have passive income from anything other than the stock market, your equation doesn't work.  Some of us have worked to create passive income streams from multiple sources to increase retirement security and have found that in our specific equation that lowering shorter term costs to the detriment of long term gains works better for us when there's no risk of completely running out of money.

Man, your approach here is fine.  You've obviously done your research and you're making the numbers work for you.  But your path is not the only one to take, and telling people they're "incorrect" when you don't seem to understand that there's more than one way to reach this goal is flat out rude.  Then to go out and drop passive aggressive insults about "feelings" and "facts" is just disrespectful.

I'm not surprised by how you're behaving here given your age, but something you may learn in the future is that no matter how right you may be on any given subject, people are more likely to ignore your words than take them to heart if they're being insulted by the person presenting it to them.

Yes the equation still does work... it is still safer to have that money in the market even if its the only money you have in the market.

Your other investments must be 100% bullet proof clad in gold stained shit.  b/c there isnt a bullet proof investment.  you've hinted its realestate.  but if the market falls into this black hole oblivion people keep talking about your real estate money goes by the way side.   your dividends go by the way side. 

Passive income is still funded by the economy... the money is coming from somewhere. so unless you're printing it ... the doomsday you're afraid of will affect this passive income stream as well.

[MrFancypants]

Yes the equation still does work... it is still safer to have that money in the market even if its the only money you have in the market.

Your other investments must be 100% bullet proof clad in gold stained shit.  b/c there isnt a bullet proof investment.  you've hinted its realestate.  but if the market falls into this black hole oblivion people keep talking about your real estate money goes by the way side.   your dividends go by the way side. 

Passive income is still funded by the economy... the money is coming from somewhere. so unless you're printing it ... the doomsday you're afraid of will affect this passive income stream as well.

Whatever you say man, clearly you know everything about everything.

[boarder42]

you still have posted nothing of your amazing FIRE plan that i assume others would love to jump on board with that is effected in no way by the economy of any kind.

[MrFancypants]

you still have posted nothing of your amazing FIRE plan that i assume others would love to jump on board with that is effected in no way by the economy of any kind.

I would have done so earlier, but when people enter a conversation with me by saying "you're wrong" before asking me to expand upon a statement it tells me that you're more interested in winning an argument than you are seeing this from another angle.

If you want to argue, that's fine, we'll argue.  But don't come back later and expect that I'm going to shift to a polite exchanging of ideas when you've proven that you'd rather shit on everything I have to say.

[boarder42]

you havent made any argument.  except for i'm special so math doesnt apply to me.

[MDM]

The question I keep asking, and getting no answer to, is: "What Investments?" What investments are reasonable enough that they can stack up as a risk you should take versus paying off the (admittedly amazingly low interest rate) mortgage?

We keep talking about "investment" like it's this giant cash machine where you'll never lose a dime.  Of course a reasonable answer is "diversification", but you can't diversify much if you don't already have a boatload of cash to invest.

With $1000 you could buy https://personal.vanguard.com/us/funds/snapshot?FundId=0699&FundIntExt=INT.  Does that fulfill your diversification desire?

[MrFancypants]

you havent made any argument.  except for i'm special so math doesnt apply to me.

BINGO

I didn't make an argument.  I made a vague general statement about how decisions on a specific subject are influenced by an individual's unique situation.  So telling me that I'm "incorrect" was jumping the gun a bit, eh?

[Landlord2015]

Well shortly said....

I do classify mortgage as debt and it does not matter if the house or apartment is for your own use(personal home) or investment apartment that you rent for other people.

It is always debt and I do consider it debt.  However as debt goes I have no other debts... no credit card debt, no student loan, no car loan, nothing except a lot of mortgage debt... but I have passive income from 3 apartments that I rent and that income is greater then my monthly automatic debt reduction. Of course I can do extra loan reductions.

In my country(Finland, Europe) 30 year mortgage is not common. I have never ever taken such a long debt... 20 years mortgage is pretty common in my country.

What people fail to see that there exist bad debt and good debt. If the debt is for an asset that give you lot of income and you value that asset more then the negative debt then it is so called good debt.

[Faraday]

The question I keep asking, and getting no answer to, is: "What Investments?" What investments are reasonable enough that they can stack up as a risk you should take versus paying off the (admittedly amazingly low interest rate) mortgage?
...

You can invest in 3 ETFs:
- US total stock market
- International markets
- Bonds
There is no really minimum investment amount [my ETF cost/share is around $30-$40]. You are highly diversified through thousands of companies around the world plus the bond market. My broker doesn't charge a fee to buy ETFs and the MERs are low. It's win-win-win.
-- Vik

Thank you Vikb. EDIT: ALSO THANKS to:
nereo, boarder42, goldielocks, Mykl, Landord2015, NoraLenderbee, stevo, arebelspy

You people are the bomb, a force to be reckoned with. Thanks for your comments!

[boarder42]

The question I keep asking, and getting no answer to, is: "What Investments?" What investments are reasonable enough that they can stack up as a risk you should take versus paying off the (admittedly amazingly low interest rate) mortgage?

We keep talking about "investment" like it's this giant cash machine where you'll never lose a dime.  Of course a reasonable answer is "diversification", but you can't diversify much if you don't already have a boatload of cash to invest.

You can invest in 3 ETFs:

- US total stock market
- International markets
- Bonds

There is no really minimum investment amount [my ETF cost/share is around $30-$40]. You are highly diversified through thousands of companies around the world plus the bond market.

My broker doesn't charge a fee to buy ETFs and the MERs are low. It's win-win-win.

-- Vik

Thank you Vikb. You are the only person who gave me an answer I can study, think about and act upon.

to be frank this is 100% what MMM says to do so being a forum member most would have thought you had discovered this already.

[arebelspy]

MOD NOTE: Please stop sniping back and forth, boarder42 and mefla.  Keep in mind forum rule #1.  Thanks.

[Faraday]

The question I keep asking, and getting no answer to, is: "What Investments?" What investments are reasonable enough that they can stack up as a risk you should take versus paying off the (admittedly amazingly low interest rate) mortgage?

We keep talking about "investment" like it's this giant cash machine where you'll never lose a dime.  Of course a reasonable answer is "diversification", but you can't diversify much if you don't already have a boatload of cash to invest.

You can invest in 3 ETFs:

- US total stock market
- International markets
- Bonds

There is no really minimum investment amount [my ETF cost/share is around $30-$40]. You are highly diversified through thousands of companies around the world plus the bond market.

My broker doesn't charge a fee to buy ETFs and the MERs are low. It's win-win-win.

-- Vik

Thank you Vikb. You are the only person who gave me an answer I can study, think about and act upon.

to be frank this is 100% what MMM says to do so being a forum member most would have thought you had discovered this already.

I've been hammering on this material for years - I've read the FAQ's, dozens (hundreds?) of forum threads, most of the website articles, but with what VikB says, I know now that I can go to E*TRADE and I know what to look for and how to work it.

Now can you please just leave me the hell alone? You look for a way to dig on me even to the very end? Damn.

[boarder42]

Just an FYI etrade will charge you fees to trade these ETF's thats why vanguard is recommended here. 

[Landlord2015]

Just an FYI etrade will charge you fees to trade these ETF's thats why vanguard is recommended here.

Yeah, but Vanguard is for USA. I live in Finland(Europe). The pension plan in my country is pretty simple. The law dictates that from salary a portion goes to pension etc.

However IF I would live in USA yeah sure Vanguard and 401k etc....whatever, but I can't judge them I am not an expert on them.

I don't like stock investing. However my own brother will invest in stocks, but it is because he does not feel he has enough money to invest in real estate and he has children(costs) and a big mortgage. My brother does have a better career then me and he has a very high paid job/salary and his wife also works so they do pretty well.

[arebelspy]

I've been hammering on this material for years - I've read the FAQ's, dozens (hundreds?) of forum threads, most of the website articles, but with what VikB says, I know now that I can go to E*TRADE and I know what to look for and how to work it.

Check out JLCollins' Stock Series.  It's by far the best beginner resource out there for how to invest your money, IMO.

http://jlcollinsnh.com/stock-series

[NoraLenderbee]

you havent made any argument.  except for i'm special so math doesnt apply to me.

Your argument has been "Keeping the mortgage produces a higher return than paying off the mortgage AND NOTHING ELSE COUNTS." People are telling you that to them, there are some intangible, non-measureable things that count more toward their happiness. Your calling them"imaginary" doesn't make them unimportant.

[boarder42]

you havent made any argument.  except for i'm special so math doesnt apply to me.

Your argument has been "Keeping the mortgage produces a higher return than paying off the mortgage AND NOTHING ELSE COUNTS." People are telling you that to them, there are some intangible, non-measureable things that count more toward their happiness. Your calling them"imaginary" doesn't make them unimportant.

i was saying the feeling of safety and actually being safe are 2 different things if you want to make an less safe decision b/c it feels safer to you then you're your own person go right ahead.  people do it every day when they get in their car but refuse to fly on a plane.

[Landlord2015]

Well as I see it is subjective taste...

I like Robert Kioysaki:
https://www.youtube.com/watch?v=qCFoh-WBhus
and before someone hater claims he is scammer I don't think so though I would not pay for his expensive courses. Please note that video is from a decade ago. Today's real estate market is tougher if you go for investing with thought oh my god this apartment will rise in value you might crash and burn very badly.

However I also like
David Ramsey
and most of you think that paying of debt is good. I agree.

That said consider this IF I take a new loan today I will NOT get so good loan agreements as I did a few years ago which was perfect timing for loan.

Instead of me taking a NEW LOAN with less good loan I can sell one of my apartments. Use all that money and buy another apartment or investing in something big.

Likewise instead of paying off very low interest mortgage... if you plan to invest big then saving money and using that is better then a new loan.

That said I also agree that pay of mortgage is good. Who of you wants to make the banks rich at your expense? Pay of mortgage slow as possibly and that is what you do.

This is subjective to risk taking...
You want to play safe? Do as David Ramsey tell you pay of fast mortgage.
You want to take risks? Take risks... but whatever is your fate if you become rich, wealthy, or do ok, or crash and burn... well I can not foresee the future.

For me there is a fine balance. Doing extra loan reductions is good for me, but IF I want to invest big then maybe it is time to save money and not been so keen on paying of mortgage very fast.

[steveo]

if you have a 30 year fixed rate mortgage you lose the security ie increase risk of running out of money before you die.  its a plain and simple fact based on historic markets.  Doesnt F'n matter if 2008 happens right when you retire or not.  we are not preaching this b/c you can make more money in the market than in a house over time.  Its b/c a house payment is also inflation proof.  A by product of the market making you more money is increased security in the event of a down market.  You have more liquid capital.  etc. etc.

Hang on. I just want to be clear on this. Your argument comes down to a simplistic analysis of historical stock market returns. I get it now.

The problem is that you do have diversification and decreased debt if you pay off your mortgage. Have you ever considered asset allocation. Its a pretty important topic when it comes to getting the best risk/return outcome. You are conveniently ignoring this component.

And stop bringing up people who cant get 30 year fixed rates at low rates... we've already covered they are best paying it off.

A breakthrough. Paying off the mortgage is in some instances the right option.

Just a little side point that maybe you should think about as well. The US market with regards to a mortgage is unusual. I'm pretty confident that this would never occur in a free market economy. This brings up the point on how much longer the US government will continue to prop up this market.

its not a feeling its not a belief its not a false piece of mind or sense of security its actual security.

I'm not sold on this at all. I understand that its your opinion based upon your understanding of the historical returns of the stick market compared to the housing market. I accept in the US in a lot of situations it is probably true however I think the point that you are missing is that different people will classify risk/reward criteria differently to yourself. You also have to accept that your historical returns analysis might not make a significant different with regards to your overall returns for lots of people. So the theoretical benefit of keeping your mortgage for as long as possible compared to the actual additional return with increase risk exposure might not suit everyone.

With all due respect you didn't understand the concept of earned value of owning a house. I think you have missed out on some other factors in your analysis as well.

[steveo]

Actually it does not.  Your insurance and property taxes go up, only the fixed part of your mortgage does not.  Having a fixed mortgage in the US at these rates, is better than paying down because that money can be earning you money.  If you pay it down, all it does is lower your costs.

I disagree with this comment completely. How much of a percentage are your insurance and property taxes compared to rent. Lets say its not a 100% hedge but if not its pretty close to that.

[steveo]

Your argument has been "Keeping the mortgage produces a higher return than paying off the mortgage AND NOTHING ELSE COUNTS." People are telling you that to them, there are some intangible, non-measureable things that count more toward their happiness. Your calling them"imaginary" doesn't make them unimportant.

Correct. Investing isn't just about a certain % gain. Don't get me wrong as that is important but its not everything.

[NoraLenderbee]

you havent made any argument.  except for i'm special so math doesnt apply to me.

Your argument has been "Keeping the mortgage produces a higher return than paying off the mortgage AND NOTHING ELSE COUNTS." People are telling you that to them, there are some intangible, non-measureable things that count more toward their happiness. Your calling them"imaginary" doesn't make them unimportant.

i was saying the feeling of safety and actually being safe are 2 different things if you want to make an less safe decision b/c it feels safer to you then you're your own person go right ahead.  people do it every day when they get in their car but refuse to fly on a plane.

Keeping the mortgage is not safer unless you define safety exclusively as "having more money." But safety isn't just one thing to everybody. For some people, safety = "not owing money." For others, safety = "living expenses below X." For others, safety = "lowest possible risk." Mefla, for example, is someone who clearly values minimizing risk higher than maximizing gains. That doesn't make Mefla an idiot about math; it just means s/he has different values from you.

If I drive a car because I believe it's safer than flying, then yes, I'm fooling myself. But if I drive a car because it's cheaper, or because  I like driving better than flying, or because I want to haul a truckload of stuff, I'm not fooling myself--I'm prioritizing something higher than the absolute risk of death.

[Faraday]

The question I keep asking, and getting no answer to, is: "What Investments?" What investments are reasonable enough that they can stack up as a risk you should take versus paying off the (admittedly amazingly low interest rate) mortgage?

to be frank this is 100% what MMM says to do so being a forum member most would have thought you had discovered this already.

I tried to buy VTSAX through Scottrade over two years ago and they wanted $3k minimum so I shyed away - I usually test investments with less than that.

[Faraday]

I updated my Note #162 above to add thanks to all of you who answered me. You have helped me tremendously...

[MDM]

I'll see what I need to do for working directly with Vanguard...

mefla, anything specific you did not like about the fund in post #159?

It might seem that...
Total US Stock Market Index   62.9%
Total International Stock Index   27.1%
Total US Bond Market Index    8.0%
Total International Bond Index    2.0%
...would be diversified enough, and have a low enough entry cost, but that's just a guess.  Your thoughts?

[Faraday]

I'll see what I need to do for working directly with Vanguard...

mefla, anything specific you did not like about the fund in post #159?

It might seem that...
Total US Stock Market Index   62.9%
Total International Stock Index   27.1%
Total US Bond Market Index    8.0%
Total International Bond Index    2.0%
...would be diversified enough, and have a low enough entry cost, but that's just a guess.  Your thoughts?

Holy Crap, my bad, I missed that MDM, I clean missed that. Thank you!

[arebelspy]

Mefla: Please start a new thread if you want investment advice. Your personal portfolio is not on the topic of classifying mortgages as debt.

Thanks.

[Faraday]

Mefla: Please start a new thread if you want investment advice. Your personal portfolio is not on the topic of classifying mortgages as debt.

Thanks.

Edited and removed this information, thank you.

[arebelspy]

Thanks.  :)

[TheNewNormal2015]

I have mainly been following and participating in the other thread in 'Investor Alley'
http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/

I thought the following data resources might assist in the discussion:

Historical 30yr fixed mortgage rates:
http://www.freddiemac.com/pmms/pmms30.htm

Historical S&P500 total returns:
http://dqydj.net/sp-500-return-calculator/

Would be interesting to see correlation between starting level of rates and future equity returns, as well as whether average equity return outperformance vs mortgage rates over 30 years (if there is any outperformance) is statistically significant

[boarder42]

My definition of risk was defined based on the 4% SWR if you're not using this at all and have other means of getting all your money in retirement then the risk analysis doesnt apply to you.  very few people hit this category here since thats the main source of income for most here.  and if you retire based on the 4% SWR you have around a 70% chance of never running out of money.  the chance of never running out of money increase by 5% if you have a 4% fixed interest mortgage for 30 years.  therefore reducing your risk.  so if someone is planning on even half of their retirement income coming from the stock market, then you have a higher likelihood of success if you carry a mortgage in retirement than someone who doesnt. 

[boarder42]

i know my posts have been somewhat attacking but its b/c i believed paying off a mortgage was best as recent as 2 months ago.  Just trying too hard to break peoples opinions.  i'll go join the fun on investor alley that newnormal posted.

[MDM]

I have mainly been following and participating in the other thread in 'Investor Alley'
http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/

Would be interesting to see correlation between starting level of rates and future equity returns, as well as whether average equity return outperformance vs mortgage rates over 30 years (if there is any outperformance) is statistically significant

See http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/msg603865/#msg603865.