5. Building Wealth by Never Paying Off Your Mortgage

CHAPTER

FIVE

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Building Wealth by Never Paying Off Your Mortgage

It seems like a crazy idea now, but many financial advisors during the boom told anyone who would listen that they shouldn’t pay off or even pay down their mortgage debt. Not only should everyone own a home, but everyone should have a mortgage and no one should ever pay it off. The conventional wisdom, built up from decades of government support for home ownership was that housing prices could never fall.

After all, those in power testified that it was so. Fed Chairs Greenspan and Bernanke, as well as regulators and economists with the FDIC and Federal Reserve Bank dismissed the notion of a price bubble in housing. Like all bubble markets, “the sidelines began to seem a place only for people who had an aversion to wealth,” Goodman wrote.

So the days of mortgage burning parties were long gone. How stupid could a person be to pay off their mortgage? After all the home would build equity by itself, whether there was a mortgage on it or not and besides the money used to pay down the mortgage could be invested to earn much higher returns than the tax advantaged interest rate being paid on the mortgage.

The authors of Untapped Riches: Never Pay Off Your Mortgage—and Other Surprising Secrets for Building Wealth, Susan and Anthony Cutaia with Robert Slater claimed in their 2007 book that the fixed-rate mortgage was the worst mortgage in history.

The Cutaias claimed certain types of mortgages were wealth creators. Mortgages like Option ARMs, Cash Flow ARMS, and negative amortization loans were best because these loans were “smart debt” which freed up cash so borrowers could leverage their homes to create wealth. They also advocated interest-only loans.

To their credit, the husband and wife team cautioned readers not to fritter away their cash on boats and vacations. But, the adjustments on these adjustable rate mortgages are what set the housing crash in motion.

Never pay off your mortgage principal the authors wrote, telling the story of an 80 year old man with a debt free house and no cash. Thank goodness they were able to get him an adjustable rate $800,000 loan. Otherwise, “He might as well have been poor,” they write.

Financial planners and CPAs all over the country were advising people not to pay down or pay off their mortgage loans.

The two financial/mortgage experts wrote that it’s a shame to be debt free. They blame the banks for instilling the notion in our heads that paying off our mortgages is a good thing, when in fact “being debt free doesn’t help you build wealth. It just locks up your money in equity.”

“KEEP YOUR MONEY OUT OF THE BANK’S HANDS,” is the wealth-building strategy #3 from the husband and wife team. “NEVER PAY OFF YOUR MORTGAGE—NEVER!”

Scientist, financial analyst and mortgage underwriter Marian Snow claimed there was a crisis in her 2007 book, Stop Sitting on Your Assets: How to safely leverage the equity trapped in your home and transform it into a constant flow of wealth and security. Ms. Snow wrote that there is a high cost of forfeiting future equity earnings. Excessive down payments, amortizing loans, extra principal payments, bi-weekly mortgage payments and untapped equity from real estate appreciation were all sources of wealth laying fallow, wasting away.

Ms. Snow uses an example of a $100,000 down payment that instead should be “relocated into a conservative side account earning an 8% compounding return.” In 30 years that hundred grand would grow to over a million bucks, she writes. Eight percent annually compounded over 30 years: only public employee pension plan managers make such an absurd assumption.

Snow the scientist then berates anyone who believes that a smaller mortgage amount means smaller interest payments and saving money. “Are you really saving anything? Aren’t you forfeiting the opportunity to deduct more interest that year?”

Depression-era thinking has led people to the poor-house of a mortgage-free home and no other assets according to Snow. Ms. Snow’s book contains all kinds of silly acronyms that she claims are trademarked for what she calls the Home Equity Riches Optimizer and the Home Equity Retirement Optimizer. Suffice it to say Ms. Snow’s assumptions are aggressive and she dismisses the idea of a housing bubble despite her book being published in 2007.

It wasn’t just real estate and mortgage hucksters like Mr. and Mrs. Cutaia and Marian Snow selling the mortgage debt snake oil. Financial planners and CPAs all over the country were advising people to not pay down or pay off their mortgage loans.

“Planners must consider many factors when analyzing the 15-year versus 30-year mortgage option, but certain issues deserve mention. First, even if the mortgage is held to maturity, the argument that the 15-year option is optimal because fewer total dollars are spent to purchase the home is seriously flawed. The fact that a smaller total dollar expenditure is required for the 15-year loan is irrelevant to the maturity decision.”

“Including a Decreased Loan Life in the Mortgage Decision”

Journal of Financial Planning, December 2003.

“Advantages of the 30-year mortgage include lower monthly payments and accumulated wealth, in an investment account available to help alleviate hardships. Withdrawals from the investment account would be free of penalties for the non tax-deferred accounts, and free of penalties for the tax deferred.... The data showed that a borrower ... willing to invest with a risk level associated with the S & P 500 would benefit from a 30-year mortgage.”

“Effect on Net Worth of 15- and 30-Year Mortgage Term.”

Journal, Association for Financial Counseling and Planning Education, 2004.

“The popular press, following conventional wisdom, frequently advises that eliminating mortgage debt is a desirable goal. We show that this advice is often wrong ... mortgage debt is valuable to many individuals.”

“Mortgage Debt: The Good News.”

Journal of Financial Planning, September 2004.

“... U.S. households that are accelerating their mortgage payments instead of saving in tax-deferred accounts are making the wrong choice ... in the aggregate, these misallocated savings are costing U.S. households as much as $1.5 billion dollars per year.”

“The Tradeoff between Mortgage Prepayments and Tax-Deferred Retirement Savings.”

Federal Reserve Bank of Chicago, August 2006.

Ric Edelman, who Barron’s ranked in the top 100 financial advisors in the country from 2004–2010 and author of numerous books on personal finance, advised, “Never own your home outright. Instead, get a big 30-year mortgage, and never pay it off (assuming you can afford to make the payments on the mortgage).” Edelman wrote that our parents were all wrong to pay off a mortgage as quick as possible. Mr. Edelman’s ten reasons to carry a big long mortgage are all over the internet.

Summarizing Edelman’s ten reasons:

REASON #1 Your mortgage doesn’t affect your home’s value.

Edelman says the reason you’re buying your home in the first place is because you think it will rise in value, otherwise you’d rent. Not having a mortgage is the equivalent of stuffing money in a mattress.

REASON #2 You’re going to build equity anyway.

Paying down the mortgage is a weak way to build equity. The home will appreciate in value anyway according to Edelman.

REASON #3 A mortgage is relatively cheap money.

Debt is inevitable in today’s society writes the financial expert, so load up on mortgage debt as opposed to credit card debt.

REASON #4 Mortgage interest is tax-deductible.

The after-tax interest rate that you pay on your mortgage is lower than other available credit.

REASON #5 Mortgage interest is tax-favorable.

Rather than pay down debt that is tax-deductable, invest that money in investments that are taxed as low as 15 percent.

REASON#6 Mortgage payments generally get easier over time.

Inflation will make your monthly payment shrink, relatively speaking.

REASON #7 Mortgages let you sell without selling.

Want to capture the increase in home values but not sell? Just borrow more against the home.

REASON #8 Large mortgages can let you invest more money more quickly.

The lower the down payment you make, the more you can invest in other investments.

REASON #9 Long-term mortgages can help you create more wealth.

Paying down your debt doesn’t create wealth; put that money toward other investments.

REASON #10 Mortgages can give you greater liquidity and greater flexibility.

Don’t tie up your liquidity in the house; keep it available for other things, like investments.

Edelman the hot-shot financial advisor claimed we should all stay in hock up to our necks and invest whatever money we might use to pay down the mortgage just in case home prices actually fell. While Edelman advised this, the stock market crashed, commodity markets crashed and interest rates on Treasuries and bank CDs went to virtually zero. During no time period could a person earn a risk-free rate of return higher than even the tax-advantaged rate of a 30-year mortgage.