Quote:
Originally Posted by pyroguy
KenKat, you mentioned that you thought some debt is good, but then you contradicted yourself on some items. For example, the mortgage debt you thought was fine with the low interest rate, but then said that without the deduction it wasn’t worth it. Even when the deduction was available it still wasn’t worth it. For the “average” American making $50k a year, if they had a $200k mortgage at 5% interest (I know high by today’s standards, but not uncommon a few years ago and it makes for easy math), they would pay approximately $10k in interest in a year. The deduction based on a 25% income tax would allow them to get $2,000 back from the government. So they would spend $10k to get $2k back at the end of the year. 
As for the HELOC for your Camaro, that’s not a good way to go either. What you did was take a depreciating asset and put it up against your home. If you got to where you couldn’t pay your bill for your car this way you have now risked your home. A repossession on a car isn’t great, but a foreclosure is worse.
As for your statement of earning 7% in an IRA to have debt, if you had a paid for house, would you go out and take a mortgage just so you could invest? That 7% isn’t guaranteed and if invested poorly you could lose all of the money. Then you’re stuck with a mortgage and no money where before you would have no mortgage and could invest your mortgage payment. You’ll get MUCH further along that way. Your best wealth building tool is your income. Don’t let someone else make their money off of your income. |
My rate of return on my investments since I started tracking the detail in 1999 is 7.8% per year. My 3.39% mortgage was an effective rate of around 2.5% when it was deductible. Now that interest rates have cratered and it’s no longer deductible, maybe I just pay it off with some excess cash I have accumulated.
But yes, I will defer taxes on income and invest it at 7.8%, also tax deferred, rather than pay tax on that income to pay off a 3.39% mortgage.
Same thing on the Camaro - save tax deferred and invest at 7.8%, pay interest at 2.25% (less than that when I could deduct it). I could have paid cash, but why tie up capital in an asset with no return?
I’ve heard the “would you take out a mortgage to invest it?” argument. I view a home as a consumption item, not an investment - the mortgage funded that consumption while I put that money to better use. The income from a job funded the payments on the mortgage. Now that I am approaching retirement age, the income will go down some but the mortgage will be paid off. I don’t need to borrow against the house now because all that money I didn’t put into the house has grown much faster than the value of the house.
Over the very long run, houses are typically not an asset with good return on investment. They keep up with inflation, maybe another 1% on top of that. Paying cash for a house ties up capital in an asset with a low expected return.