Ric Edelman: Hi! I am Ric Edelman. We are talking about the 11 reasons to carry a big long mortgage.
Reason number 10. Mortgages give you greater liquidity and flexibility. To help you understand this, let's pretend that you and your neighbor are both buying a $250,000 house. You each make 75 grand a year and you each have 50 grand in savings. Your neighbor hates mortgages; he takes out a 15 year loan with a fixed interest rate of 6.
He uses his 50 grand as a down payment and then he sends in an extra $100 a month to pay that sucker down even more. Unlike your neighbor you know that mortgages are a great tool. So you take out a $237,500 30-year fixed rate mortgage at 7% and you invest the difference. You never make extra payments.
Compared to you, your neighbor has a smaller mortgage, a shorter mortgage, a lower interest rate, and he is adding money to every payment. You have got a smaller payment though, 1600 bucks, most of which is interest. Assuming you're in the 25% tax bracket, that means your payment costs you $1200 a month, your neighbor pays almost $1800 a month, but less of it is deductible.
His after-tax cost is $1500 and this is where your smarts come through. Every month you pay $300 less than your neighbor. You invest that money, instead of sending the money to a lender, with an extra $100 a month, you invest that too. And after five years, let's say that you both lose your jobs. Your neighbor has a big problem. Even though he owes less on his mortgage balance, he doesn't have any money in cash reserves to help him make his current payment.
But you don't have that problem. With the money you invested every month and the money you invested in spending it on the down payment, you have got a NASDAQ of about 80 grand, assuming a hypothetical 8% return on your investments.
You can afford to make your mortgage payment for years even without a job. It doesn't matter that you own more on the total mortgage balance. When you keep control over access to your money, you maintain liquidity. When you give your money to your lender, you lose control.
After giving money to your lender the only way to get the money back is to sell the house, and no bank will let you refinance if you are unemployed with no assets, so stop listening to those who pretend that the only thing that matters is paying off your mortgage, your life is more complicated than that, and by realizing this, you see that trying to pay off the mortgage is actually a risky thing to do.
So instead smarter, safer approach is to carry a big long mortgage, invest the difference and don't bother trying to be in a hurry to pay it off.