So I feel like one of my intellectual strengths might be my ability to always reconsider my thoughts and opinions. I often times play a “devil’s advocate” game with myself and try to make a compelling argument for the opposite course of action from whatever it was I thought I was going to pursue originally. I guess it is a glorified version of “sleeping on it”, but I just like to make sure I have truly thought everything through. I believe it has broadly served me more or less well in life. It may not be such a great trait for a blogger, however, especially one purporting to speak from some sort of pulpit of wisdom.
Still, it would be equally foolish not to share my rethinking of the matter with you.
Here it goes:
Contrary to what I wrote two days ago, mortgage debt is not such a big deal for two reasons. First, it has a relatively low interest rate, especially considering the rather long period for repayment of the loan. Also, it is structured so that one is paying off the interest on the front end. This is helpful because it greatly reduces the cost of the enterprise and could be as much as 25%-30% less or so if you are in a decently high tax bracket. Simply put, you get a pretty significant discount on your housing costs during the early years of the loan. This money could be saved or invested in other productive ways which are hard to calculate but real. Therefore, you could overtime actually make more money this way than you could in the savings achieved by paying off less interest.
More obvious and more importantly, the cash required to accelerate the payment of the mortgage is not being used for better purposes. A good vanilla index fund should likely be able to beat the 4.25% and 4.85% on an annualized basis that I am currently paying on my mortgages for my primary and rental property.
This is even more pronounced if I were to put the money in a pre-tax basis retirement account like a 401(k) or a 403(b). As I have explained in earlier posts, since these investments come off the top of your income it is best to think of them as having an automatic return of sorts for the initial year you invest them equal to the rate of your top tax bracket. I think most folks would take a 20-30% return in a given year.
Finally, of course, is the hard to quantify value of liquidity and security. It is easy to access cash saved and relatively hard to tap into the value of one’s property (and you will pay additional interest if you do decide to do that).
So, at the end of the day I have come to the conclusion that 30 year mortgages at the present historically low interest rates are simply an amazing deal. We should perhaps do a slight little grin every time we pay the bill each month.
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