SmartMoney on Making Your Home Pay

SmartMoney, which I scan occasionally on-line, but which is still apparently a real magazine printed on paper, currently has a cover story that includes a bitSmart Money Map called Life Plan: Make Your Home Pay Off. It is just one section of a larger feature on planning personal finances. I cannot bring myself to read the other bits.

As an exercise in laying bare the state of mainstream personal finance advice and/or journalism, let us examine this piece in detail. It’s not long, at seven paragraphs and 532 words.  I should be able to get my hands around their advice and, if necessary, refute it without too much fuss.

Paragraphs 1 and 2 tell us about a retired couple, Bob and Linda Gillet of San Diego, who live a life of European cruises and dinners out. They can do this because they paid off their mortgage early.


Now they estimate they’ve got an extra $600 in the budget each month. "We don’t ever think about whether we can afford things," Linda says.

I guess $600 a month is more money than I thought.

Paragraph 3 reinforces the message of 1 and 2, telling us that the finances of the family home is a big deal for most people and getting bigger. And it shares a statistic that suggests that people over 55 are now much more likely to have a mortgage than they were in decades past.

Okay, so we’re about halfway through the article, and I can see where it is going. This will be a Ramsey-like screed about how you should pay off your debts so you can live comfortably. I know how to discuss that. I’m ready.

Paragraph 4 reads:

Still, prepayment isn’t right for everyone. Bankrate.com senior financial analyst Greg McBride says it’s not worth it if it keeps a family from meeting other savings goals or forces them to liquidate investments. Also, if the mortgage balance is large enough that it still creates a significant tax deduction — typically, above $100,000 — it’s often better to leave it be.

Huh? But didn’t you just…? Okay, fine, turns out this will be more balanced than I expected. It’s true, prepayment isn’t right for everyone. Good for you for saying that.

But what’s this about not doing it if it interferes with "other savings goals" or forces you to "liquidate investments?" What has that got to do with it? What matters is the return on investments versus the interest rate on the mortgage. If your savings goal is socking away money in Treasuries paying you 4% while you pay a mortgage at 5% (after taxes) then you really ought to rethink the goal.

And what’s this about not paying off a mortgage over $100K because it still creates a significant tax deduction? A person should work out the after-tax cost of the mortgage. There are some non-linear effects of the standard deduction, but nothing special happens at the $100K level and not paying it off because it’s bigger than that is, well, counterintuitive.

Paragraph 5 tells us that a homeowner could also refinance the mortgage. Okay, that’s often a great idea. Not really on-topic, though.

Paragraph 6 returns to the topic of how much you owe on your house, sort of, by suggesting you borrow more with a home equity loan or a reverse mortgage. Of course, this is a last resort and the "least evil" way to borrow money if you need money, but it’s an option. I wonder how Bob and Linda feel about it.

The last paragraph is a chain of non sequiturs that nobody would believe if I didn’t reproduce it in full.

Of course, homeowners can always profit from their home the old fashioned way, by selling it. Experts at the Joint Center for Housing Studies at Harvard say remodeling should pick up this year, after Americans spent a paltry $114 billion on it in 2009, barely half what they spent in 2004. But homeowners appear to do best when they focus on the basics. In a recent industry survey, the projects that recouped more than 65 percent of their costs included entry door replacements, roofing replacements and basement remodels — not as flashy as a marble Jacuzzi, but the kind of improvement that looks good on the market.

Assuming that by "profit" we mean cashing out, then I don’t have a problem with the first sentence, although it has little to do with what is left of the narrative thread at this point.

Then, out of nowhere, we get a particularly unsurprising prediction about how much will be spent on remodeling this year. Wha? So I guess we if decided to sell the house because this mortgage thing was just too complicated, we should spend some money on fixing it up first. We then get the commonplace observation that boring and cosmetic improvements recoup more in resale value than flashy ones. Of course, when we say recoup more, we mean involve less of a loss. Even more commonplace than the observation that the dull improvements do better is the one that none of them increase the value of the house by as much as you pay for them. So the last thing you would want to do if you were thinking of selling would be to spend money on remodeling. Wait a sec, what were we talking about?

So let’s recap. In this article from SmartMoney we learn: 1) Paying off your mortgage early is a good idea. 2) Not necessarily. 3) Refis can also be a good idea. 4) Or you could borrow more. 5) Or sell the place. 6) If selling, consider making dull improvements, because they will be less bad of an idea than flashy ones.

And they wonder why Old Media is in trouble.

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