The Jefferson Spread

A lot of personal finance strategies rely on what I call the “Jefferson Spread.”

It is amazing how many strategies come out of this.  Not that they are all good or all bad. But pick up most books on how to “build wealth” as a middle class family, and the Jefferson Spread will almost surely be the ultimate driver of how to do this.

What is it?

Primary residence purchases for middle class families are subsidized by the government. This is a huge reason you can get a lower rate of interest on a loan for a primary residence than you can for any other loan.  Try to get a business loan or even a loan for a second home, rental home, vacation home, whatever, the rate of interest will likely be much higher than what you can get for your residence. One huge reason for this is that entities backed by the federal government, such as Fannie Mae and Freddie Mac, can be counted on to buy conforming loans.

Basically any investment plan that is based on “paying your mortgage off as slow as possible” or “always have a mortgage” is directly referring to the Jefferson Spread. That is, you can get a cheap, subsidized loan on your primary residence, so take that money and invest it elsewhere.

You can trace a lot of the programs and policies that started this to the Great Depression. But in my opinion, it was a way of thinking bestowed on us from Thomas Jefferson that has led to government subsidized loans for land ownership. He was quite fixated on the idea of the free, land owning farmer. Owning the land that you lived on was paramount in Jefferson’s ideological view of how the world should work.

The minds of Jefferson and Hamilton seem to somehow be burned into the collective psyche of our country. They disagreed on a great many things, which is one of the reasons we disagree on so much still today (I believe Hamilton was almost always right and Jefferson almost always wrong). Why do we subsidize primary residence purchases in this country? In my opinion, it is probably because that is what Thomas Jefferson would have wanted.

Photo by Britt Reints