One of the reasons I like to read the financial articles on the Yahoo Finance website is because they are often completely ludicrous, and it is like watching a train wreck. (This is my own personal opinion, I am sure there are plenty of people out there that just love these articles.) You think you might get some great financial advice. Instead, you end up just shaking your head…
The article in question is titled “Don’t Rush To Pay Off Your Mortgage”, and was actually written for the US News and World and Report website.
Now, I know that many people choose to invest their spare money instead of paying down their mortgage, and I have no issue with that. However, the reasons stated in this article to choose investing are laughable.
The author of the article, Adam Bold, fielded a question from a caller on his radio show about paying off a mortgage. The caller was wondering if he should cash in $50,000 of the $100,000 he has invested in a mutual fund to pay off his mortgage. Bold went through some mathematical discussion of how he could deduct the mortgage interest from taxes and such so that he was effectively only paying a 3.6 percent interest rate on the mortgage. I have no idea how Bold came up with half his numbers because without seeing an amortization table, we have no way of knowing how much the caller is actually paying in interest. (If he is at the beginning of his loan, he is paying a heck of a lot more in interest than if he is at the end of his loan. Based on the information given in the article, I don’t know how Bold can even come up with the numbers required to make an educated decision.)
Bold further justifies keeping the mortgage by stating that the caller should be able to count on a gain of 10 percent per year because that is the long term rate of return of the stock market. Where has this man been the last couple decades???? To me, it is financially irresponsible to tell people to make decisions based on such a ridiculously high rate of return. If my retirement portfolio had gained 10 percent annually since I started investing, we would be a heck of a lot better off than we are now. Sure, ten percent may be accurate if you go all the way back to 1926. However, usually people invest for a shorter time horizon than 85 years.
My favorite quote in the whole article is this:
“Many people believe they’ll attain peace of mind when they pay off their mortgage. They might share the Depression-era belief that the government can’t take their house away if they pay off their loan. I believe strongly that any peace of mind is outweighed by the potential benefits of keeping the money and investing it. “
So, the author is implying that people think “whew, my house is paid off, now the government can’t take away my home”??? I know that my motivation to pay off my house is not because I am afraid some random ‘government’ official is going to pull me out of bed one morning and set me out on the curb. (Besides, doesn’t the government bail you out of your underwater loans now anyway??) I want to pay off my mortgage so I have more freedom to do what I want instead of being constrained by debt.
I also take issue with how Bold can determine how much peace of mind anyone would have from paying off their mortgage. What about if we get another market ‘correction’ and that $100,000 is suddenly worth $80,000? Is the benefit in that scenario still outweighing the peace of mind you have from owning your own home? I seriously doubt it.
I will say though, the article did finally make sense to me when I got to the bottom:
“Adam Bold is the founder of The Mutual Fund Store, which provides fee-only investment advice with locations coast-to-coast. He’s also host of The Mutual Fund Show, a call-in radio program broadcast across the country.”
Big surprise. So this guy manages to get an article on US News and World Report and pushes his own agenda for financial gain. This is what is so wrong with the media. People cannot turn to it for honest information. The only thing is, not everyone knows that articles like this are not necessarily written with the reader in mind. Instead, it appears to be written to benefit the author.
{ 59 comments… read them below or add one }
How about having that $100K now worth $50K or $40K..
I’ve voiced the same opinion as yours, Kris. I don’t what kind of selection criteria editors at Yahoo! or US News & WR use to select their content, but apparently quality advice or blatant self-promotion by the author doesn’t seem to matter.
Adam Bold gets 10 points in the “What-a-Wanker” in the sweepstakes for Bad Financial Advice.
101 – who else is in the sweepstakes? We should make a list!
You are right, it could easily go way below 80k. I was being conservative! 🙂
One names springs to mind: Jim “What-a-tool” Cramer. A few more lightning rounds, and he may get upgraded to wanker status.
That’s a very funny comment 101!
101- He is not a wanker yet?
Read about how Mr. Monk (who is a monkey) is a better stock picker than Cramer and you may change your mind!
http://everydaytipsandthoughts.com/lessons-learned-from-primates/
Cramer does have *some* reasoned well-researchd, hence his lesser “tool” status. It’s the wankitude that gets spewed during those lightning rounds that hurts him.
Love Mr. Monk!
Bad call, US News. I guess they don’t understand conflict of interest. They probably have Center for American Progress people give them facts on marriage and the Huffington Post talk about how important bloggers are in shaping political debate.
10% risk free… ridiculous. If it were that easy, bankers wouldn’t bother financing mortgages… THEY would put all their money in the stock market.
Great points Nicole.
As I said, I have no issue with people choosing to invest instead of pay down their mortgage, to each their own. But I think Adam Bold was making some pretty risky assumptions in his article, and the conflict of interest was obvious once you reached the bottom.
The advice screams “conflict of interest”. Can Adam guarantee the caller 10% returns for the next decade? I truly hope the caller got a “second opinion”…no return beats the peace of mind when you’re mortgage free.
Index- That is what scared me, is teaching people that counting on ten percent is a good idea. That is way too risky for me, and probably most of the population.
Plus, his ‘peace of mind’ argument held no water for me. The market can either be up or down. So for a good part of the time, your ‘peace of mind’ may actually be panic because the market is not giving you that 10 percent return that you based your decision on.
Wow, you are right… that’s pretty lame of U.S. News to publish such garbage!
Some internet site channels (like this one), will let anyone publish whatever. Too bad this gives the author credibility that shouldn’t be given…
Good catch Kris!
Money Reasons- why US News basically allowed a ‘sponsored post’ disguised as a news article is beyond me…
I’ve heard Adam Bold on the radio before. Of course, he wants you to put money in the Mutual Store instead of your house. He can pick mutual funds and time the market better than you can so he deserves that fee on top of the fund costs (haha).
There isn’t consensus among the financial guru’s as to whether people are better off paying off their house or investing the money instead. Credible people take both sides of the argument (Ric Edelman, Baron’s #1 independent financial advisor in the US agrees with Bold). You have to run the numbers for yourself to determine what is best for you, your peace of mind and your individual financial situation. Interest rates are as low as they’ve ever been, so it might make sense to carry a mortgage– it certainly makes more sense now than when interest rates were at 8, 10, or 12 percent. For example, if you have a mortgage at 4.5% and interest rates kick back up where you can 6 – 9% on your money, you probably come out ahead holding a mortgage.
Biz, I TOTALLY agree that it is a decision that has to be made on a case-by-case basis. However,I also feel you need to use conservative numbers. It would be like saying you should be able to count on 3 percent interest on your savings account. We all know that interest rates are nowhere near that point right now. If they ever do get back in the range you mention where you can get an almost risk-free return of 6-9 percent and your mortgage rate is 4.5 percent, then it is a no brainer to invest. But that is not the case right now. For instance, I put more down on my mortgage right now because interest rates are pretty darn low (I still invest though). If rates went up to 9 percent, of course I would put that money toward investments as opposed to my mortgage.
Plus, I would get huge peace of mind if my mortgage was paid off. I could invest like crazy if that were the case. Counting on ‘peace of mind’ from your investments is insane because you very well could be setting yourself for failure.
What’s amazing to me is that is the most common financial advice that is being propagated out in the media. I’m glad to see your readers aren’t fooled!
I can’t wait to pay off my mortgage. I dream of having that chunk of $ every month to put someplace else that is not my mortgage!
Molly- isn’t that an exciting thought? It is the best of both worlds! Your house is paid off and you can invest without as much fear because no matter what, at least your house is paid off. (And the government can’t come steal it from you. 🙂 )
Unless you don’t pay your property taxes. Or you live in a state where the HOA is allowed to foreclose on you…
Nicole, I guess I am assuming that if you are responsible enough to pay off your mortgage, you generally will also pay your taxes and HOA fees. I know, I shouldn’t assume, but I am sure the percentage of people that get kicked out of a home that is fully paid off is quite small. (Exception being in places like Detroit where some houses are incredibly cheap but the taxes are crazy high.)
It’s not just the fees that HOA can get you for in some states… and it is actually easier for them to foreclose on you when you’re paid off because there’s no mortgage company to hire a lawyer to fight them. According to an NPR story I heard, the HOA thing is a pretty big problem in Texas.
Well, let me just say this. I know there are situations where people can get thrown out of their house, and I am not super familiar with HOA issues. I guess I was just referring to what Bold said that paying down the house instead of investing was really depression era thinking where people feared being thrown out of their house. I don’t know that people pay down their house because they fear the government will take it away. I think they pay it down so they have financial freedom to hopefully live life without debt and have more choices in life.
Biz of life also makes a good point.
I’m starting to feel bullish about the markets again (or if not bullish, then at least more safe)… so even when I’m done saving for summer I’m not sure if I’ll go back to heavy mortgage pre-payment. We’ll see how I feel in a few months.
Nicole, you know the saying… when the general public catches on to something, that means it is too late to invest. 🙂 (Or something like that)
I am bullish somewhat too, but careful. I invest, and I also put extra down on my mortgage. It is a balance so I kind of diversify our discretionary income. You can always do a mix of both.
Who says I’m the general public? 😉
One other thing……. Bold lives in Las Vegas where housing prices have been absolutely decimated. House prices are not stable, and don’t always hold steady or go up. You just can’t get a quote on your house every hour of the trading day. The long term return on stock market indexes has been in the 8 – 10% range (by long term, I mean 30 – 40 years or more). The long term return on houses has kept pace with inflation, 2 – 4%. The correction in housing prices we’ve just seen is a reversion to the mean.
Biz, you are right, Vegas is a mess right now.
In my mind, it doesn’t have to be an ‘all or nothing’ decision. You can pay down your house with some funds and invest some. Then you are protecting yourself in case one investment/asset goes down in value. (Hopefully not both, although we have seen that happen.)
Perhaps Bold is thinking you can also get a bailout on your home?
I agree that the very, very long term return on the market does out pace house appreciation. However, I don’t view my house as an investment anymore, it is almost comparing apples and oranges to me. I want my house paid off so I can have financial freedom. That is more important to ME than POSSIBLY making a couple extra percentage points on my investment. (which, by the way, I will pay taxes on.) I am the opposite of what Bold is suggesting – I would get much greater peace of mind from not having a mortgage than having extra money invested in a volatile market.
I paid off my house by a paying down my mortgage a little each month and used the rest to invest in the market. So I think you know where I stand on the issue. Most young investors have never experienced high interest rates. When I first started buying houses the interest rate on a 30 year mortgage was 10%. Higher rates are in our future. It is just a question of when and how much.
Those kind of things shouldn’t be an either/or. I’d do both myself, but if I was older I’d pay off the house just for cashflow purposes. Debt is debt, doesn’t matter if it’s a mortgage or not. I’d just rather have less money completely tied up in the house right now.
I worry for people with a big mortgage and for what’s going to happen when rates go up. Also know some people who are leveraging their investments – that I couldn’t do either.
I can’t imagine being older and having a huge mortgage, that would scare me half to death. (Unless I had millions in the bank.)
I also do both, and I think Mr. Bold would have been smart to advise a compromise between paying off the mortgage and investing.
It is a personal choice based on each individual’s numbers. But I like doing both. Extra money is sometimes used for investing, sometimes for paying off the mortgage faster and sometimes a bit of both. But the bigger chunks are for mortgage.
I agree, a mix of both is a good idea. Some people though can’t even stand the thought of investing in the stock market period and prefer to have all their money in the bank. The person’s risk level is very important when deciding what would give the most ‘peace of mind’.
Love this quote “Besides, doesn’t the government bail you out of your underwater loans now anyway??” So true, I’m not sure why people are so focused on paying off their mortgage at the expense of other investments. If you have a plan that is working, stick to it.
I couldn’t wait to pay down my mortgage some early in the loan because I hated how much of my payment went to interest. I wanted my mortgage payment to go towards equity, not interest.
It is a very personal decision, and you are right. If you have a plan that works for you, then that is great.
I hosted a guest post on a similar topic “Is Owing Your House Outright a Bad Idea?” and received a lot of heated comments. In the end, a home owner needs to make a decision about what they want in 5, 10 or 15 years. I think it’s a good idea to eventually pay off a mortgage if one is going to stay in a house for over 15 years, but it may not make sense if they’re thinking of moving in 5 or even 10. I don’t know, I’m sure there’s a calculator out there to help determine what’s best (I’ll try and hunt one down – I love free calculators!) I’m not sure how Bold was figuring out all the financial details for this caller (maybe he had background information or something) it would be interesting to know.
I know, I would have loved more details myself. As I said, with the info given in the article, it was hard to decide what the best thing might be. Of course, since he represents mutual funds, I am guessing ‘invest’ might be the answer no matter what.
I would try and pay off the mortgage quickly no matter how many years I was staying. But that is because I hate paying interest of any kind. But that is just my problem, and I wouldn’t recommend it to everyone by any means.
I like to put a little extra in every month to help pay down the principle. If I had a 100k windfall, there is no way I would put that toward the mortgage though. To me, that big chunk would be so much more useful invested.
Telling people that they can get 10% return is completely irresponsible though.
Hmm, maybe I will write a post about what I would do with a windfall.
This wasn’t necessarily a windfall, it was money he had accumulated, but I guess the net effect is the same.
Would you have taken half of it to pay down the 50k remaining on the mortgage though?
Great topic and great discussion! I especially like some of the rationalizations… Bold is from Las Vagas (Decimated real estate market)… Bold wants you to put money into the “Mutual Store.” These add texture to the story.
Ultimately, this is a risk-tolerance issue. It’s an unequivocal decision for me, but that’s because I know our risk-tolerance very well.
BTW, it’s easy to use math to justify or dispute whichever point of view… It’s all about the assumptions!
Very true Shawn, you can use math, statistics, whatever to justify whatever you want to do. ‘Facts’ can lie. For instance, the historical return of the stock market has been 10 percent since the 1920s. That does not mean it is a fact that you can always expect that high of a rate of return.
It is all about the risk tolerance. What gives me peace of mind may not give you any peace of mind.
Regardless, lets all invest in the Mutual Fund Store!!! 🙂
Information or advice can not used by everyone. You have to evaluate the information to determine if it is right for you. It was good you pointed out he has a bias because of his connection to mutual funds.
Krant- I think that was my biggest problem with this article, it was an obvious conflict of interest so I deemed his advice to not be credible. (Not to mention his justification seemed a little weak.)
I think I said earlier, it was more like a sponsored post than a legitimate financial article. (In my opinion)
Actually, I personally like holding low interest debt on my mortgage because I can and have gotten a BETTER LONG TERM, return on my cash through investing. But this is such a personal issue, with so many facets, that it is irresponsible to advise someone else without getting a lot of personal and psychological information!
Barb, I agree that you can definitely do better investing than paying down your mortgage in some instances. In your case, you are very knowledgeable about finance and obviously know your risk level and such. I would much rather read a post from you about WHY you chose to invest instead of pay down your house as I am sure it would not be loaded with things like how it isn’t good to have ‘depression-era thinking about paying down your house’ and assuming where other people get their piece of mind. You also know that ten percent a year is not a guarantee.
When I buy a house, I plan to pay if off as soon as I can. With that said, it does seem to be a poorly written article. With the interest rate as they now, it might be indeed possible to make better returns with the mutual funds and not pay the mortgage off. And I have seen number where it would make sense. BUT it is still a “might”, it depends on how far off the caller is to paying his mortgage off, what his interest rate is and what “his” rate of return is. For all we know, he might be a risk averse investor who never goes beyond money market funds. On the other hand, no advice is fit for everyone, so it is difficult to give advice that will be good for everyone in a single article. He should have atleast said what his assumptions are, like the mortgage rate and how he ended up with 10% ROI. Poorly written article nevertheless.
Suba, I really do wish they would have provided more info in the article. (Gosh, I hope the caller did provide more info than the author provided or else he should be fired for making about a million assumptions.)
When my mortgage is paid off, I will not be losing any sleep or peace of mind over the opportunity cost of how much more I could make while investing. I will just be focusing on what I can do with that extra money every month!
People actually pay him for this kind of advice! That’s a double whammy!
Just because it was mentioned in the media, it doesn’t mean that it is right. After all it is only an opinion. At least that’s how I take it. My boss paid off his mortgage when he was in his late 20s! Since then he never ever had any debt. He is my mentor, my inspiration and the best example of how to manage money. At least for me.
Aloysa- I can’t imagine my mortgage being paid off in my 20s. That would have been wonderful. Good for him for not hopping into a bigger house or something.
I am not only inspired, I am envious!!
Well, you know where I stand on mortgage debt. I hate it. It totally feels like a monkey on my back. Wow. We are on the same wavelength again. I just posted today that people (including myself) shouldn’t blog about topics that they have no expertise in because it leads to a lot of bad info floating around on the internet. The conflict of interest angle is also important. I don’t think a lot of people bother trying to understand the writer’s perspective and motive.
I love the extra cash flow I have now that one of my mortgages is paid off. I can’t wait to finish off the other one. My approach has always been to do a little of both investing and paying extra to manage the risk but I wouldn’t just do all mortgage or all mutual funds at the expense of the other.
First Gen – We do a mix of both too, but I really can’t wait until that payment is gone in 5-7 years.
There is so much BS out there on the internet. They needed to put the bio of this guy at the top of his propaganda so readers could understand his conflict of interest from the very beginning of the article.
One of the worst place for info is yahoo stock message boards. I don’t know how people live with themselves by pumping certain stocks and such for their own benefit.
This is really insane advice! Honestly, I have a credit card that I have a 1.99% interest rate on that I’m in NO hurry to pay off- it is like last on our list of debt- because in reality where else can you borrow money for 2%?
What credit card do you use that only has has 2 percent interest rate? Everyone should use that card!
I like what you have to say. That said if you are in debt pay off the highest rates first. The house payment intrest after taxes is pretty low.
DP- I totally agree, definitely pay down high interest credit card debt before you even think about paying extra on the mortgage!
I am not sure why (or the though process) but most high net worth balance sheets that come across my desk usually have their main residence paid off. Not their business properties or rentals which are usually leveraged, but their main property.
Evan, that is interesting. Maybe they needed to pay off their residence in order to have less debt so they could purchase their other rentals? Or, maybe they just thought it was a good idea to pay them off!
This is exactly the detailed explanation Iâ??ve been looking for to help clients understand that paying off debts is important, but the mortgage is â??cheapâ?? money. Robert T. Kyiosaki of the book Rich Dad Poor Dad still has a mortgage because he can use the money from his equity as leverage to invest in business.
Also, as far as tips on budgeting are concerned, itâ??s far more important to focus on eliminating high interest or any revolving debts.
The only risk I see with not accelerating the mortgages now, is that I donâ??t think it will be too long before the rates are high again.
Diversification is the biggest reason I can see to have investments other than your house. I’m a California bankruptcy lawyer, and far too many of my clients bought into the mantra that “real estate only goes up in value”. Rather than fund retirement savings or other investments, they poured every available dollar into the biggest mortgage they could obtain.
Now, real estate has crashed, and those folks are not going to be retiring on the equity in their homes. The stock market is also subject to ups and downs, but putting eggs in several baskets may temper the effect of those ups and downs.
Sometimes it pays to pay of a mortgage early.
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