The 10th Man

Pay Down Your Mortgage

November 16, 2017

The latest issue of Street Freak came out on Tuesday. Street Freak is a bit of an aggressive stock-picking newsletter, where we come up with a new idea every month. I try to keep the ideas a secret—if you want them, you have to subscribe! But I’m going to let you in on this month’s idea for free. Are you ready? Here it is:

Pay down your mortgage.

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Yes, that’s a bit unorthodox for a financial newsletter. But people spend too much time thinking about the next get-rich-quick idea and not enough time thinking about their overall financial well-being. I’m willing to bet that in addition to having a successful portfolio, many investors reading this also have a lot of debt.

Going into what might be a downturn, I’m uncomfortable having a lot of financial leverage. If you think the market is going to go down, then you should stop thinking about buying inverse VIX ETNs and start thinking about how to deleverage in a smart fashion.

Better Risk-Reward

Paying down your mortgage is part of that. It is part of an overall exercise in balance sheet repair, which includes—

  1. Building a cash position
  2. Paying off debt:
    1. Margin debt
    2. Credit card debt
    3. Car loans
    4. Mortgage debt

Financial leverage cuts both ways. It can help you on the way up, and it can hurt you on the way down.

Funny thing about paying down debt—technically, you are “making” whatever the interest rate on your loan is. If you are paying down a 4% mortgage, you are actually earning a 4% return (on a pre-tax basis). Given that high-yield ETFs yield about 5% these days (and are circling the drain), it seems like a much better risk-reward.

Also, I would not get too caught up in thinking about your mortgage interest deduction. Chances are, it is going away anyway in the tax reform bill, and besides, that is a terrible reason to have debt. There is nothing quite like the peace of mind of having a house that is paid for, or nearly so. Trust me, I’ve been there.1

As for credit card debt… there is no reason to have credit card debt unless you are experiencing temporary financial stress, in which case a stock pick from a newsletter is not going to help you.

And I would not worry too much about your credit score suffering because you do not have any debt. That’s the wrong reason to take out debt.


Bernie Sanders likes to talk about how the US isn’t really a free country because people don’t have freedom from financial stress. Well, financial stress is just a part of life in a free market economy.

But take a page out of the Bernie Sanders playbook and… eliminate your financial stress! All this money going out the door in monthly payments—you can make it stop. There is no freedom in the world quite like freedom from debt.

If you don’t do this, and we get the downturn I think we are going to get, your balance sheet is going to deteriorate as the asset side of the ledger gets smaller. So the goal here is to deleverage when you can, not when you have to. Forced deleveraging (i.e., margin calls) is never any fun.

I am half-descended from flinty New Englanders. You have never met a cheap b****** like a Connecticutian, so part of this is in my DNA. New England is the land of the good credit scores.

Don’t worry, I’m taking my own advice. The goal is to get the house paid off in 2-3 years. When I look in the mortgage amortization spreadsheet I built and add up all the interest I’ve paid since I bought the house in 2015, it just makes me mad. I told the loan officer when I got the mortgage that I was going to prepay the hell out of it. He didn’t seem to mind. Not his problem.

The heuristic on paying down your mortgage is that you shouldn’t do it when interest rates rise. To use an extreme example, if interest rates rose to 10% and your mortgage was 4%, you would be better off keeping the money in a savings account than paying down your mortgage. But one thing that is not factored into that calculation: less debt is always better than more debt.

My guess is that when the market turns, we are going to be hearing about a lot of hidden leverage that we never even knew was there. It is like that old Warren Buffett quote: “You only find out who is swimming naked when the tide goes out.”

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1 One wrinkle: if your house is nearly paid off and you do run into financial trouble, the bank will foreclose on a low LTV mortgage first. But this shouldn’t really be a consideration—just something to keep in the back of your mind.

Jared Dillian
Jared Dillian


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Nov. 16, 2017, 4:54 p.m.

Jared c’mon brother snap out of the malaise you have been in due to hating the tape.  I hate it too, and have been carried out shorting several times.  Trade the market in front of you, not the market in your head.  If we are paying down mortgages, maybe we shouldn’t be in the market. You saw the decision theory live today.  Those shorts that are on stretchers today, went for the 50% at 5,000 payout.  P.S.  Short DIS was a recommendation based on the same emotion of the tape.  P.S.S.  I am a fan.  I just expect more.

Nov. 16, 2017, 12:08 p.m.

Mortgage guy’s two cents:  Due mostly to the “wrinkle” in the footnote, build your payoff money in a pick-your-bonds-funds until you have sufficient (above your X years of safety liquidity), then pop the whole thing at once if that seems best at the time.  Look at the interim interest cost as a catastrophe insurance policy, nobody likes it but when it matters, it matters a lot.  In the meantime you are much better protected and with money as cheap as it gets you might even start making money on it…eventually.

Nov. 16, 2017, 9:47 a.m.

One risk of paying down the mortgage is you can’t easily get the money back out in times of stress. You can get a HELOC, if you have income. But you generally can’t get the money you paid into your mortgage back temporarily.
I had a house paid for once, and I slept so much better. Did not think it was stressing me out, but it must have. I will have my current house paid for in 10 months or less. But pay the other debt first. And keep a cash buffer. I guess if you are reading this financial letter, you are smart enough to know all of that

Nov. 16, 2017, 9:37 a.m.

Agree 100%. My wife and I just paid off the mortgage on our primary residence. The $400 plus in interest every month now stays in our pocket.

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