Freedom vs. Wealth
My wife and I are currently leasing an apartment but we’re seriously considering the purchase of our first home. As part of our research into the matter I’ve looked at some of the various mortgage terms out there and their benefits and disadvantages. I’ve also been studying what our Church leaders have had to say on the matter of home ownership and going into debt to do it. What I found, in the process, was a seeming contradiction of what the financial “experts” had to say and what the Church is teaching.
Most experts will tell you that historically speaking the stock market will give a rate of return on investment from 7 to 10% over the long-term (assuming an investment of at least 10 years but the longer the better). Since most mortgages are at least 15 years long and usually have an APR of less than the rate of return on your investments on Wall Street, it makes good financial sense to take out a long mortgage (say 30-years), make minimum payments, and instead of paying it off early, invest any money you could have used to pay it off early into the stock market. Doing this brings you a greater return on your investment and increases your wealth. Even if a family plans to pay off the mortgage early and then invest the same amount of money that went toward the monthly mortgage payment for the rest of the 15 or 30 years, all the financial analysis and calculations indicate that your net worth in the end is greater if you don’t pay it off early and instead invest.
President Gordon B. Hinckley, on the other hand, has told us to do just the opposite in a conference address where he gives an example from President James E. Faust’s life:
He had a mortgage on his home drawing 4 percent interest. Many people would have told him he was foolish to pay off that mortgage when it carried so low a rate of interest. But the first opportunity he had to acquire some means, he and his wife determined they would pay off their mortgage. He has been free of debt since that day. That’s why he wears a smile on his face, and that’s why he whistles while he works.
I urge you, brethren, to look to the condition of your finances. I urge you to be modest in your expenditures; discipline yourselves in your purchases to avoid debt to the extent possible. Pay off debt as quickly as you can, and free yourselves from bondage. (Gordon B. Hinckley, “To the Boys and to the Men,” Ensign, Nov 1998, 51)
President Hinckley even seems to be aware of the fact that his counsel is in opposition to what the experts advise when he said “Many people would have told him he was foolish to pay off that mortgage when it carried so low a rate of interest.”
In a recent discussion on the AllFinancialMatters blog regarding whether or not to pay off your mortgage early, the blog’s author, JLP, summed up his position with the following:
If your mortgage rate is substantially lower than the long-term rate of return in the market, then you are better off investing your extra cash in the market and taking your time paying off the mortgage.
And he’s absolutely right, if your goal is to increase your net worth. However, the key to understanding and even reconciling these two contradictory views is understanding the goal and end result of the advise and counsel being given. The financial experts’ goal is to build wealth but the goal of the Lord is freedom. President Hinckley made this clear when he said “Pay off debt as quickly as you can, and free yourselves from bondage.”
President Hinckley recently reminded us of what President J. Reuben Clark taught us concerning debt and freedom:
“Interest never sleeps nor sickens nor dies; it never goes to the hospital; it works on Sundays and holidays; it never takes a vacation;…. Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands, or orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you.” (Gordon B. Hinckley, “‘Thou Shalt Not Covet’,” Ensign, Mar 1990, 2)
Usually making financial decisions that increase our wealth also increase our freedom. When we have more, we can give more and the number of choices we have in how we use our money exponentially grows. But sometimes making a financial decision means having to choose either greater wealth or greater freedom. The Lord has made it clear that our priority should be freedom. As for me and my wife, when it comes down to choosing which kind of mortgage to take out, we will choose the shortest fixed interest mortgage we can possibly afford and we will work hard to pay it off as early as possible.
June 6th, 2007 at 9:12 pm
This is really great Thom.