dcsimg The Get Rich Slowly Forums • View topic - Why do people say "Debt-free except for the mortgage?"

  GRS Home  Forum Home
Bank Rates Center
   Savings Account Rates
   Money Market Rates
   Highest CD Rates
Insurance Rates Center
  Auto           Health
   Life              Home
Mortgage Rates Center
  Mortgage Rates
  Mortgage Quotes

Last visit was:
A place for Get Rich Slowly readers to ask questions
and exchange ideas
It is currently Tue Nov 25, 2014 4:14 pm




Post new topic Reply to topic  [ 11 posts ] 
Author Message
 Post subject: Why do people say "Debt-free except for the mortgage?"
PostPosted: Thu Oct 14, 2010 6:10 pm 

Joined: Tue Mar 11, 2008 12:19 pm
Posts: 1785
Location: Ottawa, Canada
Isn't that like saying you're "cancer-free, except for my lungs?"

Or like saying my house is "cockroach-free, except for the kitchen?"

Any other examples? Or an explanation why people don't instead just say "my only debt is my mortgage?"


Top
Offline Profile   
 Post subject: Re: Why do people say "Debt-free except for the mortgage?"
PostPosted: Fri Oct 15, 2010 6:06 am 

Joined: Tue Jan 26, 2010 10:08 am
Posts: 113
I think it's the mindset that a mortgage is "normal" debt, and therefore it "doesn't count". You're expected to have a mortgage at some point in your life, and likely keep it for a long time.

The phrase bugs me, too, since I only consider someone to be debt-free if, at any point in time, they lost all sources of income and only needed to worry about paying for things they wanted/needed (food, shelter, utilities, etc). I think a lot of people assume that "shelter" automatically includes a mortgage payment because they don't disconnect the house with the loan. You can have a house/shelter without needing to send a check every month to someone, but because most people don't, they don't make the distinction.

Personally, I'm finishing up paying off a 2nd mortgage, and don't plan to snowball my effort to my primary mortgage (it'll go towards building up savings instead). Given that, I wouldn't call myself "debt free" until I sell my house, which will be in another year or two (which is why I'm not concerned about pre-paying on the mortgage).


Top
Offline Profile   
 Post subject: Re: Why do people say "Debt-free except for the mortgage?"
PostPosted: Fri Oct 15, 2010 8:09 am 

Joined: Fri Sep 12, 2008 12:29 pm
Posts: 1629
Location: Seattle, WA
Whether you order your debts by "snowball" or by interest rate, the mortgage is likely to be last on the list. It is (usually) the only one you can't pay off by buckling down for a little while. And it's the one that is the most debatable, as far as if you should even pay it off ahead of time at all.

I have never gone through that stereotypical struggle to pay off debt, but I imagine those who have like to talk about it.


Top
Offline Profile   
 Post subject: Re: Why do people say "Debt-free except for the mortgage?"
PostPosted: Fri Oct 15, 2010 10:07 am 
Moderator

Joined: Wed Sep 23, 2009 9:01 am
Posts: 5399
Houses used to be appreciating assets. Borrowing to fund an appreciating asset is smart.

A business takes capital/assets and produces a return on it. If a business can produce a return on assets of 40% (which is normal) and can borrow at 8%, it makes good business sense to borrow. A philosophy that "debt is bad" is a subjective belief. Thee is nothing wrong with that belief but it is not part of an objective analysis.

In personal finance you could rationally apply the same principles. If one can borrow money to buy a house so that rent payments are avoided and one gains from the asset appreciation then it makes economic sense to do so if the net present value of the avoided rent payments and future resale value exceed the after-tax cost of the house. This is often the case and that makes mortgage debt "good debt" much of the time. Here "good debt" means debt with positive NPV.

Is there risk associated with this? Of course. And that must be factored into the analysis of value in both a business and personal finance environment.

But I think that answers your question of why people express their situation that way.


Top
Offline Profile E-mail   
 Post subject: Re: Why do people say "Debt-free except for the mortgage?"
PostPosted: Fri Oct 15, 2010 10:22 am 

Joined: Tue Mar 11, 2008 12:19 pm
Posts: 1785
Location: Ottawa, Canada
DoingHomework:

I agree with your analysis 100%. I totally agree that debt can be employed to make even more money, and that in many cases, it makes perfect sense to do so. My beef is with people who claim they're "debt-free" when in reality, they're carrying an enormous pile of debt.

If I buy a house with a mortgage, and max out my line of credit to buy gold (bubble? What bubble? It's going to keep going up, you know), and max out my credit cards to start up a business that I expect to be turning a huge profit in 3-5 years, then that's a lot of debt. I could say, "I have a lot of debt, but it's all invested in appreciating assets."

What I could not say is, "I'm debt free, except for a mortgage, line of credit, and some maxxed-out credit cards." Well, I mean, I suppose you could say that, but I think it's stupid, which was my point in the first place. :)


Top
Offline Profile   
 Post subject: Re: Why do people say "Debt-free except for the mortgage?"
PostPosted: Fri Oct 15, 2010 10:52 am 
Moderator

Joined: Wed Sep 23, 2009 9:01 am
Posts: 5399
peaceofmind wrote:
I only consider someone to be debt-free if, at any point in time, they lost all sources of income and only needed to worry about paying for things they wanted/needed (food, shelter, utilities, etc). I think a lot of people assume that "shelter" automatically includes a mortgage payment because they don't disconnect the house with the loan. You can have a house/shelter without needing to send a check every month to someone, but because most people don't, they don't make the distinction.


Ok, nothing wrong with your definition of debt free. But if someone rents and does not have a mortgage, they would have a large monthly obligation for rent just like a mortgage. If they lost their income they would lose their house.

Actually, if you want to think about security, having a mortgage is far more secure. Eviction from a rental takes just a month or so. Foreclosure takes far, far longer.


Top
Offline Profile E-mail   
 Post subject: Re: Why do people say "Debt-free except for the mortgage?"
PostPosted: Fri Oct 15, 2010 10:54 am 
Moderator

Joined: Wed Sep 23, 2009 9:01 am
Posts: 5399
kombat wrote:
What I could not say is, "I'm debt free, except for a mortgage, line of credit, and some maxxed-out credit cards." Well, I mean, I suppose you could say that, but I think it's stupid, which was my point in the first place. :)



I'm debt-free except for a mortgage. But, you're right, I don't see any reason to go around telling people that because the mortgage is a rather big deal!


Top
Offline Profile E-mail   
 Post subject: Re: Why do people say "Debt-free except for the mortgage?"
PostPosted: Fri Oct 15, 2010 11:07 am 

Joined: Fri Sep 03, 2010 6:33 am
Posts: 66
Location: Tennessee
DoingHomework wrote:
I don't see any reason to go around telling people that because the mortgage is a rather big deal!


Although we are debt-free, I also don't see any reason to be telling others about it. :)


Top
Offline Profile E-mail   
 Post subject: Re: Why do people say "Debt-free except for the mortgage?"
PostPosted: Fri Oct 15, 2010 12:01 pm 

Joined: Tue Jan 26, 2010 10:08 am
Posts: 113
DoingHomework wrote:
peaceofmind wrote:
You can have a house/shelter without needing to send a check every month to someone, but because most people don't, they don't make the distinction.


Ok, nothing wrong with your definition of debt free. But if someone rents and does not have a mortgage, they would have a large monthly obligation for rent just like a mortgage. If they lost their income they would lose their house.


Good point. My point about being debt-free wasn't that it would mean no more expenses ever (which isn't true even in the case of a paid-off mortgage since you still have upkeep, maintenance/repairs, taxes, utilities, etc). You can still manage to have a roof over your head without paying money, though (living with family, working/volunteering in exchange for room/board, living in an eco-friendly house that's self-sustaining, etc.

Granted, most people won't do any of those things, but renting does give you a lot more flexibility. Sure, you might lose out on your deposit if you suddenly moved houses, but if necessary, you could do so to reduce your monthly obligations in the case of a job loss or something.


Top
Offline Profile   
 Post subject: Re: Why do people say "Debt-free except for the mortgage?"
PostPosted: Fri Oct 15, 2010 6:20 pm 
User avatar

Joined: Mon Jun 23, 2008 6:54 am
Posts: 636
To me, "being in debt" most often means "having a negative net worth."

I owe some money on a loan, but I have 10x that amount in financial assets. I consider myself to be "debt free" since I have a positive net worth. I could pay off the loan at any moment; I just choose not to because the interest rate is less than 2%. It's the same with credit cards. I put everything on my card, but I pay it off every month, effectively allowing me to borrow a few thousand dollars at 0% for 30 days at a time. It would be silly (although technically correct) to say "I have credit card debt" during each billing cycle.

Typically taking out a mortgage to buy a house does not result in a negative net worth (unless you have no other assets and put 0% down). You can usually sell the house and eliminate the mortgage whenever you want - you are just choosing not to because it wouldn't make sense. So if your only debt is a home mortgage, then you've probably achieved a positive net worth, and by my definition it is fair to say that you are "debt free."

Tim


Top
Offline Profile   
 Post subject: Re: Why do people say "Debt-free except for the mortgage?"
PostPosted: Sat Oct 16, 2010 11:50 am 
Moderator

Joined: Wed Sep 23, 2009 9:01 am
Posts: 5399
Another business concept related to this is long term debt vs. short term - solvency vs. liquidity.


Top
Offline Profile E-mail   
Display posts from previous:  Sort by  
Post new topic Reply to topic  [ 11 posts ]  Moderators: kombat, bpgui, JerichoHill


Who is online

Users browsing this forum: No registered users and 9 guests


You cannot post new topics in this forum
You cannot reply to topics in this forum
You cannot edit your posts in this forum
You cannot delete your posts in this forum
You cannot post attachments in this forum

Search for:
Jump to:  
Powered by phpBB © 2000, 2002, 2005, 2007 phpBB Group
Theme created StylerBB.net & kodeki