Do you consider your mortgage "debt"

[Flames Fan, Ph.D.]

1. It's debt. No one can claim otherwise.

2. Whether it is good debt or bad debt depends, like all investments, on the moment in time when you made the investment (median home price at the time, interest rate, quality of neighbourhood at time of purchase versus in the future). For a long time, thanks to steadily increasing house prices, people forgot that a mortgage is a levered investment that carries risk. Now it's evident that there is no free lunch.

3. I agree with Phanuthier that it is does look like someone is talking their book. If the mortgage was this great, pure-as-the-driven-snow debt that ranked above school debt and all others, then there would not be all these mechanisms of gambling on prevailing interest rates through your mortgage. Everyone would be satisfied with their golden investment.

4. I would argue that, as with most debt, people take on mortgage debt at levels higher than what is economically advantageous to them. I'm fortunate enough to make a great salary that places me in the top 15% of earners in the US... but if you looked at house prices, you'd think I was barely in the middle of the pack. The distortion isn't because I'm cheap (really i'm not!), but because homes remain historically expensive. Part of that is the emotional security brought by home ownership, and part of it due to the historical assumption that it is a "safe" investment.

[troutman]

Is it "good" to borrow for any of the following purposes?

- To buy an engagement ring

- Breast enlargement

- Braces for your kid

- Flames Season Tickets

- Crazy Vegas Weekend

- A new suit for that big interview

- to repay a gambling obligation before Rocco breaks your legs

[Phanuthier]

Originally Posted by return to the red

Just thought of something. If you have rental properties but carry a mortgage on those properties would you concider them debt still or an investment?

Its both. I think if you are in the business of rental properties and you don't consider mortgages on your rental properties as a debt, you might want to find a accountant pretty soon here.

As for what I would consider the "best type of debt" ... I would go with :
a) student loans. Gives you a solid foundation for the future. If you don't need it for tuition, you can invest it as well, at good rates.
b) cars? I think they get better rates?
c) real estate? or what should go here is whatever gives you the best rate

Either way, if I could generate any extra available cash, I'd put it in the market somehow. Like I said, my parents did the real estate gig and I get it... but for the risk/returns/etc I would take the market any day of the week.

If you are worried about risk, I would argue throwing your money at the NASDAQ, DOW, S&P500 are better in terms of return, liquidity and safety.

[chemgear]

Originally Posted by troutman

Is it "good" to borrow for any of the following purposes?

- To buy an engagement ring

- Breast enlargement

- Braces for your kid

- Flames Season Tickets

- Crazy Vegas Weekend

- A new suit for that big interview

- to repay a gambling obligation before Rocco breaks your legs

Absofrickenlutely!

[Flames Fan, Ph.D.]

Originally Posted by Phanuthier

Its both. I think if you are in the business of rental properties and you don't consider mortgages on your rental properties as a debt, you might want to find a accountant pretty soon here.

As for what I would consider the "best type of debt" ... I would go with :
a) student loans. Gives you a solid foundation for the future. If you don't need it for tuition, you can invest it as well, at good rates.
b) cars? I think they get better rates?
c) real estate? or what should go here is whatever gives you the best rate

Either way, if I could generate any extra available cash, I'd put it in the market somehow. Like I said, my parents did the real estate gig and I get it... but for the risk/returns/etc I would take the market any day of the week.

If you are worried about risk, I would argue throwing your money at the NASDAQ, DOW, S&P500 are better in terms of return, liquidity and safety.

Completely agree with the last point: I should have written earlier that the home is a concentrated, levered debt. If you told someone you were going to take out a 200K loan and use it all to buy one single stock, they would hopefully tackle you right there. But with a home, we perceive that concentration to be good

The only place I would part ways with you is on car loans. Cars, almost by definition, depreciate. So the money used to buy a car is (practically) never going to be recouped. You're really paying solely for the utility in this case.

[Robbob]

I would consider it debt, but as many have mentioned it definiately good debt to have as long as you are on the right side and have some equity.

[Phanuthier]

Originally Posted by Flames Fan, Ph.D.

The only place I would part ways with you is on car loans. Cars, almost by definition, depreciate. So the money used to buy a car is (practically) never going to be recouped. You're really paying solely for the utility in this case.

True, I get that a car is a depreciating asset. (One reason I drive a Civic and not a BMW.) However, a car is a necessary evil where most of us live... so if you're going to own a car, and you have the credit rating to back it up, wouldn't you rather take the low interest rate, and put your cash in the market?

[photon]

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.

Where do you get that $100,000 in capital?

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%?

Would it? Do the math. How long would it take you to save $100,000 to invest? Compare the two, I borrow $100,000 and invest at 9% return and pay 4% interest, you save for x years and then invest at 9% with no interest. How much will we each have after 20 years? 40 years?

Originally Posted by return to the red

Just thought of something. If you have rental properties but carry a mortgage on those properties would you concider them debt still or an investment?

It's still debt; money borrowed and payed back over time. It's also an investment; something purchased for the purposes of increasing value or generating revenue.

It's also debt that someone else is paying for you.

[bomber317]

Originally Posted by Phanuthier

True, I get that a car is a depreciating asset. (One reason I drive a Civic and not a BMW.) However, a car is a necessary evil where most of us live... so if you're going to own a car, and you have the credit rating to back it up, wouldn't you rather take the low interest rate, and put your cash in the market?

I'd paid the car off outright if I could. That's just what I would do. I don't believe there's a black and white answer for your scenario.

If there are no brainers such as 0% interest for X number of months on your car payments, and you have a high savings account, then I'd definitely take the low interest loan and stick the cash in the account.

I personally do not want to be left in a position where I need to cash out an investment not on my terms especially if I had to take a loss.

[Phanuthier]

Originally Posted by bomber317

I'd paid the car off outright if I could. That's just what I would do. I don't believe there's a black and white answer for your scenario.

If there are no brainers such as 0% interest for X number of months on your car payments, and you have a high savings account, then I'd definitely take the low interest loan and stick the cash in the account.

I personally do not want to be left in a position where I need to cash out an investment not on my terms especially if I had to take a loss.

Thats fair. I'm also comfortably hold 100% of my money in the stock market sans $8k of emergency money, with at least $20k of stocks that I feel are liquid. No bonds, CD's, preferred shares, high interest account or anything like that for me.

[kevman]

Originally Posted by Phanuthier

b) cars? I think they get better rates?

That they don't... "0% financing" is a trick. Find car with said financing incentive and offer to pay in cash - I guarantee you'll get a better deal!

[photon]

Cars are another interesting thing, Phanuthier you say that's why you drive a Civic and not a BMW, but as you say it's a necessary evil so I'd be more focused on what the cost of driving the car per period of time was..

If a $20k car is worth $10k after x period of time, and a $40k car is worth $30k after the same period, I'd rather drive the $40k car (presuming that it's a car that's more enjoyable to drive, otherwise no) all things being equal.

Though Civics from what I understand hold their value well so the comparison between a Civic and a BMW probably isn't a good one.

Our last two cars we purchased outright (one brand new, one slightly used), and I'm finding that the amount of $$ put into them plus the purchase costs is almost the same as making car payments.

I think the ideal is to buy a car fairly new, drive it till the warranty expires, then sell it

[Phanuthier]

Originally Posted by kevman

That they don't... "0% financing" is a trick. Find car with said financing incentive and offer to pay in cash - I guarantee you'll get a better deal!

Really? What is the trick? I actually paid for my car in cash, cause I didn't like my financing options.

[kevman]

Originally Posted by Phanuthier

wouldn't you rather take the low interest rate, and put your cash in the market?

You'd be better off offering to pay cash, getting the bigger cash discount, paying cash for the car, opening a personal LOC to borrow money to invest and writing off the incurred interest from your LOC...

[Phanuthier]

Originally Posted by photon

Cars are another interesting thing, Phanuthier you say that's why you drive a Civic and not a BMW, but as you say it's a necessary evil so I'd be more focused on what the cost of driving the car per period of time was..

If a $20k car is worth $10k after x period of time, and a $40k car is worth $30k after the same period, I'd rather drive the $40k car (presuming that it's a car that's more enjoyable to drive, otherwise no) all things being equal.

Though Civics from what I understand hold their value well so the comparison between a Civic and a BMW probably isn't a good one.

Our last two cars we purchased outright (one brand new, one slightly used), and I'm finding that the amount of $$ put into them plus the purchase costs is almost the same as making car payments.

I think the ideal is to buy a car fairly new, drive it till the warranty expires, then sell it

Ha, actually I did my research. In addition to wanting good mpg and certain features like manuel transmission, the deciding factor for me on a Civic versus Mazda's, et al was Civic's had one the best holding value and 2nd lowest maintainence (besides Corolla). I also wasn't willing to pay over $20k, and wanted to keep it below $15k, but I wanted <10k miles because I didn't want a big maintainence bill. Then I held out for months until one came on the market.

I honestly can't wait till zipcar comes to my area, so I can get rid of my car. All I need is my bike and my motorcycle, then the occasional time I need a car, just use zipcar.

[kevman]

Originally Posted by Phanuthier

Really? What is the trick? I actually paid for my car in cash, cause I didn't like my financing options.

Asking

Car manufactures don't get some magical 0% rates from the banks they then pass on to you. They offer 0% financing as a purchase incentive since they are obviously losing money at that rate. Every time I've ever looked in to "0% financing" there is always a cash back incentive that is exclusive to it and often much more lucrative. When I bought my new truck I could get 0% financing for 4 years or a $5,000 cash incentive.

Based on the amount I borrowed and the fact that I could pay it down at my own pace (faster) it made more sense to take the cash. That and interest on a car loan isn't tax deductible where as interest on an investment is. Double win.

[Cecil Terwilliger]

Other than a few drive-bys this has been a very well posted thread.

Good on ya CPers. Hard to find a thread where people discuss an issue rather than belittle each other and point out each others shortcomings.


And just to stay on topic, the obvious answer is yes but when we look at Trevor's points about the nature of the debt, I do agree that generally mortgage debt is good debt. It has its downfalls though, no doubt.

[Deegee]

Mortgage loans aren't always debt. For a Mortgagee it's an asset.

[Rathji]

Originally Posted by MarchHare

Out of curiosity, if you had spent $300k on a home in Calgary in 1986 (25 years ago), how much would it be worth today? I honestly don't know the answer, but I suspect over that period the average home in Calgary has appreciated more than 100%, even after the market downturn of 2008.

I know that homes that sold for $110k - $120k in 1996, sell for ~ $300k+ now.

I am guessing that a 300k house would be worth somewhere around $750k worst case.

[blankall]

Originally Posted by Flames Fan, Ph.D.

1. It's debt. No one can claim otherwise.

2. Whether it is good debt or bad debt depends, like all investments, on the moment in time when you made the investment (median home price at the time, interest rate, quality of neighbourhood at time of purchase versus in the future). For a long time, thanks to steadily increasing house prices, people forgot that a mortgage is a levered investment that carries risk. Now it's evident that there is no free lunch.

3. I agree with Phanuthier that it is does look like someone is talking their book. If the mortgage was this great, pure-as-the-driven-snow debt that ranked above school debt and all others, then there would not be all these mechanisms of gambling on prevailing interest rates through your mortgage. Everyone would be satisfied with their golden investment.

4. I would argue that, as with most debt, people take on mortgage debt at levels higher than what is economically advantageous to them. I'm fortunate enough to make a great salary that places me in the top 15% of earners in the US... but if you looked at house prices, you'd think I was barely in the middle of the pack. The distortion isn't because I'm cheap (really i'm not!), but because homes remain historically expensive. Part of that is the emotional security brought by home ownership, and part of it due to the historical assumption that it is a "safe" investment.

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.

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.

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.

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

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.