April 24th, 2020 9:55 AM by Jackie A. Graves, President
Battered by the one-two punch of an uncertain economy and a volatile stock
many homeowners are rethinking their relationship with debt.
In boom times, it can make sense to mortgage your home, which
typically appreciates in the single-digit range, and use your excess cash to
invest in stocks, which had been soaring until early 2020.
And in tough times, the conventional wisdom advises paying down
the mortgage while eschewing investment risk.
During the economic slowdown caused by the coronavirus pandemic,
which approach is the correct one? Advocates for both strategies make
compelling cases, and the reality is that the right answer for you probably
depends on your tolerance for financial risk.
Thomas Anderson, the author of “The Value of Debt in Building
Wealth,” says the instinct to pay down the mortgage in tough times is a natural
one — but you should ignore that urge.
“When times are bad, the gut reaction is, ‘I should be paying
down debt,’” says Anderson, who runs Anasova, a personal finance marketplace
headquartered in Chicago. “People should actually be doing the opposite.”
Chris Hogan, the author of “Everyday Millionaires,” disagrees.
He advises clients and audiences to pay down their mortgages as quickly as
possible, and especially when the economy hits a rocky patch.
“I’m allergic to debt,” says Hogan, a Nashville-based financial
coach and a protege of Dave Ramsey, the prominent financial guru. “I see debt
as a threat.”
Which approach you take
depends on your appetite for risk
Both strategies are correct in theory, says Ken Johnson, a
housing economist at Florida Atlantic University. Using debt as leverage to
boost returns is a common practice in the financial world. On the other hand,
there’s much to be said for the cozy feeling created by an utter lack of
creditors seeking monthly payments.
“You can’t go broke if you don’t have any debt,” Johnson says.
Which approach is right for you really depends on how you feel
about debt and how comfortable you are with the market’s inevitable swings.
“The average person has to fall back to, ‘What is my tolerance
for risk?’” Johnson says. “It’s well established in academic research that
different people have different tolerances for risk.”
Personal preference isn’t the only variable. Risk tolerance can
shift with economic cycles, too. In an episode of the classic TV series “All in
the Family,” Archie Bunker burned his mortgage after he paid it off. Archie was
old enough to remember the Great Depression, and he adjusted his risk tolerance
accordingly. Today’s generations are accustomed to low mortgage rates, and
they’re more comfortable owing money on an asset that usually appreciates.
While the pro-debt Anderson and the anti-debt Hogan have
divergent views on home equity, they agree on the basics of building wealth.
Both hate credit card debt, both suggest building emergency savings accounts
with six months of living expenses, and both urge investing for retirement.
But for those who already have achieved homeownership and
financial stability, the two experts espouse very different approaches to using
the value of your residence.
Hogan advises putting 15 percent of your income toward
retirement savings and using excess cash to trim mortgage debt. He sees debt
not as a tool but as an insidious enemy that must be attacked.
“I know this about debt: It brings risk,” Hogan says. “Debt
doesn’t care if your kid is sick or if you’re sick or if you lost your job. It
Hogan interviewed millionaires for his most recent book, and he
discovered a common theme: Many paid down their home loans as quickly as they
If you must have a mortgage, Hogan advises, take a 15-year loan,
because you’ll retire the debt more quickly and pay much less interest than
with a 30-year mortgage.
About 37 percent of owner-occupied homes in the United States
were owned without a mortgage as of 2018, according to the U.S.
Census Bureau. The other 63 percent of homeowners should accelerate the day
they make the final payment, Hogan argues.
“When you get that deed to your house and you realize you own it
now, it’s a game-changer,” Hogan says. “You get the gift of options.”
Instead of diverting money to a monthly mortgage payment, you
can route that money to saving and investing.
Anderson, on the other hand, takes a contrarian view. While he
says Americans are right to avoid credit card debt and to quickly retire
student loan debt, Anderson argues that too many consumers have learned the
lesson that all debt is bad.
“Yes, there’s value to owning your house outright,” Anderson
says. “Of course there is. But there’s also a value to having $100,000 in the
He cites $100,000 as a hypothetical number. It might be more or
less depending on your situation. But say that instead of paying off the
$100,000 you owe on your mortgage, you hang onto the $100,000 and continue
paying the loan.
You can use the $100,000 to make an investment if you see an
opportunity, or to provide a cash cushion should you lose your job. Anderson
notes that it’s almost impossible to tap into your home equity if you apply for
a loan without a steady income.
“If you don’t have a job, what you need is money,” Anderson
Assuming that the rest of your financial situation is stable,
making monthly payments on a home loan shouldn’t create undue stress.
“People are so quick to want to own their house but not have
cash,” Anderson says. “I sleep well at night if I have $100,000 in cash. Cash
With mortgage rates near record lows, using your home equity as
a tool is a wise move, says Anderson. He calls it “strategic debt,” and
he says that if you redirect your home equity to tax-advantaged retirement
savings, you’ll reach retirement with far more in your portfolio than if you
had focused on paying down your mortgage.
In “The Value of Debt in Building Wealth,” Anderson lays out
three scenarios that illustrate how leverage can affect your retirement
savings. He starts with a 35-year-old homeowner, household income of $120,000 a
year and a $300,000 interest-only mortgage. The homeowner has $30,000 annually
to devote to mortgage payments and retirement savings, and earns a 6 percent
annual return on retirement savings. Here’s how the results would stack up:
The no-debt approach gets you to retirement with $1 million: Say you despise
debt and spend extra income not on retirement savings but on retiring the
mortgage. After 12 years of mortgage payments of $2,500 a month, you’re
debt-free. At age 47, you redirect the $2,500 that had gone to the mortgage
into retirement savings. You’ll reach retirement age with $1 million, Anderson
The medium-risk approach gives you a nest egg of $1.25 million: With this
strategy, you opt to pay just $1,250 per month toward your mortgage and devote
the other $1,250 to retirement savings. You’ll hit age 65 with $1.25 million in
the retirement account and pay off the mortgage at age 65.
The high-leverage strategy creates a retirement account of $1.45
million: Instead of aggressively paying down the mortgage, you pay only
the interest on your mortgage, which costs $750 a month. You put the remaining
$1,750 toward retirement savings. At age 65, your retirement nest egg has grown
to $1.75 million. Even after subtracting the $300,000 you still owe on the
mortgage, your account balance is worth $200,000 more than that of the
medium-risk approach and $450,000 more than the no-debt approach.
The difference is mainly because of the effects of compounding.
By investing early, you get more time for your investments to grow in value.
Anderson acknowledges that his scenarios are hypothetical. For instance, he
assumes a 6 percent average return; your portfolio might do better or worse.
What’s more, paying interest only for three decades would
require taking out a new adjustable-rate mortgage (ARM) every five or 10 years.
And, of course, ARMs carry the risk of rising rates.
While Anderson advises using leverage, he also suggests a calculated
approach to employing debt as a tool. Don’t borrow more than you can afford to
repay, and don’t take money that a lender would deem risky.
So don’t take a loan that requires you to pay private mortgage
insurance, and don’t pay more than the average rate on a 30-year fixed-rate
mortgage, which stood at 3.55 percent as of April 22, according to Bankrate.com data.
“Get to the maximum amount you can borrow at the lowest rate,”
For most homeowners, that would mean borrowing 80 percent of
their home’s value. Your goal: Borrow money cheaply and then use your
investment portfolio to generate returns higher than your mortgage rate. With
rates at rock-bottom levels, Anderson predicts, taking out a loan today will
look like a savvy move years from now.
“I don’t think I’m going to wake up and hate myself for that,”
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