Walk Away by Douglas E. French

Author:Douglas E. French [French, Douglas E.]
Language: eng
Format: epub
ISBN: 978-1-61016-102-2
Publisher: Ludwig von Mises Institute
Published: 2011-06-28T16:00:00+00:00

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CHAPTER

FIVE

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Building Wealth by Never Paying Off Your Mortgage

It seems like a crazy idea now, but many financial advisors during the boom told anyone who would listen that they shouldn’t pay off or even pay down their mortgage debt. Not only should everyone own a home, but everyone should have a mortgage and no one should ever pay it off. The conventional wisdom, built up from decades of government support for home ownership was that housing prices could never fall.

After all, those in power testified that it was so. Fed Chairs Greenspan and Bernanke, as well as regulators and economists with the FDIC and Federal Reserve Bank dismissed the notion of a price bubble in housing. Like all bubble markets, “the sidelines began to seem a place only for people who had an aversion to wealth,” Goodman wrote.

So the days of mortgage burning parties were long gone. How stupid could a person be to pay off their mortgage? After all the home would build equity by itself, whether there was a mortgage on it or not and besides the money used to pay down the mortgage could be invested to earn much higher returns than the tax advantaged interest rate being paid on the mortgage.

The authors of Untapped Riches: Never Pay Off Your Mortgage—and Other Surprising Secrets for Building Wealth, Susan and Anthony Cutaia with Robert Slater claimed in their 2007 book that the fixed-rate mortgage was the worst mortgage in history.

The Cutaias claimed certain types of mortgages were wealth creators. Mortgages like Option ARMs, Cash Flow ARMS, and negative amortization loans were best because these loans were “smart debt” which freed up cash so borrowers could leverage their homes to create wealth. They also advocated interest-only loans.

To their credit, the husband and wife team cautioned readers not to fritter away their cash on boats and vacations. But, the adjustments on these adjustable rate mortgages are what set the housing crash in motion.

Never pay off your mortgage principal the authors wrote, telling the story of an 80 year old man with a debt free house and no cash. Thank goodness they were able to get him an adjustable rate $800,000 loan. Otherwise, “He might as well have been poor,” they write.

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