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Dynamic Chiropractic – April 26, 1991, Vol. 09, Issue 09

To Mortgage or Not to Mortgage?

By Stanley Greenfield, RHU
That is the question. This question ranks right up there with such jewels as, "How high is up?" I'm not sure if there will ever be a clear cut definitive answer, but in my own way I too will attempt to confuse the issue even more. Quite a few of you have written or called me concerning this, so here goes.

Depending on who you talk to and in light of what tax change we are involved with, the answer could go either way. To begin with, why have a mortgage? That's an easy one and for the majority of us, it does not take a rocket scientist to answer. If we couldn't take advantage of leveraging with a mortgage, we couldn't afford to purchase a home to live in. That is one of the real advantages of a mortgage. For relatively little down, we can purchase a home with a much greater value, and pay it off over a period of years. Sort of a "pay as you go" plan. Inflation has us paying more for it with inflated dollars, but hopefully, the value is inflating as well. That, by the way, is not always the case. Yes, it is true that the interest we pay for this privilege is quite substantial, but thank goodness, at the writing of this article, it is still deductible for tax purposes.

Some may argue, why tie up all of your money in this one investment when, with the use of a mortgage, you can "have your house and invest too." That is valid as long as your "other" investments are appreciating at a greater value than the interest you are paying. Maybe these same people should be asking themselves, "Should I be using borrowed money to invest with?" That is exactly what they are doing. Now don't get me wrong, there is nothing wrong with this scenario, as long as you understand that is exactly what is happening. That question puts a different slant on things, instead of asking, "Should I pay off my mortgage, or invest the money?"

I use my infamous Greenfield Rule of Economics which states, "Money is worth what you can borrow it for."

There are some other factors that should play a very important role in determining your answer: taxes. Yes taxes, the wonder gift of economics that the Internal Revenue Service has bestowed upon us. For some reason still unknown to mankind, interest on a personal residence mortgage is still, at this time, deductible. Our last great bastion of tax relief, long may it last. By adding this into the equation, the "cost" of money is reduced, based on your tax rates, which, if you "read lips" or not, this author feels will soon be going up. The higher the rate, the lower the net cost of money goes. Keep in mind that the same holds true in reverse for your return on your other investments, especially if your investments are not sheltered from taxes.

If the interest rate on your mortgage is low, you have an additional "asset" that you must take into consideration, especially if you don't plan to live in this house forever. That is a feature that will enhance that marketability of your home, even in a bad market.

If you have a low mortgage rate and paying off your mortgage will deplete your reserves, it would make sense to keep the mortgage. What if it doesn't affect your cash flow? Then I would go back to the formula concerning the value of money. Does that mean that if your mortgage rate is high you should pay off the mortgage? That depends. (Spoken like a politician or a financial planner with an answer that no matter what happens they can always say, "See, I told you so.")

I know a lot of you feel that a mortgage is a lot of excess baggage and you should pay it off as soon as possible, especially before you retire. There is a lot of validity in that statement, but it does create a potential problem for the retiree. What if they have a lot of their money tied up in their house and run into a situation where they need cash. Yes they can borrow it "if" someone will lend it to them. Most lenders want to see your ability to repay that loan. That could be difficult to demonstrate at that point in your life.

There you have it, a clear cut answer. I'm just not sure what the question is that it answers.

Your comments and inquiries may be directed to:

Stanley R. Greenfield, R.H.U.
7240 Swansong Way
Bethesda, Maryland 20817

Please include a self-addressed, stamped envelope. Thank you.

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