Do you consider your mortgage "debt"

[Rathji]

Originally Posted by 8sPOT

I don't think there is good debt. There is bad debt and then less bad debt. I get that debt is utilized to grow a business or invest for the future. However, I am saying that having $100,000 capital readily available for these investments is better than paying someone to borrow for however long.

I understand that you can borrow at 4%, then invest at 9%. Some would say that is good debt, but now you have diminished your 9% return to 5%. Wouldn't it be better to not borrow and invest at 9%?

Of course the assumption here is that the capital is available, which it usually isn't. I just don't think there is good debt. To me, 'good debt' is like saying 'fun murder'. It just doesn't make sense in my head.

SO how much are you losing not having that $100k earning you money? its not free to have money sit and do nothing

[Winsor_Pilates]

Yes, it's obviously debt.
However, to me the important distinction is debt for investment vs debt for consumption. Debt for investment does not make me feel like I'm "in debt".

[8sPOT]

Originally Posted by Rathji

SO how much are you losing not having that $100k earning you money? its not free to have money sit and do nothing

I understand that, obviously it would be invested in something. Even a bond fund would pay you say 3% per year on the conservative side. My beef is calling it 'good debt'. That to me is a slippery slope. Sure it's necessary, but it's not good.

I totally get that borrowing to invest can be a great thing, but that doesn't make that debt good, it's just required to reach a goal.

Back to the origin though, how the heck could a mortgage NOT be debt? THATS what I really don't get.

[Flames Fan, Ph.D.]

I feel much of this is a digression, but still fun:

Originally Posted by blankall

1) Is a mortgage debt? What if the investment is owned by a corporation?

I own shares of the corporation. The corporation owns mortgaged properties. The assets in the corporation exceed the "debt". Therefore, the shares I own have positive value, and I personally have no debt.

Don't really see why it's different if the corporation isn't there. As long as you have positive equity, it's not debt, good or bad, in my opinion.

You're confusing the overall balance sheet with the individual transactions.

Also, I don't see the point of this example. The thread is about whether or not a single mortgage is debt, and whether it is good or bad. Not whether or not a REIT can turn a profit.

Also, if you have positive equity, that's only a snapshot in time and does not tell you if the debt is good or bad. If your mortgage got reset at 7% a couple of years ago and you're now in an environment wherein the rates are 4%, you got a bad debt on your hands regardless of whether or not you're cash flow positive.

Originally Posted by blankall

2) If you don't own then you have to rent. That factors into the decision as well. Also, people own houses for potentially many decades. It's not the value now or even 10 years down the road which is important, it's the value in 30 years. With stocks, the company you exist in can disappear. As long as I retain my job and can keep making the mortgage paymetns, my house will not disappear.

Absolutely. Which is why there are all those rent vs own calculators to determine at what point it is better to rent or to own. And the reason those calculators are available: because the mortgage can be bad debt in certain situations, and good debt in others.

That was my point as well, so I'm not sure I understand your counterpoint.

And yes, as long as you make the mortgage payments your house won't disappear insofar as the bank will leave you alone. But just because you can make payments doesn't mean it's good debt.

Originally Posted by blankall

3) Just because you can benefit from future interest rates, does not mean the equity in your home doesn't have value. The comparison between school debt and a mortgage is not apt. School debt is unsecured. A mortgage is secured against a piece of property. As long as you are above water, you can still sell the property for money. I cannot sell my degree for money. That's the big difference.

Secured debt, sure. But you're buying the home for its use, so why are you dismissing the reason why you're buying the education? For its use. And further and most obviously, you're certainly selling your degree for money. You just do it month to month in exchange for a salary rather than in one transaction in the form of a home. Simple as that.

Originally Posted by blankall

4) See 2. Everyone needs a place to live.

Sure, but that doesn't change the fact that you can assume "good" or "bad" debt in exchange for that need. So I'm not sure what the point is here.

Originally Posted by blankall

In fact, I'd take this all a bit further. As long as you have more assets than debts, you are not in debt. Obviously some of your investments and debts carry risks with them that could land you "in debt". A mortgaged property, as opposed to most stocks, has the potential to go underwater. Yes, that is a risk.

Again, you're running the balance sheet.

[Tiger]

This leads me to a question I am constantly debating. Should I pay off the mortgage or invest the money? I could pay off my mortgage in about 3 years. But would it be best to keep that money and invest (you should be able to make more than the interest rate) or would it be better to pay off the mortgage and I have an extra $1000 to invest a month (yes I have a low mortgage payment). Keep in mind I'll be 32 in three years and will have plenty of time to rebuild any investment too.

What are others thought, pay off mortgage or invest?

[RogerWilco]

Originally Posted by 8sPOT

A mortgage is absolutely debt. I don't think it matters why the debt was taken on, it's still debt. I could owe $10,000 on my VISA because I wanted to purchase gold, or buy a 2012 Corvette and keep it in the garage for 30 years until it starts to appreciate in value.

At the end of the day, having zero debt beats having any debt at all.

Realy? I bought a home about 2 years ago, before that I was renting. When I was renting I had zero debt. So by this logic I should have continued renting rather than putting 25% down on a house? I feel that I am now ahead of the game then I was before. Do you feel I should have stayed renting? Sure I have debt but it beats my prior position of having no debt.

By your logic no one should buy a home because no debt = better than having a home? I don't think so.

[photon]

Originally Posted by Tiger

This leads me to a question I am constantly debating. Should I pay off the mortgage or invest the money? I could pay off my mortgage in about 3 years. But would it be best to keep that money and invest (you should be able to make more than the interest rate) or would it be better to pay off the mortgage and I have an extra $1000 to invest a month (yes I have a low mortgage payment). Keep in mind I'll be 32 in three years and will have plenty of time to rebuild any investment too.

What are others thought, pay off mortgage or invest?

Both!

Many lenders offer a product that converts from a mortgage to a line of credit as you pay it down, so you pay $100 to your mortgage, borrow it back and invest it. With the added advantage of the interest on that $100 being tax deductible. So you don't actually pay off your mortgage, you just convert it to a LoC for investments.

[photon]

Originally Posted by RogerWilco

Realy? I bought a home about 2 years ago, before that I was renting. When I was renting I had zero debt. So by this logic I should have continued renting rather than putting 25% down on a house? I feel that I am now ahead of the game then I was before. Do you feel I should have stayed renting? Sure I have debt but it beats my prior position of having no debt.

By your logic no one should buy a home because no debt = better than having a home? I don't think so.

Are you further ahead though?

Lots of people make good money but still rent; the money they save renting vs. owning they invest.

I think home ownership should be a lifestyle choice; it's not an investment.

Right now buying is probably cheaper than renting because of low interest rates, but historically isn't owning typically more expensive than renting?

[MoneyGuy]

Originally Posted by 8sPOT

I understand that you can borrow at 4%, then invest at 9%. Some would say that is good debt, but now you have diminished your 9% return to 5%. Wouldn't it be better to not borrow and invest at 9%?

Nope, you do both. Get, I do it with my money. It works.

And you haven't reduced your return to 4%. You forgot the deduction.

[Flames Fan, Ph.D.]

Originally Posted by photon

Right now buying is probably cheaper than renting because of low interest rates, but historically isn't owning typically more expensive than renting?

This is a good tool.

[Phanuthier]

Originally Posted by Flames Fan, Ph.D.

Again, you're running the balance sheet.

That's the scary thing, a lot of people (including Realtor1 here) is confusing their personal income statement and balance sheet. Having debt isn't a problem, I don't even think of it as something negative at all; I get that radio commercials and billboards give it a negative connotation, but I don't really get emotional about money, so I don't see debt as "good debt (nods head and smiles) and bad debt (shakes head and frowns)" - its just a tool used for whatever purpose you need it for. If its appropriate, use it! You need a education? Student loan! You need to buy a house? Mortgage! Your car got stolen while you were downstairs in Chicken on the Way? Car financing (and LOC).

As photon says... I can see if you plan on being settled for 40 years, that it can be used as a investment tool. I see it more as a lifestyle tool. I'm young, mobile, and I'm not even sure where I'll be in 1 year let alone 10 years. When renting, I'm flexible and mobile. Owning a house is for people who settle down IMO. I don't want to settle down, I see that as something for people who are mid-life do.

[Sylvanfan]

Originally Posted by photon

Both!

Many lenders offer a product that converts from a mortgage to a line of credit as you pay it down, so you pay $100 to your mortgage, borrow it back and invest it. With the added advantage of the interest on that $100 being tax deductible. So you don't actually pay off your mortgage, you just convert it to a LoC for investments.

But all things being equal, I would suggest using extra money to get rid of the mortgage debt which is not tax deductible first. I understand the Smith maneuver thing, but the mortgage part is never tax deductible, it just decreases as the "secured" line of credit increases, which is the part you can write off.

So if you can pay down your 5 year mortgage in 3 years, I would say pay it off rather than pay it for 5 years and use your extra money to invest.

[J pold]

Originally Posted by Phanuthier

That's the scary thing, a lot of people (including Realtor1 here) is confusing their personal income statement and balance sheet. Having debt isn't a problem, I don't even think of it as something negative at all; I get that radio commercials and billboards give it a negative connotation, but I don't really get emotional about money, so I don't see debt as "good debt (nods head and smiles) and bad debt (shakes head and frowns)" - its just a tool used for whatever purpose you need it for. If its appropriate, use it! You need a education? Student loan! You need to buy a house? Mortgage! Your car got stolen while you were downstairs in Chicken on the Way? Car financing (and LOC).

As photon says... I can see if you plan on being settled for 40 years, that it can be used as a investment tool. I see it more as a lifestyle tool. I'm young, mobile, and I'm not even sure where I'll be in 1 year let alone 10 years. When renting, I'm flexible and mobile. Owning a house is for people who settle down IMO. I don't want to settle down, I see that as something for people who are mid-life do.

Great post. I don't have a mortgage and don't plan on needing/having one any time soon. If I did however, I would absolutely consider it to be debt.

[Sylvanfan]

I'd like to know what the answer is to the question...do you consider your house to be an investment? Even that needs some definition. My guess is that it would get a resounding no on this forum.

I don't consider my house to be a financial investment that's going to blow up in value like my parents generations did and essentially fund my retirement. I do think parents often tell their kids that houses are a great investment because thats what happend to them, and they think it's just going to keep on going that way (My inlaws for example who think real estate is the only way to make money). Real Estate can be if you time them right, but as most on this forum know, it's not some magical thing that always doubles in value every 5 years no matter what the global economy is up to.

But I do consider my house to be an investment in terms of providing my family with a steady place to live that also allows me to customize the place I live in to suit my personal taste, and not have to deal with a landlord, wanting to sell the place, or deciding he wants to rent out the upstairs and downstairs separately type of thing. So I'll invest in a house as a lifestyle choice at this point in my life. I expect it to return something of value to me, not just monetary value.

But at the end of the day, my mortgage surely is a debt. If my lender does a cash call on me to pay my mortgage out tommorrow or lose my house. I'm packing my things. Granted that shouldn't happen, but thats how a financial system collapses, someone gets in trouble with a bad investment and has to make a cash call to cover it...the guy who borrowed from him now has to figure out how to cover his debt and so on.

[Slava]

Originally Posted by Sylvanfan

But all things being equal, I would suggest using extra money to get rid of the mortgage debt which is not tax deductible first. I understand the Smith maneuver thing, but the mortgage part is never tax deductible, it just decreases as the "secured" line of credit increases, which is the part you can write off.

So if you can pay down your 5 year mortgage in 3 years, I would say pay it off rather than pay it for 5 years and use your extra money to invest.

Sure, if the difference was a mere two years that sounds sensible. But if you take 20-25 years as the norm then some of those funds you're investing are compounding for that period of time. Thats where you're making the major gains here (along with the tax deductions that begin to pile up over time).

I think the question the OP wanted to ask was "would you rather have a mortgage for $200k or credit card debt of $200k?" but knew the answer to that.

[mykalberta]

I do consider it a kind of debt, but its an asset backed debt that I could at anytime now after 5 years of having a mortgage get out of it and then magically not be in debt.

Car loans, line or credit, credit card etc - to me that is real debt - debt that I have no way of getting out from under without wither paying it back with income streams, selling more assets than what purchased with the debt or declaring bankruptcy.

Yes, if you purchased a house in July 2008 then you probably consider it a debt

[Cowboy89]

Originally Posted by photon

Right now buying is probably cheaper than renting because of low interest rates, but historically isn't owning typically more expensive than renting?

Not necessarily. If low rates spur enough people to buy then the price level for homes goes up and takes out any savings from lower interest rates. Converesely when more people own homes and speculate on additional properties/income properties then there is way more rental stock and way less demand for rentals and hence the rental price actually goes down. In many markets in Canada the Own/Rent cost ratio has never been higher, indicating it being cheaper to rent, despite low interest rates (Mostly because even people with no money 'own' property).

House prices sometimes perform like bonds outside of other factors. When interest rates rise, prices fall and vice-versa. Interest rates aren't really a good barometer of whether or not it's a good decision to buy because it's only one variable.

[Red]

If mortgage is not debt then why are people being foreclosed?

What a ridiculous argument from the not-debt guys.

We get it that you can invest your house equity etc, but that is not the point here. You are still playing with borrowed money. We get it that you can have a net worth in excess of your mortgage. Still, you have debt until you don’t owe money to anyone.

Rent versus own? Who’s to say that you have to rent? You buy a house and pay it off. That way you have an option other than having debt (mortgage) or renting.

I realize that paying a house off is a foreign concept these days (thanks to the financial gurus and their get rich schemes), but that’s what the idea is. Buy a house so you can own it someday. If you treat the mortgage like debt then you will most likely get there. That’s how people used to do it.

[chemgear]

Originally Posted by photon

Right now buying is probably cheaper than renting because of low interest rates, but historically isn't owning typically more expensive than renting?

I'm still finding it academically interesting how the last two years has shown the worst in terms of actual sales numbers/demand for housing in more than a decade - even with interest rates at essentially rock bottom (lowest ever?) levels. Heck, the population growth/number of homes versus 10+ years ago is pretty neat to think of in that comparison as well.

Originally Posted by mykalberta

I do consider it a kind of debt, but its an asset backed debt that I could at anytime now after 5 years of having a mortgage get out of it and then magically not be in debt.

Yes, if you purchased a house in July 2008 then you probably consider it a debt

If you manage to sell in a reasonable timeframe that is, and for prices at least several points above what you paid for it (of course to account for the inevitable lawyer/moving/realtor fees when you sell.) Real estate is not very liquid, at least in my view.

I think I mentioned it earlier this thread (I can't remember) but roughly 40% of all current SFH sales come in under less than what the owner originally purchased it for; after they eat standard realtor fees.

[Slava]

Originally Posted by Red

If mortgage is not debt then why are people being foreclosed?

What a ridiculous argument from the not-debt guys.

We get it that you can invest your house equity etc, but that is not the point here. You are still playing with borrowed money. We get it that you can have a net worth in excess of your mortgage. Still, you have debt until you don’t owe money to anyone.

Rent versus own? Who’s to say that you have to rent? You buy a house and pay it off. That way you have an option other than having debt (mortgage) or renting.

I realize that paying a house off is a foreign concept these days (thanks to the financial gurus and their get rich schemes), but that’s what the idea is. Buy a house so you can own it someday. If you treat the mortgage like debt then you will most likely get there. That’s how people used to do it.

What are you getting at here? I haven't seen anyone suggest that you shouldn't pay your mortgage off...