Jean's Blog

Bothering me….

Posted by Jean

It all comes down to how you feel about debt.

Yesterday, I was a guest on Carmen Wong Ulrich’s CNBC Show On The Money.   Ric Edelman was there as well — he has a new book out — and the fabulous Tyler Mathieson (the publicist at Money magazine where we both once worked described him as “the light of our lives.”)  Ric and I — as we have in the past — butted heads on the idea of paying down a mortgage.  We had a question from a viewer who wanted to know if he should pay off his second mortgage (8.75% or therabouts) or put the money toward savings or investments.  He was already shoveling money into his retirement plans so I said pay off the second, get rid of PMI, that’ll give you more to sock away.  Ric disagreed.  He’ll have to fill you in on why.

But let me just explain what got me started on our overwhelming debt problem to begin with.  It was an article by Louis Uchitelle years ago on the front page of the New York Times that pointed out we Americans owned a smaller share — a smaller equity — in our homes than we had at any time since the 1960s.  I started researching and we not only owned less of our homes, but our cars and we were carrying more in credit card debt and student loan debt than ever before.  This information was the foundation for Pay It Down.  And the situation as you know didn’t get better.  It got a whole lot worse.

The advice that says because mortgage debt is cheap you should have a lot of it, take the tax deduction, and invest the money you’re not putting toward that mortgage may seem to make mathematical sense.   It does often make mathematical sense.  That doesn’t mean it works.

It doesn’t work when — as people did during the last decade — you decide you’d rather spend the money than invest it.

And it doesn’t work when the market doesn’t go up during your time horizon.

Now — say the naysayers — what if the value of the home went down?  Why should you work to pay it off then?  Because barring a real hardship — like a job loss or an illness — the President’s housing plan isn’t going to help you get away with not repaying your loan.  Because if you can truly afford to make your payments the bank isn’t going to come to the table for a short sale.  I know what it feels like to have bought a home at the wrong time because I did it.  Does May 2005 ring a bell?

But I also know from research I’ve conducted over the years that having debt makes you unhappy.  It makes you unable to sleep at night.  It stresses you out.   Particularly when your income is going down — i.e. for most people in retirement.  Which is why by the time I stop working, and I hope, long before, I will have retired this mortgage of mine. If I need to access this debt to pay for part of college or something else, I know it’ll be there.  But I won’t have to worry about having a place to put my head at night.

P.S. Both Ric Edelman and I will be on CNN with Gerri Willis this coming weekend.  I’m looking forward to round 2.