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As long as you have the cash flow to support the lifestyle, you are in great shape. There are just times that you will pocket a loss instead of gains with any investment, while the mortgage interest just keeps adding up and never goes negative. When that happens you can't afford to have a hitch in your cash flow, or you will be forced to sell investments at a loss to cover the mortgage. That's how all those debt speculators ended up at the food bank, too broke to even buy groceries, driving their food stamp Cadillacs.
If you think that's a once in a lifetime event, you don't plan on living long.
You are mixing up two different ideas: high risk speculation and mortgages. I void avoid any high risk investments. I give up a lot of returns to be diversified and to be prepared for eventual changes. The stock market has been performing at 12-14% annual returns. Some speculators are chasing even better returns. I am content with 8-12% returns with a very diversified portfolio. I only need about half that to cover my mortgage; principal plus interest.
I have already lived into retirement age and the 2008 has been the only major issue in my lifetime. Even that was not so scary for an investor. I recovered my losses within a couple of years and doubled my portfolio again within 5 years. My biggest concern would be an extended period of poor returns and additional corrections. We had those conditions in the late 90's through about 2002. Well in two years with a mortgage I have paid in $30K and pocketed $30K. If tomorrow investment returns drop to zero or worse, I have made enough to pay my mortgage for a couple of more years and then could consider paying it off.
I think it is important to look at a mortgage in relation to total assets and to the size of your portfolio. When we are young, it is common to have few assets, a small or nonexistent portfolio and a relatively huge mortgage. We have two risks. One is the value of our home as controlled by the housing market. The other is the relatively high cost of the mortgage versus our assets and income. At that point in our lives paying off that mortgage helps immensely to lower risk. I am not talking about the wisdom of buying a mortgage under those conditions. My mortgage is a small portion of my total assets and portfolio.
For a lot of people a mortgage is a way of speculating in the housing market. I know I was there and did that. When I lived in SoCal, I had a mortgage with payments that were 50% of my gross pay. After taxes and the mortgage we struggled to get by. If the market had dropped and/or I lost my job, we would have been in a serious situation. The alternative was very high rent in an apartment which would have made raising a small child difficult. I expected to be transferred out of State after a year. It took a year and a half but we finally got out from under that mortgage.
I was lucky and I can certainly understand why most people really dislike mortgages and other debt. There is a lot of risk even if nothing goes wrong. We have had a couple of threads on this forum which have discussed and entirely different scenario. If you do not need a mortgage, does it make sense to take or keep a mortgage because the rates are so low? With rates under 4% I think a mortgage makes a lot of sense. That leaves the principal and interest payments at about 5% and allows a nice return with a diversified portfolio. There is still a slim possibility that investment returns will tank and the mortgage will be a poor decision. That is very unlikely either in the short term and even less unlikely in the long term. When mortgage rates increase even a little to 5% or so, the situation changes dramatically and a mortgage is likely to be a bad risk.
To me the current very low mortgage rates just seem weird. I would not buy long term bonds at low rates. I would not lend money at low rates for 30 years. I am not wise enough to predict the future ramifications of this but I suspect there will be some serious consequences for lenders and for the economy. Anyway times are good for borrowers who can afford the debt.
For a lot of people a mortgage is a way of speculating in the housing market. I know I was there and did that. When I lived in SoCal, I had a mortgage with payments that were 50% of my gross pay. After taxes and the mortgage we struggled to get by. If the market had dropped and/or I lost my job, we would have been in a serious situation. The alternative was very high rent in an apartment which would have made raising a small child difficult. I expected to be transferred out of State after a year. It took a year and a half but we finally got out from under that mortgage.
I was lucky and I can certainly understand why most people really dislike mortgages and other debt. There is a lot of risk even if nothing goes wrong. We have had a couple of threads on this forum which have discussed and entirely different scenario. If you do not need a mortgage, does it make sense to take or keep a mortgage because the rates are so low? With rates under 4% I think a mortgage makes a lot of sense. That leaves the principal and interest payments at about 5% and allows a nice return with a diversified portfolio. There is still a slim possibility that investment returns will tank and the mortgage will be a poor decision. That is very unlikely either in the short term and even less unlikely in the long term. When mortgage rates increase even a little to 5% or so, the situation changes dramatically and a mortgage is likely to be a bad risk.
To me the current very low mortgage rates just seem weird. I would not buy long term bonds at low rates. I would not lend money at low rates for 30 years. I am not wise enough to predict the future ramifications of this but I suspect there will be some serious consequences for lenders and for the economy. Anyway times are good for borrowers who can afford the debt.
The good thing is that buying a house in a rich, prosperous area like SoCal is likely going to lead to further appreciation down the road, and an absolute windfall at retirement if the
In the market we're in, the already booming areas are booming even further. My employer's headquarters is near Boston. Real estate prices there are sky high, but they keep going up, up, and up. People who buy now there will likely see far more appreciation, in both absolute and percentage terms, than most of us in flyover country. Jobs are consolidating in major urban centers and some of their satellite suburban centers.
The good thing is that buying a house in a rich, prosperous area like SoCal is likely going to lead to further appreciation down the road, and an absolute windfall at retirement if the
In the market we're in, the already booming areas are booming even further. My employer's headquarters is near Boston. Real estate prices there are sky high, but they keep going up, up, and up. People who buy now there will likely see far more appreciation, in both absolute and percentage terms, than most of us in flyover country. Jobs are consolidating in major urban centers and some of their satellite suburban centers.
Unless you bought the property in 1998 or 2005 or any of the major downturns in the economy. Then it might take you years to recover.
You are mixing up two different ideas: high risk speculation and mortgages. I void avoid any high risk investments. I give up a lot of returns to be diversified and to be prepared for eventual changes. The stock market has been performing at 12-14% annual returns. Some speculators are chasing even better returns. I am content with 8-12% returns with a very diversified portfolio. I only need about half that to cover my mortgage; principal plus interest.
I have already lived into retirement age and the 2008 has been the only major issue in my lifetime. Even that was not so scary for an investor. I recovered my losses within a couple of years and doubled my portfolio again within 5 years. My biggest concern would be an extended period of poor returns and additional corrections. We had those conditions in the late 90's through about 2002. Well in two years with a mortgage I have paid in $30K and pocketed $30K. If tomorrow investment returns drop to zero or worse, I have made enough to pay my mortgage for a couple of more years and then could consider paying it off.
I think it is important to look at a mortgage in relation to total assets and to the size of your portfolio. When we are young, it is common to have few assets, a small or nonexistent portfolio and a relatively huge mortgage. We have two risks. One is the value of our home as controlled by the housing market. The other is the relatively high cost of the mortgage versus our assets and income. At that point in our lives paying off that mortgage helps immensely to lower risk. I am not talking about the wisdom of buying a mortgage under those conditions. My mortgage is a small portion of my total assets and portfolio.
If you figure a modest 25% tax bracket, you are paying $15k on your $60k earnings, minus the 25% of your interest payments you get back via tax deduction. Then you turn around and spend $30k servicing a mortgage. If your mortgage was paid off, 100% of what you pay to the bank would be tax free. My wife and I are in a very similar situation, with far too much un-sheltered income, so we get whacked paying income tax on 85% of our SS, but for someone in more modest circumstances, being able to collect SS tax free would be a real life saver.
Let me see if I understand your logic: I should not make money because if I do, I will have to pay taxes?
Maybe your tax situation is different. For me the mortgage deduction is a big help on taxes. I have considerable medical expenses but no other deductions. Without the mortgage I would need to use the standard deduction. With the mortgage I get a substantial deduction and reduction of my taxes.
I do understand your argument. For someone with an income that is primarily social security or tax sheltered sources income taxes could be none or low. Additional income could substantially increase their taxes. My taxable income is considerably more than social security so any added income has little overall effect on my taxes. Even with significant taxable investment returns my tax rate is way under 25%. In any case, additional income always helps. It is better to make money and pay taxes than not make money and pay no taxes. If there is any case where that is not true, it is time for advice from a tax expert.
but the mortgage is not making anything deductable that wasn't deductible prior without the mortgage so i find that logic incorrect . the only thing that will show a difference is the amount of the mortgage itself.
there is no magic that happens to anything else because it didn't go over the standard deduction without a mortgage.
just run your taxes with and without the mortgage and you will see nothing else changes except that part of the mortgage that takes you over the standard deduction. whatever didn't clear the standard deduction still doesn't clear it.
Last edited by mathjak107; 05-22-2015 at 06:40 AM..
This brings up a good point that is often incorrectly discussed with regards to the mortgage deduction. The real gain is only the difference between the standard deduction and filing itemized. For most people, with reasonable mortages and low rates, its often not much, maybe 4 or 5k reduction to income or only $1000/1200 out of pocket savings (which is obviously still worth it), much less than the 25% of interest paid often touted. I fell for the same mind game to myself, estimating the extra income I had to invest when I refied, but neglected to account for the increase in income tax at tax time for the lost deduction.
Since I have state income tax, full property tax and personal property tax in VA, having a mortgage allows me to deduct those as well, so the difference is still significant. In retirement, if living in a place without those additional burdens, may be close to a wash.
Since I have state income tax, full property tax and personal property tax in VA, having a mortgage allows me to deduct those as well, so the difference is still significant. In retirement, if living in a place without those additional burdens, may be close to a wash.
again same situation , having a mortgage does not make a single thing deductible that wasn't before you added the mortgage in. if you couldn't deduct state and local taxes before you still can't even with the mortgage.
if adding the mortgage clears the deduction then that is all you get over the standard.
nothing suddenly can be deducted if it didn't clear the threshold without the mortgage.
it all gets added together and only that portion that goes over counts so if the difference is the mortgage then that is all you get that is going to differ.
10k in itemized deductions and a 5k mortgage interest deduction still only brings back the difference between a mortgage and no mortgage.
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