Paying off the Mortgage

[Emanuel]

Hello everyone,

I recently picked up The Millionaire Fastlane and joined the forum. Excellent book and excellent site.

While reading through the first chapters of the book, I noticed that MJ DeMarco put quite a bit of emphases on staying out of debt and only buying what you really need and can afford.

However, he also says that the only debt he currently has is his mortgage. If you have the money to pay the house off, why pay interest on the mortgage year after year and after 20-30 years you end up paying 3 times as much for your house due to interest? I'm assuming that MJ can certainly pay off his house right now, but for some reason he doesn't.

The only logical reason that I can think of right now is that he already paid off more than half of his mortgage and now the majority of the monthly payments go directly to principal rather than bank interest. In this case, paying it all upfront would not make such a big difference.

Thanks in advance for any clarifications.

 

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[royalflush]

Because you need the money to reinvest it in your business so your business grows exponentially.

It's fine to pay for your entire house if you have the excess cash. But if you're bootstrapped, don't do it. You need the money.

 

[JAJT]

Like Mr. Flush said it's a matter of putting your cash where it works hardest.

 

[Emanuel]

Thanks for the answers!

I understand what you're saying but I assumed MJ has plenty of extra money considering he purchased sports cars throughout the years. If you can affod expensive cars (worst possible investment in most cases) then you can afford paying off your house. Why not just pay it off in that case rather than making a bank even richer?

 

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[royalflush]

Thanks for the answers!

I understand what you're saying but I assumed MJ has plenty of extra money considering he purchased sports cars throughout the years. If you can affod expensive cars (worst possible investment in most cases) then you can afford paying off your house. Why not just pay it off in that case rather than making a bank even richer?

Maybe he bought several houses or a REALLY BIG house.

You could flip a lot of houses with the money instead of paying for your entire house.

 

[JAJT]

I understand what you're saying but I assumed MJ has plenty of extra money considering he purchased sports cars throughout the years. If you can affod expensive cars (worst possible investment in most cases) then you can afford paying off your house. Why not just pay it off in that case rather than making a bank even richer?

I understand you are trying to understand the reasoning behind this question but the way you phrased this was a bit rude. I wouldn't be presumptuous about another individual's wealth situation or question why they don't spend it how you think they should.

If you google "should I pay down the mortgage" you will get a million results with a million correct (yet different and opposing) answers. Every answer usually comes down to the opportunity cost that comes with paying down the mortgage and personal preferences.

 

[Joe Cassandra]

If you have a 3.5% interest on house (not unheard of nowadays) but you have an investment where you make 10+%, it would make more sense to invest in the 10% and keep the mortgage.

Somethings of course, like peace of mind, may not be bought, so if it is for a psychological reason, than sometimes it is better to pay off the mortgage. If your business needs the cashflow, don't cripple yourself by taking a chunk out of the company (not to mention you'd pay tax on that dividend out).

 

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[Emanuel]

I wasn't trying to be rude at all and I apologize if it sounded that way.

Mortgage debt is one of the worst debts to have since you have to pay interest for 30 years in most cases and until you pay off the last dollar of the mortgage, the house actually belongs to the bank. If you're investing all your money in other things then it certainly makes sense not to pay it off. However, if you have an excess of money that are not doing much, I think it would be a good idea to pay the mortgage off and have one less thing to worry about.Since the book promotes getting rid of debt, I just wanted to know why MJ hasn't paid off his house yet. I would first get rid of all my debt before buying a $100K sports car that loses half its value after 10 years. However, I'm sure MJ has good reasons for not paying it off.

Thanks for your clarifications.

 

[themaxx]

Maybe the mortgage costs him 4%, but he can make 10 or 20% by investing it.

 

[MJ DeMarco]

Since the book promotes getting rid of debt, I just wanted to know why MJ hasn't paid off his house yet.

I don't have a mortgage any longer.

However, he also says that the only debt he currently has is his mortgage. If you have the money to pay the house off, why pay interest on the mortgage year after year and after 20-30 years you end up paying 3 times as much for your house due to interest? I'm assuming that MJ can certainly pay off his house right now, but for some reason he doesn't.

When I wrote TMF I was in a house with a mortgage.

Since then, I sold that house and have bought another. This time I paid cash.

Here's what I wrote in another thread:

I can't speak for the other folks, but my answer is NO; I only carry consumption debt.

I own my house free and clear. I own my car(s) free and clear. I have credit cards which I pay off monthly and never carry a balance. I have ZERO debt outside of my consumption debt, things like the electric bill, insurance, gym memberships (belong to two clubs), pool guy, landscapers, cell phone, etc.

I've done both (owned houses/cars with debt, using RichKid's analogy) and truly much prefer going it cash.

I find there's a big mental difference between being affluent and owning stuff with debt attached to it, and being affluent and owning stuff with NO debt attached to it. Living like a king while having no rent or mortgage payment is bliss.

Had I decided to stay in that same house, yes, I would have eventually paid off the mortgage with a lump sum payment.

 

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[Emanuel]

Thank you for your answer MJ.

 

[Chadi]

Thank you for your answer MJ.

I'm curious as to what will you do now that you have the answer?

 

[Emanuel]

I'll finally be able to sleep at night.

On a more serious note, I found it surprising that MJ still had his mortgage and I wanted to know the reason. Turns out he paid it off which is what I would have expected. Did my question bother you chadif?

 

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[mikekob]

I would also guess instead of dropping 500k on a house cash with a 3-5% interest rate the money would be better served in a higher interest rate investment.

Sheesh... Apparently that was mentioned. Like 6 times.

 

[MJ DeMarco]

I would also guess instead of dropping 500k on a house cash with a 3-5% interest rate the money would be better served in a higher interest rate investment.

From an investment perspective, that would seem to logical. However, I'm not operating from an conventional financial perspective. What happened in Cyprus also changed my opinion. I'd rather be free in a house than be burdened to a bank. I view $1M+ is a lot safer in a house than sitting in a bank. And having done both (house w/mortgage VS house paid cash), I can honestly say there's no going back... ever.

 

[Emanuel]

I would also guess instead of dropping 500k on a house cash with a 3-5% interest rate the money would be better served in a higher interest rate investment.

Sheesh... Apparently that was mentioned. Like 6 times.

Such as sports cars? This is why I even asked the question. MJ wast still in "debt" at the time he purchased his Lamborghini. Why not get rid of the debt first and then buy toys and whatever else you want? I just found it interesting that he mention in the book that he still has a mortgage while he's driving an exotic sports car.

You should always stay as far away from banks as you possible can. If you have debt, banks own you.

In any case, it has all been clarified now. Perhaps MJ's view on this matter changed in the last few years, since he now paid off his house.

 

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[MJ DeMarco]

If you have debt, banks own you.

The bank didn't own me. I could have written a check at anytime to pay it off. However at the time, I viewed my cash was better invested elsewhere. I think the mortgage was at 4% so I could deploy the money at 6%, pay the mortgage, and make 2% on the top. That can be done as well today since rates are even lower.

 

[Chadi]

I'll finally be able to sleep at night.

On a more serious note, I found it surprising that MJ still had his mortgage and I wanted to know the reason. Turns out he paid it off which is what I would have expected. Did my question bother you chadif?

No it didn't bother me. I was just curious to know how will you use MJ's answer specifically in your situation.

 

[DeletedUser394]

Do you have a mortgage?

 

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[Emanuel]

The bank didn't own me. I could have written a check at anytime to pay it off. However at the time, I viewed my cash was better invested elsewhere.

But they owned your house

I can certainly see how sometimes investing the money in your business or in something could be much better than paying your debt off, but buying expensive cars and other materialistic things is not usually a good investment. Thus, I don't think all your money was better invested elsewhere at that moment in time. If you were to go back, would you have paid the house sooner rather than purchasing cars or other things that quickly lose their value?

Do you have a mortgage?

Not me directly (will have one soon) but my parents do and they paid about 75% percent of it in 5 years. Now almost all the money goes in principal. If they had an excess of money that they weren't using, I'm pretty sure they would pay it off.

I'm enjoying the discussion everyone and I hope I didn't sound rude to anyone. That is not my intention at all. Thanks for your answers!

 

[MJ DeMarco]

But they owned your house

And right now, the county owns my house if I don't pay the property taxes. The objective is not to ignore the game, it's to minimize it.

but buying expensive cars and other materialistic things is not usually a good investment.

They never are. I never considered them "investments".

If you were to go back, would you have paid the house sooner rather than purchasing cars or other things that quickly lose their value?

I'm afraid you don't understand. It was never an EITHER / OR -- gee, do I buy a Lambo or pay the house off? It could have been both, one, or neither. Cash is king because it gives you choices. It was a choice I didn't deem important at the time. And yes, I have no regrets on how I managed the situation.

 

[Emanuel]

Fair enough. Makes sense MJ

 

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[healthstatus]

I would also recommend that if you are going into debt to structure it with a 10 or 15 year mortgage, so you minimize the interest payments, and you put 20+% down so you don't have to carry mortgage insurance.

 

[D11FYY]

And right now, the county owns my house if I don't pay the property taxes. The objective is not to ignore the game, it's to minimize it.



They never are. I never considered them "investments".



I'm afraid you don't understand. It was never an EITHER / OR -- gee, do I buy a Lambo or pay the house off? It could have been both, one, or neither. Cash is king because it gives you choices. It was a choice I didn't deem important at the time. And yes, I have no regrets on how I managed the situation.

I can guarantee when MJ first Sat in his Lambo the feeling he must have had was overwhelming to say the least as I presume it seemed his idealistic goal.
If you read through the forum you will see that he sold it and is quite glad not to own one again for the simple fact of idiots and the unwanted attention it brings (surmising again).
Well what makes sense pay off your house in 1 go pay 1/2 and have the rest of the money work for you giving you flexibility for more investing/business capital.
If I where to have the money to buy a exotic I would do so out of the auctions with a 5-10k markup run it for a few months and sell it on. Logical thing imo