What does Mortgage Avoidance Mean?

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Much of what follows comes from the sage advice of The Mortgage Professor. My only criticism of his excellent commentary is that he never really tells you what he means by mortgage avoidance. Mortgage avoidance is best explained in terms of the mortgage interest rate. If the mortgage rate is more than the overall rate of ones investments, then clearly one should make a higher down payment on their mortgage. This, of course, means less interest owed since the amount that is being financed is lower due to the increased down payment. Put a little more simply you are avoiding a larger mortgage balance!!

Older Borrowers May choose Mortgage Avoidance More Than Younger Borrowers

An investment in mortgage avoidance makes good sense for elderly home buyers whose money is invested  conservatively. Their objective is more likely to be sustaining consumption levels they are accustomed to rather than increasing wealth. So long as the mortgage rate exceeds the yield on their investments, consumption at a given level will deplete their wealth less rapidly if they avoid a mortgage.

Home buyers with excess cash who can earn a return above the mortgage rate may do better opting for the mortgage. It may pay to take a mortgage at 6% if you can invest at 10%. I say “may” rather than “will” because any investments that promise yields above the mortgage rate carry risk, whereas the return on mortgage avoidance has no risk.

Younger buyers with excess cash are in the best position to assume the risks. If they take the mortgage and invest their cash in a diversified portfolio of common stock, they have an excellent chance of earning 9-10% over a long period. Because they are young, they can take a long view and ride out short-term fluctuations in the stock market. See Borrow on Your Mortgage to Invest in Common Stock?

Be certain you can tolerate swings in the market. If you are going to get indigestion every time the value of your portfolio drops, you should opt for the safe return on investment in mortgage avoidance.

 

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1 comment on “What does Mortgage Avoidance Mean?Add yours →

  1. I understand what you are trying to get across, but you are using mortgage avoidance in a financially unconventional way. Mortgage lien avoidance has a very precise legal connotation which has very little to do with your “common sense” usage of mortgage avoidance!

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