This Is A Parachute – Put It On And Jump! (Mortgages)


Why does anyone tolerate this sort of intentional and, it appears, knowing misdirection and worse?

Nine reasons to love your mortgage?!  I’ll give you the first one, it probably is the cheapest way for you to borrow.  But the others?  Well, let’s look.

2. It’s a negative bond. 

That’s bad, not good!  Why would you want a negative bond?  That this clownface nearly led with this reason is all you ought to need to know to go find him, warm up the tar and find the bag of feathers.

3. It leverages your entire financial life.

How is that good?  Oh yes, he does note that leverage multiplies both losses and gains, but then he makes a statement that while factually true is radically misleading — while a brokerage can call a margin loan that is underwater, your bank can’t on a mortgage.

That doesn’t matter, however, because the loss is still yours, and what’s even worse is that you get to pay interest on lost money and you’re locked in and forced to do so.  There is a ying for every yang; your brokerage will typically call your margin loan at the point it goes into negative equity — while you’ve then lost everything you had in the account the bleeding stops there.  With a mortgage this is demonstrably not true!  If you put 5% or 10% down and the house goes down in value by more than that amount you are now paying interest on lost funds and unless you have the deficiency you cannot sell because you cannot extinguish the note, so the loss is yours on both a present and continuing basis, not the bank’s!

4. It’s a backup source of emergency money.  

No it’s not, really.  If you have a job and other assets you can sell the assets or borrow against them.  If you lose your job getting a home equity line will be virtually impossible.  Further, see #3 — increasing your leverage is always dangerous and with a mortgage due to the relative illiquid nature of real estate the risk is very-much tilted toward you.

5. It makes inflation your friend.

The hell it does.  The payments on a fixed-rate mortgage may stay the same but the value of the home does not if rates rise because the buyer has to finance with today’srates, not yesterday’s.  There is no free lunch — the premise of “inflation being your friend” is a false one, stoked with a 30-year trend of decreasing interest rates.  We’re at the lower boundary for that and any pickup in inflation is either going to result in no benefit in that regard or worse, higher rates that destroy value and render your mortgage “upside down.”

6. It lets you profit from falling interest rates.

Yes, but not really as this guy suggests.  Refinancing resets the amortization clock and since most of your payment in the first few years on a mortgage goes to interest doing this, even at lower rates, is a huge lose for you if you have a number of years into the original mortgage.  So the truth is that this only helps you if you just got the loan, where the clock reset doesn’t hurt much.  Where falling rates do help is that they make it possible to finance more house with the same payment, and this tends to drive up prices.  Now tell me — which is more likely over the next 20 years — lower or higher rates?

7. It’s an effective way to build wealth.

No, it’s not.  As noted the actual appreciation in price barely outstrips inflation.  The problem with “forced savings” is that it’s a chimera; you cannot both have forced savings and a home equity line, for example, nor can you have forced savings and constant refinancing.  So which is it, asshole?

8. It’s your default investment.

And a poor one at that.  Next.

9. Paying it off can drastically reduce your cost of living.  

Well, yes.  And not having it in the first place can do so sooner.  This is particularly true when you consider that the average $200,000 mortgage costs you nearly $150,000 more in interest (assuming a 30 year, 4% loan.)  People will often claim that due to inflation the “real cost” is much lower, but that’s false; the problem with the claim is that most of the interest cost is front-loaded due to how amortized loans work (that is, the early years are mostly interest) and you lose the purchasing power immediately, along with the inability to invest those funds in something productive.  And no, that’s not necessarily a bubbly thing like the stock market either!

So all-in Jonathan has 1 out of 9, with the other 8 reasons to “love” your mortgage really being reasons to hate it instead, along with pelting him with rotten tomatoes wherever you may see him for trying to goad you into destroying your financial life.

PS: Once you’re out of the plane you will discover that “parachute” you were handed is in fact a knapsack.  

Bon voyage.

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