50-Year Mortgages

I’m trying to stay away from personal finance in this newsletter to focus on markets, but this time, I can’t resist.

Over the weekend, Trump suggested that people start getting 50-year mortgages because the payments will be more affordable. Well, the payments will certainly be more affordable, but you’ll end up paying much more in interest along the way.

How much more? I did the calculations. With a 30-year fixed rate mortgage of $400,000 at 6.5%, you will pay $510,177.95 in interest. Yes, you will pay more in interest than the house is worth. That’s with a 30-year mortgage. With a 50-year mortgage, you’ll pay $952,920.53 in interest over the course of 50 years. But the monthly payment is $2,254.87 versus $2,528.27 for the 30-year mortgage.

In what universe does this sound like a good idea?

I think that 30-year mortgages are a pretty crappy deal. I much prefer the 15-year mortgage. By the way, with the 15-year mortgage, you will have a payment of $3,484.43, but you will only pay $227,197.30.

What do you think of all this?

Back when I was doing my personal finance thing, I talked a lot about interest rates, but I also talked about dollars spent in interest. I hate paying interest. Does anyone like paying interest? What does it mean when you pay interest? It means you are adding to the profits of the bank. 

Now, I actually like banks, and banks help people achieve their financial goals, but I don’t want to make them any more profitable than necessary. I want to deprive them of that interest income. Does anyone get any enjoyment out of paying interest to a bank? Is it fun? I would rather pay interest than taxes, but not by much.

Good Old Trump

Our friend Donald Trump likes debt—everyone knows this. I do not like debt. I have the completely opposite view.

If you have debt on your car, you do not own the car; the bank does. If you have debt on your house, you do not own the house; the bank does. If you have student loans, the government owns you. I would not want to be in this position. I want to own my car, own my house, own my life. My goal is to own my house free and clear in the next 12–18 months. I had a $3,500,000 mortgage, and I’m trying to pay it off in less than three years. So far, I have paid $145,000 in interest, and that is money down the tubes. I’m trying to get out of this with paying the minimum interest possible—perhaps less than $200,000. On a $3,500,000 loan. That is how you do it.

A lot of people look at this as pseudoarbitrage, where you’re borrowing at some low interest rate and investing in stocks at some higher rate of return. How can you lose? Well, stocks can go down, and then you’ll have debt and losses. But people do this all the time. 

I should point out that my loan is a 10/1 ARM at a 4.25% interest rate. Yes, I am paying down my mortgage aggressively even with a 4.25% interest rate. I would pay it down even with a 2% interest rate. Because there is no better feeling than owning your house free and clear. If you’ve never done it, you don’t know what it feels like. You can get your arms ripped off by a thresher and can’t work, and you’re fine because you own your house free and clear. Just pay the taxes and insurance, and nothing can go wrong. Nobody can ever take that house away from you.

It’s not like Trump is unique in this way. Grant Cardone likes debt. Robert Kiyosaki likes debt. Debt can take you to zero. You can’t go bankrupt if you don’t have any debt! It’s impossible! And if you go bankrupt, there are all sorts of consequences—it’s on your credit report for 10 years. You can’t get a security clearance. You can’t work in the securities industry. You’re not going to be able to open a new credit card for years. No fun. Not to mention the social stigma. Could I have had more money if I never paid any additional principal to my mortgages and put it in the stock market instead? Yes, absolutely. But I would have had lots of stress, and I am all about living a stress-free financial life.

You never know what will happen. You never know what tragedy will befall you. House paid for, car paid for, nobody can tell you what to do. Screw you. I’m going to sit here in my house that I own free and clear and not listen to what anyone says to me. You might think that this is irrational behavior. I assure you that it is not. 

Remember, the goal is not to have the biggest pile of money. The goal is to be happy. I can tell you how to have the biggest pile of money—get a 50-year mortgage and invest in stocks. I can also tell you how to be happy—pay that sucker off.

Jared Dillian, MFA