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Comment by nazgulnarsil | Hacker News Reader

it's impossible to be happy if you're always comparing yourself to others. there will always be someone smarter, better looking, richer, and with a bigger ____ than you :p True happiness is contentment, contentment comes from financial security. I laugh at those millionaires who, as the article said, are squeaking by on 400k a year. The biggest key to financial security isn't making more money. It's reducing your living expenses. If you're making 90k a year but socking away half of that, you're buying a year of retirement for every year you work. (assuming your investments only keep you even with inflation and dont make you any additional money).

also: one of the best pieces of advice in the article is always have a mortgage. as soon as you finish paying off your first house it's time to make a down payment on a new one and rent it out to pay for the mortgage. assets>cash, plus it's tax advantaged.

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plus it's tax advantaged

I've never really liked that reasoning. Let's assume that someone is in the 30% tax bracket (paying 30% on all qualified income). Let's say this person makes $100,000/yr. They pay $30,000/yr in taxes.

Let's say they also have a $100,000 mortgage at 5% APY. They're paying $5,000/yr in interest. That interest is deducted from their income of $100,000 leaving $95,000 taxable income. Assuming they didn't move down a bracket, they're paying $28,500/yr instead of $30,000/yr, saving them $1500/yr in taxes. Remember though that they're paying $5,000 in interest. It doesn't make financial sense in that respect.

They are paying $3500 more per year than if they paid off their mortgage.

It's seems like a way for people to live in nicer houses (or have more of them) and get a "deal" or "discount" on taxes, though in the end they are paying more.

This doesn't take into account housing prices, cash flow issues, or alternative investments. The rational I've seen in people who could pay off their houses but decide not to is either:

A: I can use this as leverage and sell later when the price is higher, making me money (risky, if the market drops)

B: I can use the money that I could use to pay off my mortgage to invest in other things (also risky, given the nature of any investments)

or C: It's a tax deduction (which from my math doesn't make sense. Maybe someone can show me a situation where the math works out better by keeping the mortgage)

I'll show you the situation. If your mortgage is at 6% (I think mine is just below that) and you're in the 30% bracket (I am around there) you're effectively saving 1.8% in deductions (30% of the 6%) and therefore paying 4.2% interest right? A C.D. now pays over 5.25%.

So to clarify the math, you borrow $200k, pay $12k in interest, but get to deduct it and therefore save $3.6k, thus really paying $8.4k in interest (or 4.2% of the $200k).

Therefore if you mortgage the house (as opposed to buying it outright) and buy into a CD at 5.25% you're effectively gaining 1.05% interest for free. You're making about $2k a year. Also you're increasing your credit score, which saves you a lot of money in the long run.

In your above scenario the guy was saving 30% of 5% (1.5%, or 1500) which would put him at 3.5%. He'd be borderline retarded to pay for the house outright.

Much more intelligent (especially for someone my age, who has a good 30 years to worry about retirement, thus reducing the volatility) is to put that $200k into the market, which will probably average somewhere between 7-10% in that time. Suddenly that $200k mortgage turns into a shit ton of money in my retirement account.

Also, there's the fact that the mortgage costs only slightly more than renting a similar place (if homes as nice as mine were available for rent, which they generally aren't here) yet in 30 years I have a free and clear home I can sell.

In summation, mortgages FTW. That's why very wealthy people who could afford not to still damn near always get them.

So, in essence you're in favor of option B (use the money to invest in something that will net you more in the end), specifically in CDs, or possibly a money market account. Thanks for bringing that up. The CDs are FDIC insured and are a strong case for not paying off the mortgage.

You forgot to deduct the income tax from the interest generated by the CD.

True, that's because I'd sooner invest in stocks and only pay capital gains.

Agree dkokelly, and it also gets worse.

In your example, $5000/year interest is under the standard deduction. Unless you already have other deductions to itemize, you are getting no tax write-off for the $5000.

For instance, in 2008, the standard deduction for singles is $5450. Lets assume that you have $2000 in other itemized deductions. So, the first $3450 of your mortgage interest simply offsets the write off you would get with the standard deduction. Therefore, only $1550 would get you an additional deduction.

Now, if you're married, the standard deduction is $10900. In my situation, my mortgage interest is just barely greater than that amount.

The tax deduction on mortgage interest just means you cut the interest rate by the tax bracket, eg. if you're in a 33% tax bracket and have a 6% mortgage, the effective interest rate is 4%. Makes the math easy.

In addition, it seems to me that a lot of middle-class homeowners who use this argument would be just as well off (or very close to it) with the standard deduction.

I've never owned a house. Am I missing something?

EDIT: I live in the Midwest where 2000 sqft in a nice neighborhood is very often less than $200k. This is probably a factor.

there will always be someone smarter, better looking, richer, and with a bigger ____ than you

Oh, come on, nazgulnarsil, where's your spirit? You can do it!

Bart: You make me sick, Homer. You're the one who told me I could do anything if I just put my mind to it!

Homer: Well, now that you're a little bit older, I can tell you that's a crock! No matter how good you are at something, there's always about a million people better than you.

Bart: Gotcha. Can't win, don't try.

my extreme pragmatism depresses most people. I always hear hope for the best but plan for the worst and I think it is unnecessarily pessimistic. Hope for the best, plan for the averages, have a backup plan for the worst.

But the bottom line is that we're already incredibly wealthy by historical standards. I am in the bottom quintile by income in the U.S. (poor college student) and yet i enjoy a standard of living that is probably in the top 1% of all humans who've ever lived.

P.S. assuming you are Mr. Yudkowsky your posts at overcoming bias singlehandedly turned me from an empiricist into a rationalist.

Because real estate always goes up? The "houses are the greatest investment ever" myth is amazingly persistent.

I am also skeptical of the conventional wisdom of home ownership. I think a mortgage is simply a way to force yourself to save money. If people save with the same commitment as mortgage payments, even while paying rent, they should end up doing just fine.

(heavily adapted/paraphrased/quoted from 28 Feb 2006 Berkshire Hathaway Chairman Letter by Warren E. Buffett)

The explanation begins with a fundamental truth: With unimportant exceptions, such as foreclosures (in which some of a seller's losses are borne by creditors) the most that a real estate investor, in aggregate, can earn between now and Judgment Day is what the market, in aggregate, earns.

True, by buying and selling clever or lucky, investor A may take more than his share of the pie at the expense of investor B. And, yes, all investors feel richer when prices soar. But an owner can exit only by having someone take his place. If one investor sells high, another must buy high. For owners as a whole, there is simply no magic-- no shower of money from outer space-- that will enable them to extract wealth from their homes beyond that created by the markets themselves.

Indeed, owners must earn less than their markets earn because of "frictional" costs. And that's my point: These costs are now being incurred in amounts that will cause homeowners to earn far less than they historically have.

Work it out. Play with unknown factors (future rent, interest & house prices) and see what you come up with.

Mostly it's about even.

But just as you say a lot of human elements come into play. People choosing a rental or a purchase choose radically different properties so usually saying 'I would be paying this rent' is meaningless since you would be living somewhere completely different paying different rent. And saying 'I would be saving X' is also meaningless because you probably wouldn't be.

I think these usually outweigh the pure financials. many people purchase houses that would have never saved a dime. But of course, that's beatable.

That's not even remotely true. The interest rate for a mortgage right now is a few % points below what the stock market has returned, on average, over the last 50 years. That's not even counting the tax deduction for the interest.

A mortgage is basically borrowing money with which to make more money. Your mortgage payment on a place is generally not much more than your rent payment would be, and it's tax deductible and, over time, builds equity.

You can't save with the same commitment while paying rent because you have to pay rent.

> Your mortgage payment on a place is generally not much more than your rent payment would be

This is not true in most of the formerly booming real estate markets in the U.S. My coworker just bought a condo for $500K in Boston. At 6%, his interest payments are $30K/year, or $2500/month. My friends are renting a similar place for $2200/month.

I've heard it's worse in California, eg. people paying $3500/month in mortgage payments for houses that rent for $2000 or so. The recent Businessweek article on Merced mentioned homes with $3400/month that the owners walked away from, then out-of-state speculators bought it at a foreclosure auction and are now renting it back to the original owners for $1200/month.

> The interest rate for a mortgage right now is a few % points below what the stock market has returned, on average, over the last 50 years.

First rule of finance: any truly risk-free profit opportunities will be arbitraged away as soon as large numbers of people become aware of them.

That's exactly what happened in the 1990s. People suddenly realized that the stock market, on average, returned higher rates than a 30-year mortgage, so they took out mortgages and invested it in the stock market. As a result, the stock market quadrupled between 1995 and 2000. Then they pulled it out of the stock market and back into real estate between between 2001 and 2005.

It's highly unlikely that stock market returns over the next 50 years will match those of the previous 50 years, even with the cratering of the real-estate market.

True. However stock market returns have averaged about 10-12% a year going all the back to 1830. Furthermore, they've beaten real estate, bonds, gold and every other asset class over any given 15-year period. Even people who bought the day before the great crash in 1929, came out ahead of those who put the same money into real estate... as long as they didn't panic and sell at the bottom as most people did.

Of course we can't expect every decade to be like the 90's, but I think it is a reasonable expectation that the 200-year trend will continue barring a kurzweillian singularity or other freakish phenomena.

> It's highly unlikely that stock market returns over the next 50 years will match those of the previous 50 years, even with the cratering of the real-estate market.

Why? Stock market rises tend to be linked to technological advances. We are pretty close to some significant technological breakthroughs and these will only accelerate over the next 50 years.

Consider, for example, that within 15 years, it should be cheap and practical to use solar panels for almost everything. Consider robotics and the way robots will radicalize many industries as much as industrial robots have revolutionized factories, etc.

Down Here (Melbourne) it's a lot more extreme then that. $2200 p/m for a $500k place is >5% return.

Here it's about 3.5%-4% for a normal family house and 4%-5% for a flat.

*Interest rates are about 8%

Most economists still believe it will be above 7%. Thus a fixed rate mortgage now would still be worth it.

Of course the cost of renting vs buying is different depending where you go.

If it's an investment property the tax advantages are very nice. Deductions for interest, depreciation, insurance and maintenance can seriously add up. Add rent to that and the yearly cost compared to the medium-long term capital gains turns out to be quite nice.

Of course it depends on the state of the market, but if it's a long term investment, and you don't buy out in hicksville, that shouldn't be to much of an issue.

As for owning and occupying a home you're paying a mortgage on... well that's more of a lifestyle choice. I would agree that it's not really the best investment.

Note that I live in Australia, so much of this may not apply to other regions.

You just spelled out the problem: you still need to pay your rent. Why paying rent when you could be paying yourself? In the long run, owning the place you live is smarter.

okay, let's compare scenarios.

scenario 1

you "save" 2000 a month by spending it on a mortgage

scenario 2

you pay 1500 a month for rent and save the other 500.

in which scenario do you come out ahead? that 1500 a month is GONE.

If the math were really that simple there would be a massive arbitrage opportunity :). I think there are other variables at play, such as:

- down payment: the renter takes the down payment and gets interest on it for N years

- closing costs

- repair costs

- property taxes

and you think that difference will exceed $18k a year for 30 years?

I think your example is more realistic if the numbers are more like 3000/mo to buy and 1500/mo to rent. If rental prices were as close to mortgage rates as 2000/1500, then not only would buying be obvious, it would not even be a much larger financial commitment. The extreme case is when rent equals mortgage.

If you have a new mortgage, then somewhere between $1000-1800 is spent on interest, NOT saved, and it is GONE (well, it's a little less because of the tax advantage for mortgage interest).

Yes, you're right, but this value goes down year by year. While the rent costs never go down.

He said mortgages were a good investment, not houses. In terms of EV they're pretty high up the list, especially compared to the alternatives (buying the house outright or renting).

Nothing always goes up, but over time real estate does pretty well. Plus the tax deduction on the interest rate, and the fact that the APR is lower than what you could get with the money if invested well in other stuff make mortgages so well-worth it that even people who could buy outright almost always take them.

Because mortgages remain a great leverage instrument. Find a bank who will lend you 4X your initial deposit with a low fixed (or not...) interest rate, without margin calls, in any other investment vehicles?

If you find one that will loan it out below what I can get from a CD and somehow make the interest tax deductible, please call me.

putting money into a house that maintains its value or even drops slightly is better than paying rent. rent money is gone forever. a mortgage is building equity that you can draw on. plus I don't get how people don't realize that renting out a house to pay its mortgage is basically free money. Someone else is building equity in a house for you and all you have to do is pay the down payment and manage tenants.

My personal plan is to buy a house that has something that can be turned into a studio, live in the studio and rent out the main house. I have a feeling this type of situation doesn't go on the market too often for obvious reasons though.

Duplexes sell fairly frequently. For mine, the rent of each unit is greater than the mortgage...

As a note, though, home ownership (esp. rental ownership) is more expensive than just the mortgage (and taxes, and utilities). Like any business, there is time and attention required. Like any other depreciating asset, there is also ongoing maintenance costs. And they are not smooth like the income stream. If your rent is $1000 and your monthly payment (mortgage + escrow) is $800, you may be netting $200/mo. Great! But then you have to scramble to find the $10k to replace the roof. Or it takes two months to replace the tenants (there goes 8 months' profits). In the long term, it should work out. Your mortgage + tax payments should increase slower than the monthly rent payment. But renting out a house is not free money.

as close to free money as you can get without lucking out I would say. Of course it requires attention and time but it beats pissing money away on rent, especially in silicon valley where rents are more than twice as much as the national average.

I think you're overlooking the interest payments, which are gone forever as well. If you have a 300k mortgage at 6%, you are paying 18k year (1500 month) in interest alone. Yes, there are tax advantages but I think this is negated by property taxes, PMI insurance, etc. Your mortgage payments aren't buying equity in your house.

and viewing houses as just another investment is amazingly persistent and is the attitude that got us into our present problem in the first place. a mortgage is building equity in a physical asset, stocks are gambling to try to get 10% returns in paper money.

How are stocks 'gambling'? Buying a stock is buying a fraction of a business. Is all business ownership gambling? A business is just a group formed to do something too complex for individuals -- are the constituent individuals also a gamble?

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