Playing "devil's advocate" on the mortgage debt issue.

We have a land loan on our 13+ acre property, our payment is less than $200 a month. I placed a slightly used mobile home on it, and use the original camp as my sewing and craft studio. I also put 10 of the acres in "Current Use" as a forest, which means it won't be developed that cuts my taxes considerably. Whenever we find ourselves with some "extra" cash, we will pay an extra principle payment on the land which is a way to save interest.

Eleven years ago (after saving for about 10 years) I bought 2 acres of land in the sticks in an area in NW Indiana where I knew I could basically do and build what I wanted without any hassle from the government. Then I saved more and built (with my own 2 hands) what I could afford with the cash I had which was a 560 sq ft 1 bedroom passive solar house.

Since I moved in 6 years ago, I have converted the attic into 3 small rooms (studio and gardening room) and built a 1.5 car attached garage/workshop (with a gravel floor)....all for less than $2k. I have also gradually built a garden and small orchard along the way.

Everyone's circumstances are different and have a different level of risk aversion so I wouldn't pretend this is the only or best way to do it but if I had to do it again, I would the same.

I will say this: Things are changing so fast now that relying on anything other than yourself and friends and family seems rather presumptuous.

Great topic, Corrie!

I didn't read every post completely folks, so please forgive me if I've missed something. I'll toss out a few thoughts for all you great permie minds to consider.

Location, available capital, age, physical condition and internal views will suggest different strategies to each of us as time goes by.

I didn't notice any mention in the thread of inflation. Currently inflation is low we're told. Keeping in mind that those who tell us that are the same folks who decide how inflation is calculated and reported, even now the low inflation is likely due to currently low oil prices. I'll say that from personal observation plenty of other things are going up steadily. Particularly building materials, utility costs and transportation costs are closely tied to the cost of oil and will jump up when oil jumps up.

So what does that have to do with whether or not to carry a mortgage? What if you took on a mortgage now at around 4% and then sometime in the not-to-distant future we find that inflation is at 2%? Well, the dollars you pay will be worth less as the future unfolds. That is likely a reason to consider mortgaging your home during this period when mortgage rates are so low. Yes, even your money is an asset of continually changing value, historically the value of currency nearly always drops.

Those who have positive expectations of what they will continue to do in life and positive expectations of their ability to adapt to the ever-changing scenes of the future are more likely to feel attracted to the benefits of a mortgage.

Many people seem strongly swayed by the obvious idea that since currently few of us can get much over 1/2% interest from a federally insured bank account that paying off their 3 3/4% mortgage is doing so much better than having money in savings and that, especially when combined with the satisfaction of owning their home free and clear, it's better to pay the thing off or never get one to begin with. That view presumes that you will never be able to come up with any project of your own that would pay better.

I presume that most people reading here at Permies have a desire to do things differently than the seemingly standard ways of most people in the US over the past hundred years or so. If that description fits you then BRAVO !! You might be a person with a COMPELLING FUTURE !

If you want to not only grow some food for yourself, but would also like to spread the good news of permaculture I encourage you to work hard, be confident, and bet on yourselves! Betting on your dream will make you healthier, wealthier, and happier! Betting on yourselves is, in my view, the heart and soul of yankee ingenuity and the values that used to drive the US and many others. Maybe you want to start a farm, a nursery, a seed farm, a market, or something the rest of us currently haven't imagined. Go for it! Borrowed money is just a tool. Learn to be confident in using it! As you progress, perhaps you will be able to offer loans to others whose values you clearly support. Perhaps you will offer innovative services that you couldn't have without borrowing to get started or to expand. Perhaps you will build sustainable structures for others to use who wouldn't otherwise have had a truly modern structure. Or maybe, like our host, you will focus on the service of spreading useful information at the risk of your own time and money!

The best thing you can do for the world is to work hard to follow YOUR COMPELLING FUTURE !!!

I paid my mortgage off, and it was great. The only reason I plunged back in was to get cash to buy our land free and clear. I expect to rent this place out for income once I build a hovel out there, but I still hate having a mortgage. It has nothing to do with financial wisdom, but represents my strong antipathy toward enriching in any measure the criminal and fraudulent fractional reserve banking system. The government has abdicated its responsibility by turning the management of our money over to the Federal Reserve--a private bank--and now we borrow our currency at interest. This guarantees perpetual inflation (since the money to pay the interest also has to be borrowed), and sure enough, the dollar has sunk to 4% of its 1913 value. So I want to do my part to starve the beast, and despise having to rent that money. I've got a charge card too, which I use for all purchases so as to get airline miles, but that also puts me in conflict, since even though I pay the balance each month, the evil banksters still skim a percentage from the merchants. I strongly object to the fake system that's been foisted off on us, and resent supporting it in any way. The day is coming when I'll bail out of it all. Andrew Jackson was an asshole, but killing the bank and paying off the national debt was a heroic act.

Had a couple of mortgages and then ended up buying a house outright. The first mortgage was a good deal - definitely cheaper than paying rent and the house almost tripled in value by the time we sold it at the beginning of 2005 - 7 years later - thanks to the real estate bubble. We put a larger than 20% down payment on the second mortgage, and sold it two years later towards the end of 2006 for about 20K less than we'd put in. The market was going down and we had realized that we did not want to stay long term in the town we'd moved to - hubby had landed in a really toxic work environment among other things. We didn't want to be stuck paying a mortgage there so priced the place to sell. We set the money from the sale aside for our next home purchase, putting it in a CD that still paid fairly decent interest at the time, and did workamping out of an RV for a couple of years. Hubby did try another year of full-time employment - another toxic government job - and decided that was it working for someone else.

Neither of us had full time employment when we bought our current home, so we had to pay cash - adding in some money from a retirement account. Since we only had a limited amount of guaranteed income, and we weren't exactly sure how we would support ourselves, it was a huge relief to only have to pay taxes and interest. Since we're low income, we wouldn't get any benefit from deducting interest on a mortgage - in fact, with the first home we had, the standard deduction started outweighing mortgage interest by the 5th year. A bonus was that our home has a pretty low property tax rate (started at $800 a year, now ajust over $900), and insurance is less than $50 a month. The previous home was about 3x as much on the property taxes.

Basically, for us the reduction in stress has been the biggest benefit - we had both been under major stress for multiple years and it was just a matter of time before that translated into a major health issue. Another plus is that, should we choose to do so, we can rent out our property and go full-time RVing at any time.

Non Disclosure statement: absolute total support & respect for all that is done on Permies and certainly all that is done by Mr. Wheaton and his amazing staff, I’m from NY, I have faithfully followed numerous threads, podcasts, and learned a TON of relevant valuable information, all very much appreciated.
I respectfully submit a few Big Thoughts that may be of some use and speak to the Culture I know in reference to 11 reasons to carry a big, long mortgage.

Permaculture & Real Estate are two very different animals.

Deep breath; permaculture is a wholistic ethical design science. A good design is predicated around in-depth knowledge of Water, Climate, Culture.
It’s the last one - Culture, that if a person is not fully aware of the culture within which they exist, and practices permaculture AND dives headlong into RE (debt, interest rates, contracts) without the total awareness of how the larger macro systems interact in a Liberal Capitalist economy; booms, busts, QE, energy dependence, energy decline, centralization, NIRP, you can in effect, lose your shirt.
I will speak to the culture I know and respectfully submit a few Big Thoughts that may be of some use.

Awareness of Self, Awareness of Culture

Self
Basic Meyers-Briggs test to indicate whether your personality, temperament, character is introvert or extrovert after that it’s broken down into one of four main groups; NT, NF, SJ or SP and yes this very much matters when contrasted with how you operate with the external society, how ‘successful’ you’ll be towards your goals or waste precious energy trying to be like somebody else, remember Permaculture principals of energy audit. After that exercise it’s fairly easy to quantify your capabilities & experience in any number of areas, improving and adding more areas of knowledge where you see fit. The Ant Village videos express this brilliantly.

Crunching numbers is not that hard - although it does take time - but it misses the crucial point; make sure you understand the present paradigms and their inherent patterns that for now, are accepted as the norm, and don’t assume they will remain intact. To know where you are going is fine but if the society your living in won’t support those plans because it’s about to take an altogether different and opposing trajectory, you might want to find that out first.

Culture
Linear progress, that is, anything we can invent based upon the footings of the industrial revolution, thus oil, is better than anything civilization has built before.
Technology will save us, that is, anything we have already learned by using oil, thus inventing new technologies, will in the end produce some new technology that will be equal or greater in energy delivery systems, than oil.
Free Market Capitalism and Capitalism in general is the pinnacle economic system of human civilization and capable of self-adjusting to deliver greater and greater standards of living.
Massification of the American population (higher education) will contribute to the centralized system and make it more effective and efficient and sustain a thriving knowledgeable middle class capable of solving problems.

Nothing is static, and it ‘pays’ to pay attention to the national culture that exists now and where it may be headed in the near future. Before you take out a loan of ANY kind give yourself a crash course (literally) and do the real work required to make much better choices.

The indoctrination & acceptance of Linear progress, almost on religious equivalence, has been pushed into our collective and historical psyche since the inception of this country, manifest destiny and all. The discovery of a little black puddle in Titusville Pennsylvania and subsequent use in 1859, put this ideological process on steroids. Anyone who genuinely embraces permaculture design understands that while some subsets are successional, overall the system is cyclical in how energy is transferred over time. Linear unending progress has its place with butterfly winged kitten unicorns.

How long do empires take to grow, thrive, then decline? 500 – 1000 years. Start date 1492 David Graeber, The First 5,000 years of debt.
Cheap energy (oil) does have its limits, after that the EROI declines and that precipitous decent has direct effects on economies. Booms & Busts, fits & starts, expansion & contraction are the evidences we have reached that point.

GDP growth on one end of the seesaw and its endless cries for expansion meets end of 300 year run on cheap fossil fuel party on the other end of the fulcrum and contraction is the force to split the two in half. The laws of physics state you can’t have endless growth without huge amounts of resource input to keep a dissipative system going. This country has used both economic hitman policies to saddle other countries to debt for the purposes of extracting resources and outright military ‘shock & awe’ action all for the purposes of keeping this party going.

When cheap oil was beginning to look sparse, the debt spigot was turned on full blast to substitute for what would have been a declining GDP in the early 80’s. It was essentially a bait and switch. Wage increases would not support the GDP (because they couldn’t be paid for) so debt became the currency. The Salary Class threw the Wage class under the bus with NAFTA/GAFTA (and we’re seeing the blowback in politics right now).

Be sure that the mortgage you are taking, with the rates you are getting, can be supported by the income you are counting on once the banks (faced with NIRP) take currency in a ‘virtual’ direction and start helping themselves to your precious bank account and 401k (if you have one). It’s called a Bail In, and has already been signed off by the G20.

Technology will continue to make advances, to be sure, and as Martha says ‘that’s a good thing’ and it certainly won’t hurt to implement any and all de-industrial technologies into your plans and designs.

Part of the Linear progress double speak is ‘just do this or just do that’ and we’ll all be ok. Look around the average dwelling and begin to realize that 99% of EVERYTHING was manufactured or delivered via oil. So pervasive - this reality has seeped into our very beings, which allows us to think in terms of one size fits all, such as Mr. Edelman and so many others peddling the LP meme of our time.

I thank Corrie for bringing this subject up, now I have to go get ready to salvage a fallen building tomorrow.

Cheers,
sheila

Ann Torrence wrote:
Actually, having a generous emergency fund AND saving up the bigger down payment BEFORE taking out the smaller mortgage (ala Dave Ramsay) sounds even better.

My response was:
How does having a mortgage balance of [for instance] $75,476 (because one put an extra $20k down), beat having a mortgage balance of $95,476 with that $20k liquid, in the scenario where income disappears for some reason? The payment is still due on either of the two remaining balances at the end of the month. Having a generous emergency fund in either case will help pay it, but having that extra $20k liquid undeniably adds to the security of this person's situation. The POINT is, that the mortgage balance at this moment makes no difference whatsoever.

Ann Torrence wrote:
Have a mortgage balance of $75,476 AND the extra $20K of liquidity. Buy a smaller house.

If, with our back and forth, what we're trying to figure out is whether or not having a lower mortgage balance ("no mortgage balance" is not part of this example) matters at a moment when regular income disappears, then we have to compare apples to apples (same original capital amount, same purchase price, etc.). We'll never get anywhere if you improve your side's situation, but not the other side.

Corrie Snell wrote:My response was: How does having a mortgage balance of [for instance] $75,476 (because one put an extra $20k down), beat having a mortgage balance of $95,476 with that $20k liquid, in the scenario where income disappears for some reason? The payment is still due on either of the two remaining balances at the end of the month. Having a generous emergency fund in either case will help pay it, but having that extra $20k liquid undeniably adds to the security of this person's situation. The POINT is, that the mortgage balance at this moment makes no difference whatsoever.

I agree that in a situation where you lose your job it's more advantageous to a big portfolio of easily liquidated assets than a corresponding amount of home equity. However, the advantage can be somewhat mitigated by setting up a home equity line of credit in advance to access the equity in the house. Of course, once you lose your job it's often too late to set something up, so planning is key.

Corrie Snell wrote:

Charli Wilson wrote:I'm in the 'pay it off quickly' camp at the moment- mostly because my savings get 0.5% interest if I'm lucky, but I'm paying 3% on my mortgage.

And I don't get sick pay or anything at my job (and neither does my Partner- he is on a zero hours contract with no job security whatsoever!). So a mortgage for many years but at a low cost each month was important- and the ability to overpay whenever we wanted to try to pay it off faster!

Charli, with "no job security whatsoever," doesn't the idea of having a nice, cushy emergency fund (even if it is only earning .5%), to help, or fully cover the mortgage payment and other expenses in case of reduced or eliminated income in the future, as Mr. Edelman suggests with Reason #10, sound better than having a lower mortgage balance at that (hopefully never to occur) time? Assuming it will still take several years to pay off your mortgage, even making extra payments, what if the two of you lost your jobs a couple years short of your goal? As Mr. Edelman puts it, all those extra payments don't make a difference at that hypothetical moment, because there's still a balance on the mortgage, and the minimum payment is still due at the end of the month.

I was just reading this:
https://permies.com/t/17422/tnk/permies-publishing-standards

I would like to retract the above comment, as I feel it is approaching the limits of acceptability, and was a fancy way of saying "Charli, you should feel this way." I apologize, Charli.

Sherri Lynn wrote:Once you pay it off, you can decide if you want insurance or would rather bet on yourself if you are a handy person and put away money in savings instead of paying insurance.

My own research has so far shown you be right about not being required to have insurance if your house is owned free and clear, and so this partially addresses Mr. Edelman's "Reason #11: You'll never get rid of your payment, no matter how hard you try," (taxes, and maintenance and repair remain). Surely Mr. Edelman is aware of this, too. I wonder why, then, he makes a point of including it? Probably because he feels strongly about the typical advice of: "carry insurance on things you can't afford to lose."

Ryan Workman wrote:I'm in the no mortgage camp. Mr. Edelman's advice sounds good while credit is cheap, but what happens when the music stops playing? Also he seems to be saying that paying off your mortgage is not the key to wealth. I don't see wealth as money. Time is wealth and a mortgage means I have to spend more time making money. If I grow a lot of my food (something I find satisfying) and own my home how much paper do I really need in the bank?

I would assume that when the "music stops playing," Mr. Edelman will retract the advice as no longer relevant.

But, while the music is playing (again, I want to talk about today), his suggestion is to pull out the equity, invest it, and let the proceeds make the payment for you.

Dillon Nichols wrote:Alright, I'll bite... Note, Canadian mortgages are a bit different, so the details may differ.

1) 'Your mortgage doesn’t affect your home’s value."

So, if it doesn't affect your home's value, how is this an argument for holding a big mortgage, or a small one, or none? It seems like an arguable point, but it's not an argument for a big mortgage.

Seems to me he could as easily be saying "Your bra size does not affect your home's value", so you should obviously go get a boob job...

Also... if one wants to argue the point on its own merit, I would say that in MOST cases it's true, but should the market drop hard, the person with no mortgage has nothing to worry about unless unrelated circumstances force them to sell. But, for the people who have mortgages, the closer the value of the mortgage is to the value of the property, the smaller the drop they can weather without ending up underwater. Once you're underwater, if you don't have enough funds to cover that gap, you've got issues with the bank potentially refusing to renew your mortgage so that you are forced into foreclosure, or if circumstances force you to move, leave you unable to sell.

I think you got him on that one, Dillon! You're right, it's not an argument for a big mortgage.

On arguing the point, though, the person with a mortgage has nothing to worry about either if the market should drop hard, unless, as you point out, they have to sell. Both the own-free-and-clear-guy, and the carries-a-mortgage-guy lose out if they have to sell. And, "renewing the mortgage" isn't part of Mr. Edelman's scenario as he's recommending only 30 yr. fixed rate mortgages.

Dillon Nichols wrote:2) "A mortgage won’t stop you from building equity in the house."

As his own graphic shows, long term it will most likely somewhat limit the equity, but not prevent you building equity. Another non-argument IMO. There are exceptions, which lead to the troubles described above.

I think you're right again, here, not an actual reason for carrying a mortgage.

Dillon Nichols wrote:3) "A mortgage is cheap money."

True, at this particular moment in time. Notably, outside the US, mortgage terms are generally much shorter than the amortization period, so you can't count on the mortgage remaining cheap for the whole length.

This one I'm on board with. If you want to borrow money to invest, doing it by way of a mortgage is the cheapest way to fly by far. In the US you might get to deduct interest depending on how you file; in Canada, you can't deduct the interest, UNLESS you take out a loan against the house specifically to invest. Not quite the same as a regular mortgage.

He is a U.S. based financial advisor, so I would only apply his advice if I were living in the U.S.

Aaron Barkel wrote:Lets consider the scenarios with real world numbers. I will consider 3 scenarios. All scenarios are for a $100k house...

Yes, as mortgage interest rates rise, the model begins to break down, but not so far that with your 7% example the numbers are now in favor of the non-30yr. mortgage scenarios. And, for those able to itemize, they're ahead even more still.

Again, using the numbers we have available today, Mr. Edelman is giving this advice. I don't know what the top end number on mortgage interest would be before he would retract the advice.

Ann Torrence wrote:Let me make my point more clearly. Taking out a mortgage does not "protect" one's home equity. Imagine your home is worth $500K today, and you take out a $400K mortgage, bank that money in some foreign bank. Next week the market falls and the home is suddenly worth $300K. Yes you have $400K in the bank. You also have a $400K obligation. If you were entirely rational and unethical, the correct mathematical decision is to walk away from the mortgage, leave the bank (hey it's all a betting game anyway, right?) taking the loss. If you liked the house, you could buy it right back with the $400k and pocket the difference. That is taking it to the extreme to make my point. No equity is protected by taking out a mortgage and it is misleading of him to suggest otherwise. When I spot something that egregious, I view the author's agenda with suspicion.

Hmmmmm...you make an interesting point. But, re-financing to pull out equity when a home still actually has that "value" doesn't seem like a wicked thing to do, whereas your "extreme" scenario of walking away from the loan the following week does seem like a wicked thing to do. I don't think Mr. Edelman is suggesting anyone do that. Furthermore, I don't see how this example shows that the equity pulled out isn't protected.

There's little to add to the logical arguments in this forum, but for anyone willing to invest 9 minutes, Ianto Evans connects to something deeper than logic.

One simple reason for limiting the mortgage: the banks here will only give you a mortgage that you WILL pay off in a certain time. In practise a big mortgage should be paid by the time you retire, or at least nearly so. My hubby is around 50, so we could not make it 20 years as I had wished for - it is 15 years.

I know in Sweden you are allowed to get a mortgage with extremely long time spans, even so that it exceeds your life expectancy, but not here.

My first home purchased, we had negative equity, ie the purchase price and mortgage value were greater than the then value of the property. Interest rates rose to around 18%. There was no and remains, no tax deductible element in mortgage repayments here. (Which kind of collapses the whole argument anyway).
There is no guarantee that the equity in your home will rise, that interest rates will not make loans prohibitive.

I've paid off my mortgage because I would not be able to afford the monthly repayments and still survive. Interest on savings is virtually zero yet there would still be interest on the mortgage. Paying off the mortgage gives me greater spending power. That is, I have enough money to survive. Take half of that away, I'd spend my life working 24/7 or sell the house and try and find somewhere much cheaper to live, which wouldn't be anywhere around here.

I'm in the pay-it-off early camp and here are my two counterpoints to the article:

#4 Mortgage interest is only tax deductible if you itemize your deductions. If you're in a lower tax bracket, chart 8-4 would have the mortgage cost you 5% and the investment gain you only 4%.

#10 If "Nervous" Nick and "Smart" Sam get laid off 15 years after they bought their houses, Nick would not look so bad. For the second 15 years of Sam's mortgage, Sam will be working extra to make sure the boss doesn't lay him off. Nick will be more financially independent at that point and can keep working for the boss he doesn't like, start a new business, pursue his permie dream, etc without that mortgage around his neck. So while there is more layoff risk for Nick during the first 14 years, the risk is much, much lower during the later 16 years.

Side point:
#1 While this point was disputed well up above in the post there is more to poke fun at about it. The first sentence is questionable in my opinion. "You’re buying your home because you think it will rise in value over time. (Admit it: If you were certain it would fall in value, you wouldn’t buy it — you’d rent instead.".

I've bought and sold three properties in the past 20 years. I didn't make money on any of them. I put plenty of sweat equity into all three and broke even on two of them, lost $20K on the third. I was still happy to own them because instead of wasting $1000 per month renting them I lived in them for the equivalent of $20K total. Which works out to roughly $88 per month to own.

This thread speaks of real estate and interest rates as if they are all the same.

I bought a tiny house in CA in 2000 for $80k and sold it in 2004 for $350k. Bought another one in 2011 for $65k and sold it for $85k in 2012. There are markets where money can be made on real estate appreciation but it is very risky and you need to know when to buy and when to sell.

Same goes for loans, with interest rates as low as they are right now, spending more to get the property with the creek or well rather than the one without and borrowing more to do it makes sense for someone who has a fairly secure income. Keeping your payment low so you can improve the property can make sense.

If you work in an area where land is expensive then the option of saving up enough to buy may be quite difficult or move the purchase off too far into the distant future whereas debt now allows someone to start working and improving the land now.

I read some of these posts and I read its as "choose to win the lottery as winning the lottery is the best way", not everyone can pull that off for a host of reasons.

Take my son, he is 25 and making a bit more than min wage, saving much money past rent isn't all that feasible. There is a gentrifying area in town that has older homes with larger lots and he could borrow the money to buy one now. Value will go up, he has to pay to live somewhere, saving his money first will mean paying a lot more later if all the fixer upper homes are fixed and the area is fully gentrified and all that rent money has been pissed down a rathole.

Now if inflation hits or even returns to a bit more normal level, the price he is going to pay for that debt is going to go up signficantly as well, UNLESS he has a fixed interest rate. Then, the price he pays goes DOWN. Since interest rates are REALLY low the risk of them going lower isn't much of an issue even if for some reason a person can't refinance, but getting locked OUT is. The issue with inflation is the same if you are trying to save, the value of that savings goes down unless you are REALLY good at investing and if you are, you wouldn't be in the fix...LOL!

Real estate "value", "sweat equity", interest rates, and debt are all tools, tools are rarely good or bad, applications are...

Let me respond to the whole idea of RISK, as it's been thrown around in this thread.

There are some who assume that the only risk involved here is taking out a big loan that you may not be able to pay back. Yes, that would be a risk: potentially losing your down-payment and ruining your credit. So that risk involves spending your money and potentially losing it.

But I would argue that an even bigger risk is to spending your years and not having anything to show for it. Allow me to explain.

We all get about 75 years on this planet, give or take a decade. You work for the first part of it, and then when your working days are through, you hope you've got enough money saved to live reasonably comfortably in the latter part. A mortgage allows you to lock in equity and pay down a future expense: where you will live. People that never take that step are taking a HUGE risk down the road, assuming that they'll be able to pay rent forever, even after their income is fixed but rental costs continue to rise every year.

They spend their years and have nothing to show for them. You can lose money and get it back, but nobody gets those years back.

Are there risks in investing in a home or in property? Sure, but the odds are greatly in your favor, which is why the mortgage company loans you the cash in the first place. Over the long haul, home values and incomes go up, with very few exceptions. If you can't live with that small assumption of risk, you should lock your doors and hide your copper pennies in a coffee can under the bed. Are their risks in spending your years and having nothing to show for it when you turn 70? Without any hesitation, yes, there are. This is, in my opinion, the much larger risk.

So looping back to the original post: taking the biggest mortgage that you can afford and then never paying it off ---- that's dumb. Take a mortgage that reasonably stretches you when you start, pay it off over a reasonable time-frame (20 years sounds about right to me), and enjoy the years and years that follow of living in a paid-off home.

Here are my thoughts on the mortgage question:

That 300K house, when you're done paying it off in 20 or 30 years, will actually have cost you more like 500, or 600K.  By paying off a mortgage early, you can save tens, if not hundreds of thousands of dollars.  What could you do with an extra 10, or 100K?  Probably a LOT.  

RISK.  If you lose your job, get injured, whatever, and you have a mortgage and can't pay it, the bank takes your house.  Even if you are just one payment away from paying it off, they own it, and you're homeless, and everything you paid is GONE.  You've got NOTHING.

By paying off your mortgage, YOU OWN THE HOUSE.  Not the bank.  People wrongly assume they "own" their home.  If they have a mortgage, they do NOT.  The BANK owns your home, and as such, if something goes wrong, they take it.  

By YOU owning the home, if you get sick, injured, whatever, your risk is much less.  Now you only have to worry about taxes, utilities, etc.  But your biggest worry, a mortgage, doesn't exist.  I'm a fan of taking the SMALLEST mortgage you can, and paying it off as QUICKLY as you can.    

Hi everyone. I just got an apple for the, Survival Advice From Gilligan's Island, post from three years ago. Thanks. I haven't read what  brought it back up again. I sort of hit my wall of how much social media I can take. Its not the first time this has happened. Like a root ball, sometimes I have to go dormant and build up new energy to explode out later under the right conditions with new energy...

... But on the same theme... I owe this to Chris Martenson. Hopefully it loads.



I guess this would be, "Survival Advice From Saturday Night Live". Budumpt'tup.

This thread is old, but I’mma talk about it anyway.

The problem I see with the article mentioned by the OP is that even if you are a rare being who actually has a bunch of cash in excess of what you need for the down payment, you cannot maintain liquidity and take advantage of arbitrage at the same time with the same money.

So say that you have $100,000 in cash and you take out a $100,000 mortgage at 4% interest. As long as you have that money in the bank, totally liquid, then you can pay off the mortgage whenever and there is virtually no risk. But you will obviously lose money on the interest, making this a poor decision.

So say that you instead invest that $100,000 and earn an average of 5% in interest, dividends, or whatever. Congratulations! That is actually quite a good rate of return for, say, conservative common stock investments, and you have actually turned a tiny profit. Unfortunately, it is not terribly easy to achieve even 5% returns consistently and it does involve an increased element of risk (both that you will not make enough to break even and that you may lose your capital itself, which generally becomes more likely with greater potential returns—damn!) Of course, losing part of your capital means you can no longer afford to pay off the mortgage in full.

But even if this all works out surprisingly nicely and you make a decent little return, there is still the fact that your money is no longer liquid. So the risk of suddenly not being able to make your mortgage payment and/or having to sell off investments for cash at a steep loss due to bad timing is greatly increased, thus undoing all your hard work and putting you in the hole.

To mitigate this, you can hold some portion of the $100,000 in cash, but then you have to get an even better rate of return on the remainder in order to break even. In order to achieve significantly higher returns, you will need to begin edging toward speculation, which of course involves increased risk. When margins are slim, is all this extra work and uncertainty worth it?

Risk is a factor not because we should avoid any hint of it, but because risk needs to be accounted for financially in order to properly allocate resources. An investment with an 8% rate of return could be a better or worse deal than an investment with a 3% rate of return depending on their respective levels of risk. Likewise, an investment returning 6% that requires two mouse clicks and 30 seconds of thought is superior to an investment returning 6% which requires weekly monitoring and several hundred hours of education to understand, if their risk levels are equal.

You can make the math on this equation work out either way depending on whether or not someone slightly outperforms or underperforms the market, whether they itemize, etc. You could absolutely come out ahead by taking out a mortgage, but it certainly is not guaranteed; you could easily lose money instead. In my opinion, the potential return is too small to make the risk and bother worth it.

However, the OP is absolutely right that having $0 in the bank having paid every extra dime to get down to a $20,000 mortgage balance is a much riskier place to be than having $20,000 in the bank with a $40,000 mortgage.

I guess I do not understand points four and five at all, which is related to the tax deductions possible upon the interest given in a loan. Oh I am not stupid, I understand the interest paid to a bank is deductible, but why is that such a great advantage? If I am not paying a mortgage, I still can deduct a host of housing costs. Everytime I spend money on materials that improve my home, that can be deducted because it is building equity in my home. And if I am not making a house payment, guess what? I am free to buy more material for the home!

For me, much of my materials are produced by my own woodlot and sawmill. The woodlot has property taxes that can be deducted, and the swmill can be deducted (rapidly depreciated in one year via Section 179 if I want), not to mention deduction of the sawblades, fuel, oil and grease. I can also deduct the logging equipment's depreciation and operating costs. But because I do not have a mortgage, instead of spending money on the mortgage payment itself, I invest that money back into the house which increases its overall value. And if I want, I can sell a house every five years and not have to pay taxes upon its sale.

What the man is not realizing is, without a mortgage, I do not need to work a traditional job. This is what most financial planners miss out on; they do not calculate what is NOT spent. So while he is advocating a person have a morgage and deduct that interest every year, that most likely means a person has to have a traditional job (because how would they get a mortgage otherwise in the first place), and thus have to pay W-2 income taxes. What they are paying in payroll taxes to make the money to pay for the mortgage, more than makes up for the measly interest they get to deduct.

This makes no sense.

Yes I have to pay income taxes too, but as a retired welder now farming, I get a host of deductions that are not available to the average worker working a tradional job. He is advocating a tax dedection of $3500 per year for the average size home, and I am deducting $10,200 a year in property taxes. A $3500 deduction, or a $10,200 deduction...the math is not hard to do.

Ah, crap. "Just when I think I am out, they draw me back in"

I thought I was being remiss for not posting the article I stole that SNL skit from on Extreme Frugality.

Here it is.  https://www.peakprosperity.com/extreme-frugality/

Now I can go back to working on the Shipping Container home I have been building so we can bring in people that will never be able to afford a mortgage, but still have the will for a post apocalyptic permaculture adaptation. I have got two of these to build before winter. I'm sure an article on this will show up but not till next year.

I have to say when you read this -https://www.foxnews.com/media/jp-morgan-ceo-suggests-government-seize-private-property-quicken-climate-initiatives
and you have a mortgage with Chase, you realize how Chase views  the government seizing property.  Not looking good to have someone holding your mortgage with
such a fast and loose idea of people losing property rights to fund a government.

Worse yet, in California, home insurance companies leaving the market in droves.  The (name-less) insurance company cancelled ours.  I start looking. I look for 3 months ,
Just on the 3rd month and the old insurance was ending, I was able to get insurance.  PHEW!
However, What would it mean to NOT get home owner's insurance mean to our Chase mortgage?

Our home is prime for foreclose  because we have only 1/14 of the loan to our massive property value.   It would be so easy for the bank to sell our home making
it more valuable to foreclose on.   We have checked how much money we have and  taking every cent we own, we can pay off our home and save ourselves from Chase if this insurance also cancels again.
Why pay off your loan?  Stress, this is too damn stressful that a bank might be able to sell our home from lack of home owner's insurance.

You pay it off : a bank that doesn't honor property rights ,insurance companies who can cancel , and the risk of foreclosure when you did NOTHING WRONG
is more than enough reason to pay off a mortgage!

This is a question I was thinking about recently. I am at the very start of paying down my mortgage, and I have been opting to make extra payments towards the principal every month so that the burden of interest will be lower in the long term. I went on to read a lot of commentary in personal finance circles, the consensus of which suggested that what I am doing is merely an emotional response to fear of carrying debt and an irrational move that would prevent me from making better money investing elsewhere.

After much back and forth internally, I finally plugged the numbers into calculators and found that the difference between paying extra towards my mortgage or investing that same amount was almost an even wash. In fact, paying down came out ahead once I factored in capital gains taxes for investment income. I gathered from this exercise that the argument to invest rather than pay down makes more financial sense when you are carrying a larger mortgage than what I have.

That advice also assumes that you are always going to have plenty of income coming in to pay your mortgage. As someone who is dissatisfied with their career and wants to downshift to more meaningful but less well-paying work, lowering my expenses so I can be free to explore other options is the best investment I can make for myself. To own a house free and clear with no mortgage would allow me much more flexibility in pursuing work,so it is a worthy goal to my eyes. Similarly, the last few years made me painfully aware of how much the need for income can be used to coerce people into doing things they may not want to do. Consequently, the lower my expenses, the less I am dependent on income and therefore the more free I am as a person.

My biggest problem with the idea of investing to get 7% instead paying off the principle on your 4% mortgage to get an extra 3% is that assumes the stock market always goes up. Then when the economy goes from a boom to a bust cycle and people lose their jobs they have to sell their stocks at a loss to try and keep their home. In the old days people invested and held their positions, but now banks pay millions of dollars to install their servers on the stock market floor to trade a few nanoseconds faster than other banks with their high frequency trading. They've basically turned the stock market into a casino that's way over leveraged with all the derivatives that have been referred to as financial weapons of mass destruction.

There are no energy poor rich countries, and whether we're actually at peak oil, or self imposed peak oil due to policy doesn't really matter. Energy is the foundation of our complex economy, and without abundant oil our economy is going to be much simpler, more local, and smaller. I view investing gambling in the stock market at this point to be about equivalent to picking up loose change in front of a steam roller. Germany lost access to cheap natural gas when the Nordstream pipelines were bombed, they're pouring acid in the pipes of their nuclear reactors so that they can never be restarted, and they're burning more dirty coal just to barely keep their grid up and running. It's bizarre watching advanced economies tear down good infrastructure before having a solid way to replace it.

The stock market can't exponentially go up forever without an exponentially increasing sources of energy. I personally think it's a much better idea to invest in your land/soil, access to water, energy efficient shelter, and energy independence with things like solar.