JVA Investments

Great Reasons to Carry a

Big Long Mortgage

By Ric Edelman, CFS, RFC, CMFC, CRC, BMC, QFP, EIEIO

Never own your home outright. Instead, get a big 30-year mortgage, and never pay it off

— regardless of your age and income.

Now, I know that you don’t want a mortgage. What you want is a house, but to get it, you must obtain a mortgage. If you’re like most folks, you hate your mortgage, and you’d love to get rid of it as soon as possible. You grimace at every monthly payment, and you know that, over 30 years, you’ll pay more in interest than you paid to buy the house in the first place.

That’s why you put down as much money as possible — to keep the mortgage as small as you could. You might have taken out a 15-year loan to get the loan paid off in half the time, and might even be making extra payments, or perhaps signed up for one of those biweekly loan programs, all to enable you to get rid of the mortgage just as quickly as possible. You do all of these things, of course, for a very basic and deep-rooted reason: because your parents taught you that you should never a have mortgage, and the key to the American Dream is to own your home outright.

Yet, a Big 30-Year Mortgage Is Best

Although your parents’ advice once made sense, today it is completely wrong. In today’seconomic environment, a big, 30-year mortgage is the best thing you can have. (Now,don’t confuse the idea of a big mortgage with that of a big house; I am not endorsing the idea of buying as expensive a house as you can. Instead, you should buy the least expensive home you are willing to own — and then borrow as much as you can, and for as long as you can.) So: Never pay off the mortgage. Reject 15-year loans, never make extra payments, and forget about those biweekly mortgage payment plans. Before you dismiss all this, read on — because I’m about to show you how your mortgage can help you make incredible amounts of money. First, understand that everything you know about mortgages — and particularly what you fear about them — is wrong. The myths you believe were told to you, bless their hearts, by your well-meaning parents and grandparents. They told you that mortgages are dangerous, that having one means you can lose your home. They told you this because they remember the Depression era, a time when millions of Americans lost their homes. Although mortgages were indeed dangerous in the 1930s and 1940s, the rules of money have changed and, unfortunately, your elders don’t realize this. So, by learning why your elders were correct in their desire to pay off their mortgages, you’ll come to understand why you should keep yours.

Reason: Your mortgage doesn’t affect your home’s value.

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.) Yet,

the eventual rise (or fall) in value will occur whether you have a mortgage or not. So go ahead and get a mortgage: Your house’s value will be unaffected. That’s why owning your home outright is like having money buried under a mattress. Since the house will grow with or without a mortgage, any equity you currently have in the house is, essentially, earning no interest. You wouldn’t stuff ten grand under your

mattress, so why stash two hundred thousand into the walls of the house? Having a longterm mortgage lets your equity grow while your home’s value grows.

Reason: A mortgage is cheap money.

There’s no way you can avoid debt in today’s society. Cars and college – let alone big

screen TV’s — virtually require you to have loans. And you’ll find that mortgages offer

you perhaps the cheapest way to borrow. Mortgage loans offer low interest rates because you post the house as collateral: If you fail to repay the loan, the lender sells your house to recoup its money. (By contrast, if you buy clothes with VISA, the credit card company can’t repossess your sweater when you fail to pay your credit card bill. That’s why VISA charges as much as 18% to 24%: Collecting high interest from some customers reduces its losses when other customers don’t repay their loans.)

Reason: Mortgage interest is tax-deductible.

Not only are mortgage loans low in cost, the interest you pay is tax-deductible. You can save as much as 35 cents in taxes for every dollar you pay in interest. That means a 6% mortgage loan really costs as little as 3.9%. Why carry 18% credit cards, paying interest that is not tax-deductible, when you can instead carry a 6% mortgage with interest that is tax-deductible? Your mortgage is probably the cheapest money you can borrow, so it makes sense to get as much of it as you can.

Reason: Mortgage interest is tax-favorable.

Assume you have both a 6% mortgage and a 6% profit on your investments. The

mortgage is deductible at your top tax bracket, but the investments are taxed as low as 15%. For someone in the 25% tax bracket, that means the mortgage costs them 4.5% while the investment nets them 5.1% after taxes. In other words, tax law makes it beneficial for you to maintain your mortgage.

Reason: Large mortgages let you invest more money more quickly.

Assume you own a house and want to buy a larger home. So you sell your old house andnet $300,000. Now you’re ready to purchase a new $500,000 home. How much should you put down? Should you make a 10% down payment of $50,000? Or should you put down the entire $300,000 in proceeds from the sale of the old house?

Big mortgages mean small down payments. Small down payments mean you retain lots of cash that you can then invest. Small mortgages are the opposite: Small mortgages require big down payments, which leave you with little to no cash left over forinvesting.