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Rick is right, folks. The thing you guys are forgetting is that interest paid on mortgages is tax deductible. This means that your effective interest rate is considerably lower than the stated rate once you consider the tax benefits.

For example, assume the following:

1) Loan amount of $150,000
2) Interest rate of 6%
3) Term of 30 years
4) 30% tax bracket for borrowing individual

Over the term of that 30 years, you'd pay $173,757 worth of interest. But at the same time, you'd save $52,127 over that same 30 years in taxes from the interest deductions. Thus, you'd have an effective cumulative interest of $121,630 ($173,757 - $52,127).

That being the case, your effective interest rate is closer to 4.5% than the stated rate of 6%. It may be even lower... the higher your tax bracket, the more your tax savings and the lower your effective rate. The prevailing thought is that you can invest your money over that 30 years at a higher rate than your (this example) AFTER TAX interest rate of 4.5%, meaning you'd be to the plus with any money you DON'T invest in your mortgage, but DO invest in an effective portfolio/401k/IRA/whatever.

So, the point is, borrow for as LONG as you can, as cheaply as you can, because you're borrowing cheaper than you can make money (you do believe your portfolio can do better than 4.5% over the long term, yes?) and invest whatever you have left in tax-deferred vehicles and you'll actually come out way ahead of where you would if you put the money in your house.

I know this will never convince a number of you, but this is standard practice amoung people "in the know" financially. You don't have to believe it, but you should ask someone you trust that knows what they're talking about before passing judgement. Hope this helps,

Jeff

Rick is right, folks. The thing you guys are forgetting is that interest paid on mortgages is tax deductible.

Screw the IRS and their complicated formulae. Screw the financial institutions while you're at it.

"Get out of debt" is the best advice I gave to one of my Army friends before he retired with a fat paycheck as a Colonel.

It seems to me that Rick's argument is based on a presumption that you can substantially gain more by investing your money elsewhere than in reducing the debt. That is often true, but it really hasn't been true in the last couple of years. If you had invested that money in the stock market, you might well have negative returns.

And, unless you're investing in some tax-sheltered investment, you have to consider what your after-tax return really is. Look at my calculations in post 22. I don't think I can guarantee a 20% return on my money for the next 10 years anywhere else. Where am I wrong?

Over the term of that 30 years, you'd pay $173,757 worth of interest. But at the same time, you'd save $52,127 over that same 30 years in taxes from the interest deductions. Thus, you'd have an effective cumulative interest of $121,630 ($173,757 - $52,127). That being the case, your effective interest rate is closer to 4.5% than the stated rate of 6%.

The effective interest is immaterial. You're still out over $121k. If you take out a 15 yr loan at the current rate of 4.5%, your interest would be $56,548. Lop off that 30% and you're still out $39,584. $121,630-39,584=82,046. That $82,046 is money paid on interest that will never do anything for you.

Absolutely correct on the true value of a mortgage! I was trudging through this now-huge post and was wondering if anyone was going to point this out. The true cost of a mortgage loan is often much less than than it seems.

To take the logic just a little further: how long will interest rates and other rates of return (stock market returns, certificates of deposit, etc.) remain as low as they are today. Six months? One year? Two years? If you think you can make 5% or more annually through some other investment, you should consider maximizing your mortgage and investing the cash. Risk of loss is something else to consider: a Baby Boomer with retirement in a few years will want to steer away from riskier investments, but the point is still the same. The totally risk-averse person should just go ahead and pay down the mortgage - which is a nearly risk-free return equal to the mortgage rate.

Locking into a generally long-term mortgage at today's ridiculouslly low rates is a very good thing for several reasons. First of all is the obvious lower interest rates. Second, this will generally provide the lowest minimum payment. A lower minimum payment maximizes your personal liquidity and ability to deal with unexpected problems without the threat of defaulting or messing up your credit scores. Third, you can almost always make additional principal payments.

"So, the point is, borrow for as LONG as you can, as cheaply as you can, because you're borrowing cheaper than you can make money (you do believe your portfolio can do better than 4.5% over the long term, yes?) "
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And with the current low ortgage interest rates, if they just break even, i.e. they only get as much return on the investment as what they are paying in mortgage, it covers the interest and preserves their flexibility of having the cash, should something happen, or for retirement.