"mortgage interest deduction" is only for the estimated 10% that itemize their deductions now that the standard deduction has increased so much from earlier decades. It also depends in whether you have a 3% mortgage interest rate that you got at just the right time or a 6% one. I don't imagine most financial experts would recommend borrowing at 6% to invest the proceeds.
“It also depends in whether you have a 3% mortgage interest rate that you got at just the right time…”
Agreed on all the rest, except the “just the right time” bit.
Because of the asymmetric ability to refinance when rates are lower, people didn’t have to get their mortgage at “just the right time”, but could instead refinance as rates got lower during the era of artificially low interest rates from about 2008-2020, before Bidenflation.
Many families don’t have the job security to expect that they’ll be earning an income with zero interruptions until retirement.
So, even if they’re completely ignoring the potential benefits of your investment strategy, we can at least posit that they’re semi-rationally prioritizing lightening their debt load in case of a loss of income. Since, after all, a mortgage payment is the single biggest fixed expense that drags on one’s finances during a period of unemployment.
I think that is largely true, but is assumes that one can pay off their mortgage instead of just paying it down (the monthly savings only matters if you take it down a lot or to zero), and the money invested can’t be easily converted to pay living expenses. Both are probably fairly true, but suggests a mixed strategy of liquid investment funding enough to cover say 6-12 months expenses and then paying off the mortgage.
Of course that all depends on mortgage amount and interest rates etc.
Well, to be clear, I don't think the full normie line of thinking makes much ACTUAL sense, but my gut tells me their general thinking is, "If I'm going to lose my income, I need to make sure I'm not scrambling to make mortgage payments without a paycheck".
IMO it's an outgrowth of paycheck-to-paycheck thinking, which is the default for most people. They're just thinking about the paycheck (or lack thereof) vs. the mortgage payment, not about actually managing financial assets with given rates of return.
Maybe but I'd have to see some data. The overwhelming amount of homeowners I know are in the "I might lose my job tomorrow, need to get out of debt" camp over the Bryan camp of living high on the log with effective guaranteed middle class income. Generally the only people I know in that latter camp are civil servants and union members.
Bingo. It's not about the long term investment but cutting your monthly costs so you can afford to live off social security, either at 65 or disability; as well as between jobs.
“So, even if they’re completely ignoring the potential benefits of your investment strategy, we can at least posit that they’re semi-rationally prioritizing lightening their debt load in case of a loss of income.”
Sorry, but this is just not correct.
Far better to handle the case you are concerned with by saving more, but in liquid investments.
What combination of equities vs lower return, lower volatility assets is a separate question, but equities provide more liquidity than a paid-down mortgage, and of course savings in cash and short-term bonds provide liquidity along with preservation of principal.”
So you are really basing your case on the claim that the people in question are rational about protecting from uncertain future with a less rational scheme to go about it. I.e. that they “‘only” know how to “pay themselves first” by paying down mortgage debt rather than putting the money into a “savings: account.
It's not irrational, savings accounts are liquid and things always "come up". When was the last time man you lived for an extended period paycheck-to-paycheck with no job security, and debt way over your assets sans your house? Bankruptcy will take your savings, they won't take your house.
“Without Social Security, permanently sitting on massive housing wealth would be hard to do! For the 25th-75th percentiles of total net worth, housing is their main asset. To live at all comfortably without Social Security, most of these people would have to rely on their housing wealth. Horrors? Au contraire. This wouldn’t just be better for taxpayers; it would be better for young families, who could move into the homes of the elderly when they downsize to pay for their retirements.”
This is quite true. And in fact I believe everything in this post is true.
But it doesn’t change one whit the incorrectness of Bryan’s take in his prior post on this subject that *most* Americans could get by comfortably in retirement if their Social Security was suddenly vanished.
The cells from the first graph that I found most surprising are the 50th percentile net worths between ages 18-34. They have a lot more net worth than I would have expected. Most don’t own a home yet and even if they did, early mortgage payment go heavily to interest, so home equity doesn’t explain it.
I’d be surpised if most have a paid off car that is worth that much too. Maybe it’d dual 401(k)s, but that seems like a lot to have at that age for the 50th percentile. Many also probably have student loans. Maybe my intuition is wrong, but I just found it surprising (in a good way), or else the calculations are wrong.
The "never prepay, invest the difference" math quietly assumes a US-style setup: a mortgage interest deduction that actually bites, and a working reverse-mortgage or HELOC market to tap equity later.
In India the interest deduction is capped and often worthless under the standard deduction regime, and home equity is close to illiquid — there is no real reverse mortgage market. I keep seeing clients whose entire retirement plan is "we'll sell the flat," which quietly collapses when the flat is
What is the tax treatment of a reverse mortgage? Ah-- AI is here.
It is treated as loan proceeds-- you're borrowing against your house and getting the loan in periodic payments instead of all at once. So the tax is zero. And if you pass your house to your kids, there is no capital gains tax.
The horror of downsizing when you get old is that a house is much much more than a shell to live out of. For many people, it is a part of themselves and their family. Most sensitive action would be to give your kids the family home and downsize, but then again, many elderly today don't have kids...
People should realize that their home is an asset, pure and simple: they can either live in it, or rent it out (and, of course, find somewhere else to live). If they're not comfortable spending on rent the amount that their house would rent for, they should consider moving out (and, yeah, moving can be a real pain--although mostly a one-time annoyance). Go find a nice apartment (or even a different house) somewhere, and then rent out or sell the original abode. Yes, the living experience at that location should be considered, but also, remember, it's an asset you purchased.
It's really not, anymore than my frying pan is. You have to live somewhere, a tent, RV, and Mansion all have the same worth, $0 until you no longer need it at which point it can become an asset though not always. Drive through rural areas and inner cities, you will find literally abandoned property because it was a liability, not an asset.
There is a combination of decisions and circumstances that go into accumulating net worth- income amount and consistency, amount invested and investment strategy quality, inheritance, who you marry. If you get some of these decisions mostly right, you will get pretty far. I am above the 95th percentile for my age bracket. My husband and I have pretty good income consistently, we mutually married someone who doesn’t drag us down financially. That’s about the entirety of what we got right. Neither of us has inherited and we are not great an investing though I’m trying to get better. We got a lot wrong- bought a house in 2023 even though we started looking in 2018, did not invest enough, don’t make very great investing decisions. I think we are still worth around 2.3M in the 40-44 bracket despite the mistakes.
"mortgage interest deduction" is only for the estimated 10% that itemize their deductions now that the standard deduction has increased so much from earlier decades. It also depends in whether you have a 3% mortgage interest rate that you got at just the right time or a 6% one. I don't imagine most financial experts would recommend borrowing at 6% to invest the proceeds.
Good point. After the 2017 tax act, the mortgage deduction was irrelevant for my household.
What about the change in SALT cap?
Good question. Makes it closer but no cigar.
I bought last year so it's a pretty clear break
“It also depends in whether you have a 3% mortgage interest rate that you got at just the right time…”
Agreed on all the rest, except the “just the right time” bit.
Because of the asymmetric ability to refinance when rates are lower, people didn’t have to get their mortgage at “just the right time”, but could instead refinance as rates got lower during the era of artificially low interest rates from about 2008-2020, before Bidenflation.
I'm not familiar with the term Bidenflation.
https://en.wiktionary.org/wiki/Bidenflation
Counterpoint: You’re a (tenured?) professor.
Many families don’t have the job security to expect that they’ll be earning an income with zero interruptions until retirement.
So, even if they’re completely ignoring the potential benefits of your investment strategy, we can at least posit that they’re semi-rationally prioritizing lightening their debt load in case of a loss of income. Since, after all, a mortgage payment is the single biggest fixed expense that drags on one’s finances during a period of unemployment.
I think that is largely true, but is assumes that one can pay off their mortgage instead of just paying it down (the monthly savings only matters if you take it down a lot or to zero), and the money invested can’t be easily converted to pay living expenses. Both are probably fairly true, but suggests a mixed strategy of liquid investment funding enough to cover say 6-12 months expenses and then paying off the mortgage.
Of course that all depends on mortgage amount and interest rates etc.
Well, to be clear, I don't think the full normie line of thinking makes much ACTUAL sense, but my gut tells me their general thinking is, "If I'm going to lose my income, I need to make sure I'm not scrambling to make mortgage payments without a paycheck".
IMO it's an outgrowth of paycheck-to-paycheck thinking, which is the default for most people. They're just thinking about the paycheck (or lack thereof) vs. the mortgage payment, not about actually managing financial assets with given rates of return.
“IMO it's an outgrowth of paycheck-to-paycheck thinking, which is the default for most people.”
Respectfully, I think you’re ignoring the conditionals here.
I concur that your claim is true of most people who are not homeowners.
It may or may not be true of most people overall, idk.
But I do *not* believe that it is true of people who *are* homeowners.
The fact that it is surely true of *some* of them notwithstanding.
Maybe but I'd have to see some data. The overwhelming amount of homeowners I know are in the "I might lose my job tomorrow, need to get out of debt" camp over the Bryan camp of living high on the log with effective guaranteed middle class income. Generally the only people I know in that latter camp are civil servants and union members.
Bingo. It's not about the long term investment but cutting your monthly costs so you can afford to live off social security, either at 65 or disability; as well as between jobs.
“So, even if they’re completely ignoring the potential benefits of your investment strategy, we can at least posit that they’re semi-rationally prioritizing lightening their debt load in case of a loss of income.”
Sorry, but this is just not correct.
Far better to handle the case you are concerned with by saving more, but in liquid investments.
What combination of equities vs lower return, lower volatility assets is a separate question, but equities provide more liquidity than a paid-down mortgage, and of course savings in cash and short-term bonds provide liquidity along with preservation of principal.”
So you are really basing your case on the claim that the people in question are rational about protecting from uncertain future with a less rational scheme to go about it. I.e. that they “‘only” know how to “pay themselves first” by paying down mortgage debt rather than putting the money into a “savings: account.
Yes. People are stupid like that. JFC you’re coming on arrogant.
It's not irrational, savings accounts are liquid and things always "come up". When was the last time man you lived for an extended period paycheck-to-paycheck with no job security, and debt way over your assets sans your house? Bankruptcy will take your savings, they won't take your house.
“Without Social Security, permanently sitting on massive housing wealth would be hard to do! For the 25th-75th percentiles of total net worth, housing is their main asset. To live at all comfortably without Social Security, most of these people would have to rely on their housing wealth. Horrors? Au contraire. This wouldn’t just be better for taxpayers; it would be better for young families, who could move into the homes of the elderly when they downsize to pay for their retirements.”
This is quite true. And in fact I believe everything in this post is true.
But it doesn’t change one whit the incorrectness of Bryan’s take in his prior post on this subject that *most* Americans could get by comfortably in retirement if their Social Security was suddenly vanished.
https://www.betonit.ai/p/reflections-on-americans-net-worth/comment/328223558
The cells from the first graph that I found most surprising are the 50th percentile net worths between ages 18-34. They have a lot more net worth than I would have expected. Most don’t own a home yet and even if they did, early mortgage payment go heavily to interest, so home equity doesn’t explain it.
I’d be surpised if most have a paid off car that is worth that much too. Maybe it’d dual 401(k)s, but that seems like a lot to have at that age for the 50th percentile. Many also probably have student loans. Maybe my intuition is wrong, but I just found it surprising (in a good way), or else the calculations are wrong.
Yeah I question it myself, many are still paying off student debt and car loans or no assets at all really especially under 23.
For the 50th percentile American, home equity is 85-90% of their net worth. It *is* their portfolio.
The "never prepay, invest the difference" math quietly assumes a US-style setup: a mortgage interest deduction that actually bites, and a working reverse-mortgage or HELOC market to tap equity later.
In India the interest deduction is capped and often worthless under the standard deduction regime, and home equity is close to illiquid — there is no real reverse mortgage market. I keep seeing clients whose entire retirement plan is "we'll sell the flat," which quietly collapses when the flat is
What is the tax treatment of a reverse mortgage? Ah-- AI is here.
It is treated as loan proceeds-- you're borrowing against your house and getting the loan in periodic payments instead of all at once. So the tax is zero. And if you pass your house to your kids, there is no capital gains tax.
The horror of downsizing when you get old is that a house is much much more than a shell to live out of. For many people, it is a part of themselves and their family. Most sensitive action would be to give your kids the family home and downsize, but then again, many elderly today don't have kids...
“…but then again, many elderly today don't have kids...”
Not that many of *today’s* elderly.
ChatGPT tells me it’s only about 17%.
I think you’re confusing today’s elderly with future elderly.
People should realize that their home is an asset, pure and simple: they can either live in it, or rent it out (and, of course, find somewhere else to live). If they're not comfortable spending on rent the amount that their house would rent for, they should consider moving out (and, yeah, moving can be a real pain--although mostly a one-time annoyance). Go find a nice apartment (or even a different house) somewhere, and then rent out or sell the original abode. Yes, the living experience at that location should be considered, but also, remember, it's an asset you purchased.
It's really not, anymore than my frying pan is. You have to live somewhere, a tent, RV, and Mansion all have the same worth, $0 until you no longer need it at which point it can become an asset though not always. Drive through rural areas and inner cities, you will find literally abandoned property because it was a liability, not an asset.
There is a combination of decisions and circumstances that go into accumulating net worth- income amount and consistency, amount invested and investment strategy quality, inheritance, who you marry. If you get some of these decisions mostly right, you will get pretty far. I am above the 95th percentile for my age bracket. My husband and I have pretty good income consistently, we mutually married someone who doesn’t drag us down financially. That’s about the entirety of what we got right. Neither of us has inherited and we are not great an investing though I’m trying to get better. We got a lot wrong- bought a house in 2023 even though we started looking in 2018, did not invest enough, don’t make very great investing decisions. I think we are still worth around 2.3M in the 40-44 bracket despite the mistakes.