Parental Guidance

Chris has parents in their mid-70s, and they've just sold their house. They want to buy a home closer to family, and their bank is trying to convince them to get a mortgage.

QUESTION: Chris in Little Rock has parents in their mid-70s, and they’ve just sold their house. They want to buy a home closer to family, and their bank is trying to convince them to get a mortgage. Chris is trying to convince them to pay cash. They have $500,000 in retirement accounts and savings. Dave tells Chris how to approach his parents.

ANSWER: The way to make them realize how silly this is, is to ask them this question: If they had $350,000 in the bank and were living in a paid-for home, would you borrow $150,000 on the home so that you had $500,000 in the bank? Your dad would say no, and this is the same thing. A house worth $150,000 is absolutely in their price range, and I wouldn’t buy one unless I paid cash for it.

Interest rates may be low, but the interest rate on a paid-for house is zero. Also, 100% of the foreclosures occur on homes with a mortgage. I don’t have any worries at night. I’m not worried about Bank of America screwing up my paperwork and accidentally taking my house or something. I’m not worried about any of this kind of stuff because I don’t deal with those people. None of them are in my life.

Do you know how simple and clean and sweet-smelling that makes your life? Talk to your dad that way. He’ll get it, and mom will get it for sure. She can smell risk—maybe your dad can’t.

Here something else: What you do when talking about taking out a 3% mortgage and investing the money is that you are doing that analysis with your head. Your head does math but it doesn’t measure risk. Your heart measures risk. When I asked that question about the reverse process, it activated the heart and your risk meter. Then you start to feel that little thing that says the borrower is slave to the lender. You feel that; it’s not just a math thing.

That’s the incomplete part of most people’s analysis. They don’t bring risk into it. You have to do something to activate the heart, and that brings risk into the analysis. That gives you something to talk about, and hopefully you can talk them out of it.