Gilbert Index

Mortgage is Debt

I’m talking to an old friend for the first time in a long time. We dive right into a lively banter and start getting caught up. The conversation moves on to our families, and I ask my friend how his brother is doing. And he says (paraphrased):

“He’s doing great. He just bought a house. He’s got a great job. He’s doing really meaningful work. Things are going really well.”

And I wonder, did he “buy” the house?

As in buy it.

As in exchange cash for a big wood structure.

Or did he take out a mortgage?

You can bet your house he took out a mortgage. And that gets me thinking.

We have confused mortgaging with buying.

If you take out a mortgage, that does not mean you buy a house. It means you take out debt. Full stop.


Everyone knows banks create unnecessarily complicated terms in order to create distance between you and what the term actually means. Say hi to Derivatives. Credit default swaps. Tranches. And other gobbledygook.

Banks do this because they don’t want you focused on what the term actually means. Because if you were focused on its honest meaning, you’d be less likely to buy the product the bank is pushing. It is an attempt to channel your attention. If you understand anything about sales, you’ll recognize this as standard sales technique. In sales, if you’re good at sales, you’re always trying to channel attention to where you want it.

The banks don’t get credit for inventing the word mortgage. For that, you can thank Law French and medieval English lawyers who re-purposed the term. But the banks do get credit for embracing and running with the linguistic deception that is the word mortgage. And channeling your attention away from what mortgage actually means:

Debt.

A mortgage is a type of loan specific to the acquisition of real estate, usually a house. Which means it’s debt because a loan is debt. And it’s compounded debt, the kind of debt that grows on top of earlier debt. Until you’re left suffocated in a pile of debt. It’s the most pungent and dangerous form of debt. It’s debt you want to run away from because it’ll sit on top of you like a fat Sumo wrestler and never let you reach financial independence.

The word mortgage is ugly makeup for debt. A mortgage is debt. Punto.

We’ve been hypnotized, literally, into thinking ‘mortgage’ is as benign as Dora The Explorer. A mortgage is not benign. And it can be cancerous to your financial well-being if you’re not extremely careful in how you handle it because mortgage interest compounds and compounding debt is a prison sentence to never leaving the rat race. You will be stuck in jobs you don’t want if you’re stuck paying off compounded debt. Debt is bleak.

In many cases, you might be better off renting and investing and earning dividends and coupons in, say, low cost index funds instead of making interest-baked payments on a house.

It’s important to remember a mortgage is nothing more than debt because it might help you make better decisions if or when you do want to invest in real estate.

When you take out a mortgage, meaning when you take on debt, in order to arrive at the true price you’re going to pay for your new home, you have to do math. You have to take all the mortgage payments including interest (of which there will be a lot) throughout the term of the loan and discount those payments to present day value. And then you add all that to your down payment. This is called Present Value. You have to do a PV analysis to learn what the actual price tag for your property is.

Or if this kind of number crunching is not your thing, you can refer to the NYTimes’ nifty Is It Better to Rent or Buy? calculator that helps you determine which is the better deal. A better name for the calculator would be Is It Better to Rent or Mortgage?

Long story short, you’re grossly underestimating how much you’re paying for your house. Because you’re not considering the Present Value of all mortgage payments (principal plus, importantly, interest). And yes, I’m aware real estate is an asset. But it’s only equity if you’re not underwater and in debt! At the end of the day the following is all that matters:

  • If you sell your house for more than you paid for it, bravo. Then it’s a good investment.

  • If you sell your house for less than you paid, it’s a bad investment. Financially-speaking. Maybe the memories and other treasures make everything worth it.

  • If you never plan to sell it, run the numbers and understand compounding. If you fall onto hard times financially and miss payments, your compounded debt is going to balloon. And if you end up in a position where you’re paying down a mortgage for the rest of your life, you’re effectively a renter. In which case it might have made more sense to rent to begin with and instead invest what would have been debt payments in a low cost index fund. Which perhaps would have allowed you to buy a home outright with your savings later on.

  • Or if you never plan to sell and you’re adamant in not being a noble renter, then save up enough money to build a house with your two bare hands and some help. This is a lot cheaper than mortgaging. And it’ll make you a more skilled and interesting person, and you’ll be a real homeowner if that’s what you’re after, not a fake mortgaged one. Rent or build yourself.

I understand renting vs mortgaging is not black and white. If you’re worried about making the “right” financial decision when it comes to where you sleep at night, you need to look at numbers. The NYTimes rent vs mortgage calculator is a great tool for cutting through the clutter of the rent vs mortgage debate.

I’ll leave you with the following: those medieval English lawyers. Remember them? They re-purposed the word mortgage from the archaic language Law French where mortgage originally meant ‘death pledge.’ This strikes me as a most accurate understanding of mortgage. When you mortgage a house, you don’t buy it. You go into debt, which means you make a death pledge.

Notes:

All investing is subject to risk, including the possible loss of the money you invest.

The information provided here is for educational purposes only and isn’t intended to be construed as legal or tax advice.

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