Refinance?

[Nay]

Nay,
Your little rant sounds win win but you forgot to add back in the $250k you just paid the banker on the house you still don't own that you had purchased for $50k!

You pay that extra interest to the bank in a 30 year fixed as well. After 15 years of payments on a 30 year fixed you have paid off 25% of your loan. Not a great deal when the average mortgage is kept for 5 years. You pay so little equity down in five years that it is practically valueless as any kind of investment.

Investing your money conservatively @ 8% vs. investing it in home equity at 0% is a win unless the broad bond and stock markets crash in a fundamental long term way, in which case don't bet on your house price either.

At 0% rate of return you are making a negative 3% to 4% investment every year due to inflation - this is called "real return", which is return on investment minus inflation. Over 30 years a 3% to 4% real return devalues the investment into a completely different asset class. The present value of $200K 30 years from now at 4% inflation is $61,600. So in today's money, this $200K investment is worth $61K. And that is just about guaranteed given Federal Reserve policy to grow the economy (inflation) at 3%-4% per year.

You buy a $200K house now (good luck ), put 20% down ($40K) and pay it off over 30 years in 2037 your $200K will still be worth exactly $200K in cash and will buy you a nice car (remember 30 years ago a car cost three grand). You invest the 40K @ 8% over 30 years and it grows to $402,506. At 10% it grows to almost $700K, although I think you don't model around 10% returns. This does not take into account the potential monthly investment cashflow from going interest only.

Where all of this falls apart is people buy houses they could not afford on a 30 year fixed, so they have no savings to invest. They simply grow the house price and use an interest only loan for qualifying purposes. The discipline is when you could afford the 20% down payment and the 30 year fixed and you choose a loan as a long term investment strategy to keep you cash from being tied up in your house.

Not many people do this, and first time buyers shouldn't be attempting it. Over time, though, that is your strategy to hedge against interest risk while growing your portfolio.

A 2/28 is a pretty good loan choice for a first time buyer getting into the market where income is probably growing relatively rapidly. It is not a "subprime" loan, but a financial tool that seems to fit your needs today. First time buyers who have good earnings growth don't need long term insurance plans to hedge interest rate risk. You worry about that stuff in 30 years. Now is the time to create those investments that will accumulate powerfully over the next 30-40 years, and you can focus on protecting those gains as you near retirement.

 

[wesintl]

Where all of this falls apart is people buy houses they could not afford on a 30 year fixed, so they have no savings to invest. They simply grow the house price and use an interest only loan for qualifying purposes. The discipline is when you could afford the 20% down payment and the 30 year fixed and you choose a loan as a long term investment strategy to keep you cash from being tied up in your house.

I will say this. I pretty much completely agree with you Nay. The problem is SO may people sell themselves on this idea or will agree with someone like you that told them this and then do an interest only. Then in reality the extra money NEVER gets invested even if it's house they can afford on a 30 fixed. They just see this extra cash and spend it on an escalade payment or blow it on vacations etc. It's all out the window.

It takes a VERY disciplined individual to do this. IMHO most people don't or can't.

I'll still take my 30 year fixed with enough left over to invest as well. Sometimes equity in a house can be a good hedge on other investments.

 

[Red_Chili]

The other piece of the puzzle you only alluded to, Nay, is "cash flow is queen".

I did a cash flow analysis deciding whether paying off a mortgage or keeping investments going made more sense, where the investment paid for the mortgage, and including the tax benefits (after all, you have to service the debt). The analysis was a LOT closer than I expected, modeling 6%. At 8% there was a more appreciable gap, and of course at 10% it was significant - not allowing for the volatility a 10% portfolio would entail, with the mismatch between a fixed outflow and a variable inflow and the resulting impact to the model.

Growth in equity is indeed a hedge against inflation, it is not zero percent at all. The stock market has better returns over time, but with much more volatility than most real estate portolios even considering recent events - and it moves pretty much with real estate volatility I might add. Leveraging that can make sense in certain scenarios, but not in others.

What this illustrates is there is no one fixed plan that is the 'best'. It all depends on your situation and goals. Your plan is a young man's plan, and makes sense for such - if discipline and investment assets are involved.

 

[Red_Chili]

Here is a good summary that addresses cash flow as well as return. The picture for paying off a mortgage is by no means black or white, but this sheds light. The scenario under discussion is whether to pay off a $50K mortgage with 10 years remaining with a $50K inheritance, or invest the $50K, based simply on cash flow:

Since no one knows whether the stock market will be up, down, or flat in coming years, your main criterion should be your risk tolerance. If you can't bear to lose any capital, your tolerance is extremely low. In that case, pay down the mortgage. If you can accept some risk and think you can do better by investing, consider going that route.


What do you believe the market will do over the next 10 years—the time remaining on your mortgage? Expecting average returns of 15 or 20 percent annually isn't realistic. If you're risk-averse, a return of about 6 or 7 percent annually over the long term may be a reasonable assumption; if you're more aggressive you might use 10 percent.


Your current and future tax brackets also play an important role in your decision. Let's assume you have short-term investment gains, on which you pay ordinary income tax. If you're in the 35 percent marginal tax bracket, a 7 percent taxable return is then equivalent to a 4.6 percent after-tax return; a 10 percent taxable return is equivalent to 6.5 percent after taxes. Comparing your after-tax investment return with your mortgage rate can help you decide which strategy makes the most sense.


Another option: Consider paying off the mortgage and then investing the monthly principal and interest you save. Let's compare that with simply investing the $50,000 lump sum. In both cases, we'll assume you get a 4 percent after-tax return. In example A (paying off the mortgage), after 10 years you'd end up with $98,291. In example B you'd have only $74,541.
What if the market returns 9 percent after taxes? Then investing the $50,000 up front would earn you $7,142 less than paying off the principal and investing the monthly savings. The crossover point is 11 percent, after taxes; then you'd do better by putting the entire $50,000 into the market than you would by paying off the mortgage. In the above scenarios, I've done the calculations using assumptions specific to your situation; the numbers may differ slightly for other people.


The number of years remaining on your mortgage is a key factor. If you had 20 years left, the figures would be different; then it wouldn't take such high returns to make investing the lump sum the more attractive alternative. Ultimately, you must do what makes you most comfortable. Only in retrospect will you know whether your choice was the most profitable one.

Most investment planners will not recommend planning on returns @10%+. Most recommend 6-8% for planning long term. YMMV. I am NOT a CFP.
From: http://www.memag.com/memag/article/articleDetail.jsp?id=111463

 

[Red_Chili]

Here is more info. Simple, and clarifying:

If you can earn a higher after-tax return on your investments than the after-tax interest rate expense on your debt, you should invest. Otherwise, you should pay off your balance.
Example of debt reduction vs. investing calculation

Scenario 1
Assume you have a thirty year, $150,000 mortgage with a six percent rate. Also assume you are in the 25% tax bracket. Due to the itemized deduction of mortgage interest, your after tax annual percentage rate is really 4.02% (not the 6.00% you are paying). Hence, if you expect to earn an after-tax return higher than 4.02% on your investments (odds are substantial you will if you have a long-term horizon<emphasis added>), then you should invest. To discover how much of your mortgage interest expense you can deduct, check out the myFico Mortgage Tax Savings Calculator.
Scenario 2
You have a $10,000 balance on a credit card with a 22% annual percentage rate. Credit card interest expense is not tax deductible, meaning you should only invest if you think you can earn a 22% after tax return on your investments. Given that the historical long-term return on equities has been somewhere around 11-12%, this seems highly unlikely. In this case, it would be foolish to invest.

The bottom line

Although you may be eager to invest, you need to do what is best for your bottom line. Regardless of which is the wiser course of action at this stage in your life, the ultimate goal should be to have no debt and an abundance of great, lucrative investments. With enough patience and hard work, this is a goal that you can, and will, attain.

From http://beginnersinvest.about.com/cs/personalfinance1/a/031901a.htm

It depends on your volatility tolerance, your cash reserves should disaster strike, and if you depend on your investments to partially pay for the debt. Loss of real estate value, capital loss on investments, and some other disaster such as a layoff can and do form an unholy trinity of timing.

 

[Red_Chili]

Another good one:
http://www.realestatejournal.com/buysell/mortgages/20061215-cullen.html?refresh=on

 

[RockRunner]

I understand all the comments made and tend to agree with most of them.

My question is this, does anybody put more than 5% down on a house anymore? We did put more down and lowered our payments to a level where one of us could pay the the mortgage if anything ever happened. Sure you have better cash flow if you invest in stock or mutuals vs a home but that can be dealt with an open home equity loan.

Part of the reason that Bush has to bail out the housing market is due to people buying homes with 0 down or loans for 110% to value. If I was a home owner that bought a home in the last few years and was making my payments vs one that wasn't but will be bailed out I would be PO big time.

It used to be that people bought homes and put 5-10% down and were able to afford the payments for years to come. Now that is something rare, and I feel that is part of the problem we are dealing with now.

I like to simplify things to much sometimes and that may be wrong but I still believe in some of the old time values, if you can't afford it don't buy it.

Aacon please don't take this the wrong way, I a not directing this to you. This is just in general and only my opinion regarding the WHOLE problem. I am sure there are a ton of people who will disagree with this and that is fine, it's just my 2c.

PS We do have money invested in several different areas that are doing OK and good, not just the house.

 

[acon40]

Nothing wrong taken. We rushed into a house because the women above almost killed two of our dogs, call the cops on us and almost rammed my truck. Looooong story, but that gives you a idea of what was going on.

While I see your point, thanks to a VERY understanding family, we put 5% down.

But we did look at the zero down option. Payments were to high.

 

[RockRunner]

I have had my share of neighbors like that and understand all to well. If somebody tried that with our dogs I too would be in a new home, 6x8 or something close to that ;-)

Family is a wonderful thing.

We kicked around a bunch of scenarios and in the end decided with a large down payment. We felt better that way, little conservative but it works for us. The other thing that really got me was the mortgage insurance, they have the title to the house already but they still want more.

Another thing that really bothered me was the mortgage company, he kept pushing us into a larger loan, we qualified for more than we borrowed. We tried to explain our thoughts to him but he kept telling our RE guy that we could afford more house. The RE was our friend so he did not push but I can't imagine what it must have been out there the last three years or so.

I hope all works out for you regarding your promotion and with some extra Cruiser money or ???? good luck.

 

[nakman]

My question is this, does anybody put more than 5% down on a house anymore? ..

I think so, and one of the things to try avoid is private mortgage insurance, you know that special "tax" you get to pay if you own less than 20% equity. But you can get around that using 80-10-10 financing, also it's possible to negoatiate lender-paid PMI with your lender. When we bought our first two houses, we paid PMI on both to start but were able to refinance both after a fairly short amount of time, because of the rapid appreciation. Not so much the case today, obviously.

 

[ScaldedDog]

My question is this, does anybody put more than 5% down on a house anymore?

That's a resounding "yes" from us. We've been house hunting since April and, if we ever find anything we like, we'll be putting as much as we can down, and will poor the equity from our current home into the new one once it's sold, with goal of owning the new place free and clear in ten years. Numbers can be tortured until they'll confess to anything, but I don't buy the whole "equity earns nothing" argument. My experiences say different.

Mark

 

[Red_Chili]

My question is this, does anybody put more than 5% down on a house anymore?

Absolutely. In our case, a ridiculously larger amount down. For a while there, the argument was, "with prices where they are no one can afford to buy a house with the old rules", which only fueled the price bubble to extend even further. You see what happens. Nature (and economics) abhors imbalance.

The inability to afford housing is a problem for sure - but rest assured that in the long run it corrects itself one way or the other. The correction can be painful if allowed to run laissez-faire, however.

Another pop of a bubble was when folks backed out all the equity that they could, so they could to put that into the stock market. If you can service the debt, great, but what happens in a bear market? Then you get laid off? I'm not that brave.

 

[RockRunner]

We too put a large amount of money down on our house for most of the same reasons you all mentioned. Our thinking included some of the previous thoughts mentioned since our payment is smaller now we are able to invest and afford things we want. We aren't house poor like so many of our acquaintances are.

On another note I am a little upset with the new "bail out" that good ol President Bush announced earlier today. They are rewarding the people who gambled and lost, now they get a fixed rate. Of course that does benefit some people I know too, very much so to the extend that we won' have a house guest.

 

[ScaldedDog]

On another note I am a little upset with the new "bail out" that good ol President Bush announced earlier today.

Me too! The only losers in all this are the poor slobs who didn't buy a house they couldn't afford, and are still living in an apartment. In other words, the responsible people.

Haven't the Republicans learned anything? They got their butts handed to them for not being conservative enough, and for not doing what we sent them to do. We've got the other guys feed the masses with the pablum of public bail outs. [/rant]

Mark

 

[Jacket]

Maybe the better question is Does anybody believe they will one day pay down their 30 yr mortgage to nil and be house payment free?

I know the reality is that their are other reasons to maintain a reasonable mortgage even if you could pay it off, but isn't it said that this thing we call our "biggest investment" is really just a huge interest payment that consumes 20-50% of our monthly income?

 

[Hulk]

Haven't the Republicans learned anything? They got their butts handed to them for not being conservative enough, and for not doing what we sent them to do. We've got the other guys feed the masses with the pablum of public bail outs.

The weird thing is how unconservative the W. administration has been on everything but stem cell research. When was the last time we had a true conservative in the White House? Eisenhower?

Reagan was a great man, but he was no fiscal conservative.

Here's the weird thing: it often takes a leader from the opposing party to achieve the goals of a party.

Cases in point:
Nixon established relationship with China.
Clinton ended easy welfare payouts.
There are a bunch of other examples of this, but I'm too lazy to go find them.

The theory is that only the leader of the party opposed to an issue can be "trusted" by his own party to do it right, and therefore won't get the full opposition that his own party would bring on the leader of the other party.

For example, the Republicans trusted Nixon and knew he was no pinko commie -- therefore, they allowed him to lead the U.S. to talking with communist China. Had a leader of the Democrats attempted to do this, the Republicans would have opposed him with all their might.

In Clinton's case, the Democrats trusted that his heart was in the right place concerning the poor -- so they allowed him to reform welfare. Had a Republican leader attempted this, the Democrats would have opposed him with all their might.

This obviously isn't a blanket rule, but it's occurred often enough that the phenomenon has been observed by many.

 

[Red_Chili]

Maybe the better question is Does anybody believe they will one day pay down their 30 yr mortgage to nil and be house payment free?

Yes. Right about retirement. Maybe sooner.

 

[Red_Chili]

The weird thing is how unconservative the W. administration has been on everything but stem cell research. When was the last time we had a true conservative in the White House? Eisenhower?

And Kennedy was an early trickle-down, reduce taxes advocate and it worked. I am rather a Kennedy Democrat. Clinton was no Kennedy. Except in the area of women.

Regards stem cell, dunno if you've been following it, but the most recent research has had good success turning adult human skin cells into viable stem cells, so much so that the guy who 'bred' Dolly the cloned sheep is giving up embryonic stem cell research in favor of altering adult cells. This is beyond huge. What this means is that we are on the verge of all the benefits of stem cell research without the controversy of creating human life in order to 'harvest' it. Makes the whole controversy moot.

We live in fantastic times.

 

[ScaldedDog]

Maybe the better question is Does anybody believe they will one day pay down their 30 yr mortgage to nil and be house payment free?

Absolutely. I'm 49, and will not be making house payments past 59, Lord willin', and I'm interested in doing that only if we can find the perfect place. If we can't can't pay it off in ten years, then we can't afford it.

Of course, if you're 25 and just starting out, ten years may be too aggressive, but the goal of living in a home you own should still be the goal IMHO.

As far as I know, all my siblings and my parents own their homes free and clear. We're not rich people - we all just work for a living like everyone else. However, we did have parents who grew up during the Depression, and the values they imparted to us have served us well.

Mark

 

[Uncle Ben]

Maybe the better question is Does anybody believe they will one day pay down their 30 yr mortgage to nil and be house payment free?

I know the reality is that their are other reasons to maintain a reasonable mortgage even if you could pay it off, but isn't it said that this thing we call our "biggest investment" is really just a huge interest payment that consumes 20-50% of our monthly income?

Not for a long time! I will continue to reinvest my equity into profitable ventures....it has worked very well so far! I would much rather use my deductions instead of polishing marble with my capital gains taxes!