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Smart People With Dumb Mortgages

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The smartest people are pretty dumb about mortgages. The realtor lobby and the government tax breaks have conspired to make people who should know better take on mortgages and go big on housing. In 1990, 80 percent of elderly homeowners owned their houses free and clear. In 2007, only 55 percent of elderly homeowners owned their houses outright, without mortgages and home equity loans.

Owing money, even a mortgage when you approach retirement is not a good idea. The smart thing to do -- if you don't have debt, have a reserve emergency fund, and max out on your retirement savings -- is use extra cash to pay off debts, all debts, including a mortgage, before you invest in taxable investments.

A smart friend asked me, don't income-earning people need income tax deductions? Wow, what a scam on people who earn income.

Here is an example of a dumb move by another smart person. An accomplished Ivy League physicist approached me at a coffee break after I spoke on a panel about the economy:

Big deal Scientist: I just won a big prize, should I invest in a foreign currency fund?

Me: Do you save the maximum in your retirement account?

Big Deal Scientist: Yes

Me: Have any credit card debt?

Big Deal Scientist: No.

Me: Do you have a mortgage?

Big Deal Scientist: Yes.

Me: Pay that off.

The next time I saw him he had not paid off his mortgage. The prize money went to actively-managed currency funds. I don't know his return; but, I know that whatever it was a lower risk adjusted rate of return than paying off his mortgage would have earned. And this professor is one of the smartest cats around.

He calculates the beginning and end of the universe, but didn't grasp the simple math that one side of the interest rate is better than the other. Always, stay on the "getting interest" side, not the "paying interest" side. Yes, pay off your mortgage even if you get a tax deduction for paying interest. Yes, pay off your mortgage even if the asset is appreciating more than the interest rate you are paying.*

*If you think you are borrowing to pay for an asset that is appreciating at a rate higher than your borrowing rate you are leveraging, and that is a risky thing to do. Leveraging is what professional investors do and most of them don't do it right. If you not in a corporate financial professional, hedge fund, or private equity executive you "leveraging" is losing money.

The best investment anyone can make with extra cash is to pay off debt, even your tax-coddled mortgage. Pay off your mortgage, if you are putting the maximum in retirement accounts and you have emergency savings then paying the bank a dollar of interest and getting a 30, 40, or even 50 percent rebate from state and local governments because of the tax deduction still means you are paying 70, 60, 50 cents to the bank and it is lost to you forever. I'm mystified why you want to give more money to banks and brokers.

Don't take my advice, ask any honest financial advisor who has your interest at heart. I know without fiduciary legal requirements -- such advisors are as rare as hen's teeth.

A sampling advice from personal financial journalists:

For middle income near-retirees (those over 55).

For higher-income near retirees.