Should You Take Up a Mortgage?

The word “mortgage” comes from the French “mort-gage”, literally death-pledge. The French peasants were working until they died for the privilege of owning a house. Historically, when the oldest son of a nobleman needed large sums of money which his father refused to give him, he often turned to borrowing. In arranging the loan, he would gage or “pledge” to repay the debt when his father died (at which time the son expected to receive his inheritance).

What is a Mortgage?
To understand what is a mortgage is you first have to understand the etymology {history} of the word mortgage. It is said that the first mortgage ever recorded dates to 1190 in England. Common English Law provided protections to the grantee (lender) of that mortgage loan and these protections granted the lender in the borrowers property. At that time most pledges or loans were what was known as “Living Pledges” which were just that pledges of possessions while one was living until the debt was paid.

Death Pledge
By contrast the word “Mortgage” is the opposite of the Living Pledge . It is a compound word from the Latin words Mort-Gage. Literally translated Mort means death Gage which means pledge.
mortgage = death pledge

Good Debt vs. Bad Debt

Today, many people are living by the old rules of money, the rules of the poor and the middle class. Facing uncertainty, people are saving money, sitting on piles of cash hoping things will settle down. The problem with this strategy is that savers are losers because as the Fed prints record amounts of money—the base money supply has risen three times over since 2008—savings lose value, especially as inflation kicks in and grows faster than the interest paid on savings. Others, the financially intelligent, are making a lot of money and borrowing more of it. Why? Interest rates are at the lowest in history and many assets are priced at bargain bin prices. The financially intelligent understand they can borrow money at cheap interest rates and use that money to buy assets that provide cash flow that covers their debt payment and expenses while putting money in their pocket every month. Both individual investors and large companies are growing their good debt as I write. As The Wall Street Journal reports, “Banks have lent $66.6 billion this year in five-year U.S. corporate investment-grade loans, some of the longest available, almost 25 times the amount for the same time last year, according to Dealogic. Investment-grade loans to U.S. companies have more than doubled so far this year compared to the same period in 2010. Junk-rated companies have also been able to raise debt at a record pace.”

The power of good debt

My simple definition of good debt is debt that puts money into your pocket rather than takes money out. For instance, if I’m using debt for a business deal, I won’t do the deal unless the cash flow from the deal pays for my debt payment and expenses while providing a good return. This assures that cash comes into my pocket each month, providing a continual income that allows me to enjoy liabilities. The great thing about debt is it allows me to leverage my existing cash into many assets. For example, in real estate, I can buy investment properties with debt. The bank will give me a loan for 80 percent of the purchase price while I only have to use my money—or someone else’s—for 20 percent of the purchase price. My job is to find a deal that pays the bank the interest on the 80 percent while still providing a decent return on my 20 percent. So, using simple math, if I have $100,000 in cash, I could buy one property for $100,000 that gives off $800 a month in cash flow—a little over 9 percent annual return. 

Or I could use good debt to buy five $100,000 properties. The bank would lend me $80,000 for each property and I would divide my $100,000 into five $20,000 down payments. At 5 percent interest, the payment on the loans would be around $500. So, my cash flow on each property would be $300 a month ($800 in rent – $500 in debt payment = $300 per month) for a total of $1,500 ($300 x 5 = $1,500) per month—an 18 percent annual return. I can then use the income from my properties to either invest in more assets or I can buy something nice for myself or for Kim knowing that more cash will come next month from my investments. That’s the power of good debt.