Why do people say "Debt-free except for the mortgage?"

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kombat
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Why do people say "Debt-free except for the mortgage?"

Postby kombat » Thu Oct 14, 2010 6:10 pm

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?"

peaceofmind
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Re: Why do people say "Debt-free except for the mortgage?"

Postby peaceofmind » Fri Oct 15, 2010 6:06 am

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).

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Re: Why do people say "Debt-free except for the mortgage?"

Postby stannius » Fri Oct 15, 2010 8:09 am

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.

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Re: Why do people say "Debt-free except for the mortgage?"

Postby DoingHomework » Fri Oct 15, 2010 10:07 am

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.

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Re: Why do people say "Debt-free except for the mortgage?"

Postby kombat » Fri Oct 15, 2010 10:22 am

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. :)

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Re: Why do people say "Debt-free except for the mortgage?"

Postby DoingHomework » Fri Oct 15, 2010 10:52 am

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.

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Re: Why do people say "Debt-free except for the mortgage?"

Postby DoingHomework » Fri Oct 15, 2010 10:54 am

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!

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Re: Why do people say "Debt-free except for the mortgage?"

Postby bel » Fri Oct 15, 2010 11:07 am

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. :)

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Re: Why do people say "Debt-free except for the mortgage?"

Postby peaceofmind » Fri Oct 15, 2010 12:01 pm

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.

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Re: Why do people say "Debt-free except for the mortgage?"

Postby timwalsh300 » Fri Oct 15, 2010 6:20 pm

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

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Re: Why do people say "Debt-free except for the mortgage?"

Postby DoingHomework » Sat Oct 16, 2010 11:50 am

Another business concept related to this is long term debt vs. short term - solvency vs. liquidity.


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