Sunday, October 7, 2007

The "Debt-Free" Deception: Housing Myths Part 8

Previous: Home Mortgage Tax Deduction Snake Oil: Housing Myths Part 7

The entire rent/own/mortgage debate is thoroughly confused, misguided, and backwards.

You are NOT debt-free if you have a mortgage. Mortgage is debt.

The love of mortgage debt is so bizarre that some people try to deny that mortgage is debt--and then accuse debt-free people of being in debt.

Have you ever had anyone tell you that they are "debt-free" only to learn that he/she carries tens or even hundreds of thousands of dollars of mortgage debt? The person might be justly proud of reaching some milestone in debt reduction but it is quite a feat of denial to pretend that the largest debt of his/her life does not count as debt.

RENT is debt-free for the tenant.

Someone once doubled the "up is down" mistake by asserting not only that mortgages did not count as debt but that rent did count as debt.

The person confused houses with housing, confused consumption with debt, and confused purchasing with financing.

  • Housing is consumption, an ongoing necessity like food, but recognition of a future necessary consumption is not "debt" unless you want to tell everyone that you are heavily in debt to the grocery store because you will need to eat lunch 50 years from now.
  • Debt is when you consume/take-title before you pay (becoming a debtor to the seller/provider), as opposed to pay-as-you-go (provider and consumer walk away even), or paying in advance (becoming a creditor to the provider).
The rent v. own debate is a false "opposite" and crippled by a logical flaw.

Renting and buying housing with cash are 2 forms of paying in advance. The question is if it is cheaper to pre-pay for 30 days or 30 years.

Renting and buying with cash are similar to each other and it is the mortgage that is the complete opposite. Too many people make a leap of logic of confusing paying-in-advance with spending money that they do not have, which is an entirely different kettle of fish.

The landlord is debtor to the tenant.

The tenant pays in advance by paying on the first of the month for housing in the coming month, which puts the landlord in debt to the tenant. The tenant is the creditor and the landlord owes a month of housing.


A lease is a mutual obligation on both parties. Technically, you might argue that you are in debt to the electric company because the company does not bill you until after you consumed the electricity, but by that logic you are in debt when you are eating at a restaurant before the waitress brings the bill. The distinction with restaurants, electric bills, and credit cards is that they provide a grace period with no interest charge (treating the transaction as pay-as-you-go).

The practical test for "debt-free": You are in debt if you are paying interest. You are debt-free if you do not pay interest.

Next: The Accidental Money Pit - House Depreciation-Maintenance: Housing Myths Part 9


DR said...

Under accounting rules, a long-term lease can be considered debt, depending on a number of factors. We would be debt-free if we sold our house and rented. The question is, though, would it makes us more financially secure? I don't think so.

J at IHB and HFF said...


Yes, the unpaid portion of a contract (agreement to pay in the future for future consumption/deliveries) is a liability/obligation (you promised to consume/buy something later) but a 100% pre-paid lease is an asset (like equity).

Yes, "financial security" is a different question that requires hard numbers to answer for each person and first we need to get the language straight to get past the common debt-denial stage.

Thank you for the comment.

hank said...

Completely agree with:

"The practical test for "debt-free": You are in debt if you are paying interest. You are debt-free if you do not pay interest."

It's just strange that most posts similar are arguing semantics for the most part - but that's a very clear concise statement - good call!

Thanks for the visit over to my neck of the woods... Will look into yours a bit more, I like the read so far. :)

J at IHB and HFF said...


Hello. Yes, I have seen and heard some strange definitions, usually to explain away debt. Thank you for the feedback.