The big mortgage argument

[Kevin Jorgensen]

I'm curious to hear opinions on this article. When I first read it it seemed very persuasive, but runs counter to RDPD I believe. http://www.edelmanfinancial.com/education-center/articles/1/11-great-reasons-to-carry-a-big-long-mortgage

[Chris Mason]

Before anyone starts doing cash out refinances every time their home goes up 10% in value, I'd like to point out that there are closing costs with each refinance. I'm in the mortgage industry, our compensation is tied to production of new mortgages, which refinances count as. So it's great for me if you do this each time your home goes up 10% in value, but it's probably better for you if you wait for something more, like 30% or 50% (if at all). I tack that little "if at all" on there because paying off a mortgage has a guaranteed ROI equal to your interest rate. So the apples to apples investment, where it's guaranteed ROI, would be a Certificate of Deposit, or Treasury Note, or similar, and those rarely offer more than your mortgage interest rate. 

If you're thinking of putting it in things that are not zero risk (hedge funds, real estate), then hopefully you are seeking a risk premium (not a new concept around here, but there are new lurkers reading this), else just leave the equity in the house. Which brings us to...

Further, the OP article is published on a website that has a vested interest in this, as they will happily charge a fee to help you invest that $75k you just pulled out (EDIT: Oh, they will also do the cash out refinance... just clicked around the website to confirm). Note that Warren Buffett just won his $1m 10 year bet that low cost index funds kick the snot out of managed hedge funds, so don't assume that higher fees = more micromanagement of your money = higher ROI. Better management and execution tends to yield higher ROI in real estate, but not necessarily on Wall Street, and Mr. Buffett will take your $1m if you want to bet otherwise.

The theme here is folks (myself included) whose production is measured in whole or in part by number of transactions. Just like real estate agents who would love it if you bought or sold your primary residence every two years, just like that car lot down the street that wants you to trade in your old car for a new one every 18 months, it's important to consider the source. 

All that being said, the standard BiggerPockets.com mantra is that equity represents lost money and opportunity cost, there are plenty of voices that logically and coherently argue that side of the debate (who will be joining this thread shortly), so by all means weigh all options, figure out what works for you given your particular goals and risk tolerance, and there is no "one size fits all" solution.