From hliu at mindspring.com Wed May 26 13:41:43 1999
If you can swing the cash flow, which many buyers cannot
because they like to buy the most expensive house they can
afford, then a shorter mortgage is a better "investment".
I suppose you'll say I'm nitpicking, but this doesn't even hold up to the most rudimentary analysis. The only thing a shorter mortgage does is give you a quicker rise in equity; this is only a "better investment" to the extent that this equity is best "invested" in real estate -- many down markets can show clearly that in those times, a bigger longer mortgage is a better investment ... that way, less of your investment dollars can go into the equity that is losing value.
As we know, the system is always geared to favor the rich, so a
cash deal lets you capture 100% of the resl estate appreciation
over time less inflation.
Replace "real estate" with any other kind of investment that you "know will appreciate" (how about 'internet stocks') and you'll see this is flawed: the duration and size of a mortgage doesn't have anything to do with performance of your investment; it only has to do with the risk factors associated with your investment.
A 100% cash real estate transaction sucks if the market drops 20%; similarly, a big mortgage can leave you in the position to ride out the shock of a down market -- with the equity you saved from not paying full cash for your real estate, you might even pick up a bargain or two.
I think you don't understand leverage, risk, and performance.
Let's take an example. You have $100,000. It's Jan 1, 1998. Should you:
a) Buy a $100,000 condo for cash and have zero in the bank; presume
that in 18 months your condo is worth $115,000.
b) Put $20k down, borrow $80k for 30 years; take the other $80k and
set aside 18 months of monthly payments (18 * ~650/month = $11,700)
and buy 7500 shares of AMZN at a split-adjusted price of $9.
Today's split-adjusted price is $120-15/16, so your net profit on that stock trade that you missed by "getting the best investment by having the smallest mortgage" is about $840,000, more than enough to now pay off your measley $80k mortgage and still have enough to do something fun, like buy some influence in the Clinton Whitehouse.
In America, interest on one's residence is tax deductable, up
to a principal sum of $1 million plus $100K for renvoation. So
you have to calculate your income tax rate and compare it to
your mortgage rate and then calculate your total payment
because you can make an intelligent decision on which is the
best "investment".
This completely contradicts your statement above.
And has nothing to do with what Greg is talking about.
/jordan