Monday, June 12, 2017

Math versus English

You can make arguments using the English language, or by using Math.   Which type is harder to refute?

I was on a site the other day which discussed an "expert" on mortgages (credentialist argument) who gave "10 reasons to NEVER pay off your mortgage."  While the blogger in question was somewhat skeptical, he let the credentialism fog his brain a bit, and went along with a lot of the nonsense being spouted.

As I noted, having a mortgage when you are young and in the high income brackets might not only make "sense" it might be unavoidable.    You don't have cash to buy a home, so you have to borrow.  But over 30 years, you can pay off this debt.  When you retire, it makes no freaking sense at all, to have a mortgage, at least to the 401(k) generation who has to withdraw money in a higher bracket if they have to service a mortgage.

In my posting on the subject, I cranked some numbers to prove this point.  I also showed that in order to service, for example, a $250,000 mortgage in retirement, you'd have to save an additional $400,000 in your 401(k) or IRA.  And I was probably being conservative in that regard - you'd need that amount to pay principal and interest and the taxes on the money you have to withdraw to make mortgage payments.

What struck me about these two arguments, is that the former used words alone to make an argument, while I used numbers.   And the words were familiar - the "opportunity cost" argument that is made by everyone in the world who is trying to sell you something like debt.   "If you lease this car, you'll pay less per month, and you can invest the difference!"   But we all know you'll "invest the difference" in beer and pizza, not stocks and bonds.  And the back-end charges will bite you on the ass, and you will pay more per day and per mile to lease that car than to own it outright.

And the same is true with this mortgage argument.   You aren't going to "invest the difference" because you are weak, and second, you are not going to consistently get over the mortgage rate in terms of return on your investment.  Worst of all, you could end up losing your home in foreclosure as the stock market tanks and the housing market tanks at the same time.  And oh, that might never happen right?  In the history of the United States, it only happened to a few million people, in 2008 alone....

Yes, having a tax deduction when you are in the 38% marginal bracket is probably a good thing - but you can't deduct your way to wealth.   No, you won't even get a deduction at the end of the mortgage, as it is all principal and no interest.   Glib one-sized-fits-all solutions are rarely the right answers.  And taking mortgage advice from a mortgage broker is dicey at best.

So what's the point of this?  Well, we have to use language to communicate ideas, to be sure.  But when someone's argument regarding finances is lacking a lot of concrete numbers, you have to ask yourself why.   And yet so many people fall for the "freeing up your cash flow!" argument or "opportunity cost!" arguments, without doing the math on this.   Or worse, they fall for a "credentialist" argument ("He's an expert, so he must know!").

But even from an English language point of view, it pays to analyze the logic of the arguments as well.  The #1 reason given for NEVER paying off your mortgage was that "it doesn't affect your home's value."   Think about this for a second - what does this actually mean?   Well, nothing if you think about it.   Of course it doesn't affect your home's value - why would it?  It sort of telegraphs how nonsensical a direction the author is going.

And if you read through the thing, you come to one conclusion - the author doesn't really have ten reasons for NEVER paying off your mortgage - he has only one.  And it is the "opportunity cost" argument.   Keep the debt, so you can "invest" the difference, with a financial advisor.

And guess who the original author of the piece is?   You guessed it, a financial advisor.  This is not good advice, this is self-serving advice.  And yes, every financial advisor I have talked to has told me the same thing - go heavily into debt, so I can give them the money to invest - of which they get a "taste".    People who pay off their mortgages are no fun at all, are they?   They don't make money from that!

Financial advisors are not the only ones who make this argument.  Real Estate agents tell you to "buy as much house as you can afford!" so you get "a bigger deduction".    But if deductions are so great, why not just overpay for the house or intentionally take out a 15% mortgage as I noted in my posting?   After all, you'd have a ton of interest to pay and you'll get a big deduction - right?

You can see right through the fallacy of that argument.  Overpaying for a house is stupid.  Paying more for mortgage interest than you should is idiotic.   Borrowing money when you don't have to is similarly idiotic, just as buying more house than you need or want to get a tax deduction is dumb.

But people - people with financial interests diametrically opposed to your own make these arguments all the time.

When someone tries to make a mathematical argument with words instead of numbers maybe that is a tipoff that something is up.  You can't borrow your way to wealth just as you can't deduct your way to wealth.