

Putting Money Down Gets You A Cheaper Mortgage






Your Mortgage Interest Might Not Be Deductible

Douglas also always assumes that your mortgage interest is 100% deductible.  Remember that in 2013 a married couple gets a standard deduction of $12,200.  To deduct mortgage interest, you have to file schedule A and itemize your deductions.  If you don't have more than $12,200 in deductions, your mortgage interest is completely non-deductible since you're going to be taking the standard deduction anyway.  For your mortgage interest to be completely deductible, you need to have at least $12,200 in OTHER deductions.  Most highly-paid professionals don't take the standard deduction, but 70%+ of Americans do (probably including the couple making $72,000 that Mr. Andrews keeps using as an example in his book.)  How big of a mortgage do you need at today's rate to pay more than $12,200 in interest a year?  $375K.  I hope you're giving a lot to charity or paying a lot of state taxes if you're planning on your mortgage interest being fully deductible.

You Have To Be Foreclosed On To Lose Home Equity

Douglas seems to have this irrational fear of losing home equity in a foreclosure.  He wants to keep it out of the home so he can't lose it to the bank when the bank takes the home.  I understand why he has this fear, since he reveals in the book that he lost his home to foreclosure and lost $150K in equity in his early 20s.  The financial professionals who read this blog tend to have very stable incomes and are rarely foreclosed on, especially if they keep a reasonable emergency fund.  I'm only six years out of residency and my portfolio is already larger than my entire mortgage.  This fear is highly overblown in the book.  Home equity might not be an FDIC-insured bank account, but I certainly wouldn't consider it a risky investment because I could lose the house to the bank.  I'm sorry you lost your house Doug, but perhaps you shouldn't have bought a 6400 square foot house at age 24 on a highly variable income.

You Still Have To Service The Debt

The book suggests you pay lots of that tax-deductible (maybe) mortgage interest because paying mortgage interest is just as good a tax deduction as contributing to a 401K.  But the fact remains that you can stop making $401K contributions at any time if you run into financial trouble.  You still have to make those house payments, or you'll lose the house.  Perhaps Doug doesn't mind losing his houses since he doesn't have any equity in them, but there are serious consequences to a foreclosure, none of which I want to deal with.  First, your credit score gets slaughtered, making it very hard to get any loan at all for 7 years.  Second, you have to uproot your family out of your neighborhood, perhaps leave your church congregation, and pull the kids out of their schools.  Not to mention the costs and hassles of actually moving.  Third, I don't know of anyone who's been through a foreclosure who thought it was a pleasant experience.  It probably isn't as bad as going through a malpractice suit, but it can't be very fun.  The more debt you carry, the more you have to service.  If, as Doug suggests, you have $500K in debt on your main home and another $500K in debt on your second home, that's $1M in debt you have to service every month.  Even if you can get it at say 4%, you still have to come up with $3333 every month to service it.  Sure, $1111 is deductible, but $2222 isn't.  If you think it's a good deal to pay $3 to deduct $1, I'll let you send me $100 every month and I promise to send you $33 back.


Paying Down A Mortgage Vs Investing
