Posted on November 11th, 2020
You’d think presumably wealthy politicians like Joe Biden and Kamala Harris would own their homes free and clear. But that’s not the case, per their 2019 tax returns.
Both individuals disclosed their returns on the JoeBiden.com website, and each paid tens of thousands of dollars in mortgage interest last year.
But why would they pay interest if they had the means to simply pay off the loans, a luxury most other Americans can’t afford to do? The reason is simple.
Mortgage Debt Is the Cheapest Debt Out There
- Joe and Jill Biden paid $15,796 in home mortgage interest in 2019
- Kamala Harris and Douglas Emhoff paid $32,041 in home mortgage interest in 2019
- There’s a good chance both parties could have paid off their mortgages in full
- But why bother if you can earn a higher rate of return for your money elsewhere?
Why Biden and Harris and so many other rich homeowners choose to carry mortgages as opposed to paying them off has to do with how cheap they are relative to virtually everything else.
Ultimately, it doesn’t get much better than home loan debt, especially with mortgage rates in the 1-2% range at the moment. What other type of loan offers such cheap financing?
This is why I refer to mortgages as good debt, especially since you have the opportunity to write off the interest in many cases.
On top of that, the low rate of interest makes it easy for savvy homeowners to beat the rate of return on their mortgage by investing elsewhere.
Simply put, your mortgage rate is your rate of return if you choose to prepay your home loan ahead of schedule.
Any extra dollars put toward your loan essentially earn whatever your mortgage rate is, so if it’s 2.75%, you’re earning 2.75% if you choose to pay any extra each month or year.
Unfortunately, the lower mortgage rates go, the less it makes sense to prepay the mortgage because you’re earning a lower and lower rate of return.
Interestingly, we often hear feel-good stories in the news about everyday Joes paying off their mortgages in just 5-10 years. Or even less time. But why? What’s the rush exactly?
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Getting Rid of the Mortgage Is a Psychological Victory
- The obsession with paying off the mortgage is a psychological one
- Often times there are better uses for your money than prepaying your home loan
- An alternative might be to pay off other high-interest rate debt like credit cards
- Or to invest any extra funds in the stock market, mutual funds, or a general retirement account
Sure, it’s great not to have to make a monthly mortgage payment, but that doesn’t mean it’s the best move financially to prepay your home loan.
Often, the desire to pay off the mortgage has more to do with human psychology than it does math.
It probably feels good to pay off any debt, especially a large sum of money such as a mortgage.
But as noted, it’s cheap debt and you might be better served putting extra dollars elsewhere.
Apparently, this is what Joe Biden and Kamala Harris do, and Obama did the same based on his old tax returns.
One of the richest men in the world, Warren Buffett, has also been a proponent of carrying a mortgage for the same reasons.
You get to lock in an ultra-low mortgage rate for three decades and watch the payment become effectively cheaper over time as inflation erodes the value of the dollar.
It doesn’t get much better than that, especially when you might be able to write off the interest too.
This explains why Joe Biden, Kamala Harris, Warren Buffett, and even Facebook founder Mark Zuckerberg choose to hold mortgages when they can easily pay them off.
Read more: Should I pay off my mortgage early?
(photo: Elvert Barnes)
About the Author: Colin Robertson
Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for nearly 15 years.