File this one under bizarre, for several different reasons.
Mad Money host Jim Cramer disclosed yesterday that “he recently paid off a mortgage using profits from his investment in bitcoin.”
He apparently purchased a significant amount of the cryptocurrency back when it was trading at around $12,000, which was actually as recently as last October.
The price of a single bitcoin has launched since then, hitting a record high of around $64,000 this week.
For Cramer, that’s an investment return of about 433%, something he then moved into his mortgage account, which was probably earning a return of say 2-4%, which is the mortgage rate.
He said it was “great to pay off a mortgage,” likening it to using “phony money” to pay for “real money.”
But why would he pay off a home loan that was priced at 2-4%, which is essentially its annual rate of return?
Surely a big-wig investment guru like Jim Cramer could do better than a measly 2-4% in this market, or any market for that matter.
What Is Cramer’s Rush to Be Free and Clear?
- Mortgage debt is typically the cheapest debt you can own, especially today
- Yet homeowners are often in a huge rush to pay off their home loans
- While this could make sense from an emotional or psychological point of view
- It’s a bit of a head-scratcher coming from an investment guru like Jim Cramer
Now I understand it’s a common goal for homeowners to pay off their home loan(s) in full, to become free and clear on the mortgage.
It’s certainly an achievement, and not something to be frowned upon. But it also is just that, a celebratory moment, not necessarily a financial win.
This is especially true when mortgage rates are near their all-time record lows, with the 30-year fixed priced around 3% today.
Perhaps this infatuation with paying off the mortgage early got started back in the 1970s and ‘80s when interest rates hovered between 10-18%.
That would make a lot more sense, as you’d essentially be carrying what equated to credit card-style debt, and a lot of it.
But why go crazy paying off a 3% mortgage way ahead of schedule? Does it make sense to do so financially, or is it just the emotional victory?
And why is Cramer boasting that he now owns a house “lock, stock and barrel.” What’s the good in that?
He’s proud to have a lot of money tied up in an illiquid asset?
Taking Profits Makes Sense, But Is Cramer Being Too Conservative?
- He sold some of his bitcoin in order to take profits after a massive run
- That sounds pretty smart because it’s not a gain until you actually sell it
- But why did he turn around and settle for such a low rate of return (mortgage rate of 2-4%)
- Could his profits be better served in an index fund where they might earn triple that conservatively?
Now I understand taking profits, reducing risk, and stashing gains in a safer place after such a historic and massive win.
But why the mortgage, which yields maybe 2-4% as noted, versus say anything else?!
For example, the S&P 500 Index has seen an average annual return of roughly 10%–11% since it got started back in 1926.
While there are certainly good years and bad years, those who hold long-term, which is the preferred method of investing, would see their money grow handsomely.
Cramer essentially settled for paying off a super-cheap mortgage instead of opting for relatively conservative double-digit annual gains, which is surprising.
To sum things up, paying off a mortgage in full can be a crowning achievement, assuming you do it on schedule over the course of several decades.
But rushing to prepay the mortgage might not make the best financial sense, especially with mortgage rates as low as they are now.
Simply put, there’s often a better place for your money. Now if rates go back to 10%, I might change my tune.