Covering a mortgage without losing your ass(ets).

[sgeeeee]

. . . Holy cow. *Drinks for everyone on me!

. . .

I've spent the last 3 days on a camping trip and am not about to read everything that has been posted during that time. But I did catch this line.

Please send my drink to me ASAP.

I bought a new winter coat yesterday (on sale - 50%
off) and before selecting it I got into a conversation with another shopper (I talk to everyone. My wife thinks it is
quite interesting). Anyway, this guy is 57 years old, has
multiple credit cards, owned a couple of houses and claims he has never paid any interest to anyone in his
life. I congratulated him and opined that he was
pretty unusual. Man, if that was the norm our economy would grind to a halt.

John Galt

[sgeeeee]

I bought a new winter coat yesterday (on sale - 50%
off) and before selecting it I got into a conversation with another shopper (I talk to everyone. *My wife thinks it is
quite interesting). *Anyway, this guy is 57 years old, has
multiple credit cards, owned a couple of houses and claims he has never paid any interest to anyone in his
life. *I congratulated him and opined that he was
pretty unusual. *Man, if that was the norm our economy would grind to a halt.

John Galt

Did the man own a kayak? folding or otherwise?

[cute fuzzy bunny]

Please send my drink to me ASAP.

You and GDER need to re-read my original post.

"Drinks for everyone are on me".

GDER's drink is on my knee and will be consumed shortly.

You can guess where YOUR drink is...

[sgeeeee]

. . .
You can guess where YOUR drink is...

In your kayak

[cute fuzzy bunny]

In your kayak

Noooo..but I guess you could call it that as a euphemism...

[Nords]

We refinanced again this month-- barely nine months after the last refinance (which has already paid for itself).

This time we went from NFCU's 5.5% to 5.375%. Zero points, less than 80% LTV, no cash out, applying online, no documentation or appraisal, and haggling with the title company brought the total refinancing cost down to $1151. Our payments dropped by $44 so this time it'll take 27 months to pay back the refinancing costs.

Not that I'm in any hurry to do this again. One eighth of a point was almost not worth the hassle but the zero-points rates have already "zoomed" back up to 5.625% after hovering at/below 5.5% for the last year. (So I'm calling the bottom on the best rates in the last 40 years.) We could have paid points for a lower rate but I think that points are priced for the bank and not the borrower. (Saluki, Brewer, am I right or wrong on that?)

Back in Oct 2004 (the beginning of this thread) we moved a large chunk of our portfolio, including the refinancing proceeds, into the S&P600/Barra Small-cap Value ETF (IJS). I'm tracking this on a spreadsheet with the assumption that we subtract 15% from dividends (to pay taxes) and reinvest the remainder (which Fidelity brokerage does for free). The ETF is up 18% since then and reinvesting dividends has boosted the return to 18.7%. Sure it looks smart now, but let's give this another 29 years before making a judgment call. We could look equally stupid next spring but we'll keep reinvesting those after-tax dividends.

By the time this mortgage is paid off I'll be nearly 75 years old.

Here's an interesting commentary on financial fiduciaries. Two weeks after the Oct 2004 refinancing the NFCU cold-called to offer us a HELOC at zero cost (based on the paperwork from the refinancing closing). We graciously accepted (it's only about 10% of the home's equity) since it's just one more source of emergency cash that we don't intend to use. NFCU even paid a notary to come out to our back lanai for the paperwork.

Two weeks after this latest refinancing we got another NFCU cold call offering us another HELOC. Spouse graciously accepted and the caller got busy on the paperwork. About two-thirds of the way through the script my spouse said "How does this work-- do we use our current checkbook or do you send us another one?" The caller asked "What do you mean by your 'current checkbook'?" Spouse told her we still had the first HELOC and the caller said "I'm sorry, you must be mistaken, we don't show that on our records here." Spouse said "Sure, whatever you say! When do we sign?" The caller said "Uh, we'll call you back..." and we haven't heard from them since.

[Patrick]

Originally Posted by Nords

We refinanced again this month-- barely nine months after the last refinance (which has already paid for itself).

This time we went from NFCU's 5.5% to 5.375%.* Zero points, less than 80% LTV, no cash out, applying online, no documentation or appraisal, and haggling with the title company brought the total refinancing cost down to $1151.* Our payments dropped by $44 so this time it'll take 27 months to pay back the refinancing costs.

It looks like 0.5% less for the 15-year mortgage.* What would your payments have been with that vs. the 30-year?

[brewer12345]

I think that points are usually priced such that you would have to stay in the loan for seeveral years to break even. I don't pay points as a rule because I know that the likelihood that I will keep any given loan long enough to come out ahead (positive NPV) is pretty slim.

Nords, I actually got my sister to lock in a refi about 4 weeks ago right before rates shot up again. She is going to refi a higher rate mortgage, plus the house has appreciated enough that she will be able to roll the pigggyback 10% HELOC into the first mortgage and stay at 80% LTV.

[Nords]

Originally Posted by Patrick

It looks like 0.5% less for the 15-year mortgage. What would your payments have been with that vs. the 30-year?

"Extremely painful." They would have risen by over 40% and destroyed cash flow.

While a 15-year-mortgage does a great job of reducing the loan's total interest, the shorter term is a little tight on the odds of the stock market returning more over that period. I agree that it'd have to be a heckuva bear market, but it could also be a miserable prolonged sideways market... kinda like Japan or the one we're in now.

But if we can keep getting cheap money to play the stock market's long-term (30 year) performance, while handling the cash flow within the confines of my pension payments, then I'll never pay off a mortgage. If I had to dip into the investment to make the payments then I think the whole project would become much more risky and subject to loss of capital.

With mortgages at their lowest rates since the early 1960s, this may have been a once-in-a-lifetime arbitrage. But if I can still do the math in another 40 years then I'll keep an eye on it.

Originally Posted by brewer12345

I think that points are usually priced such that you would have to stay in the loan for seeveral years to break even.* I don't pay points as a rule because I know that the likelihood that I will keep any given loan long enough to come out ahead (positive NPV) is pretty slim.

Nords, I actually got my sister to lock in a refi about 4 weeks ago right before rates shot up again.* She is going to refi a higher rate mortgage, plus the house has appreciated enough that she will be able to roll the pigggyback 10% HELOC into the first mortgage and stay at 80% LTV.

Our breakeven on points was usually 8-9 years. For a small drop like this (less than 0.5%) it might have been decades.

Excellent news for your sister, now all she has to do is stay in the house for a while and defy the national averages!

NFCU is pretty slow to raise rates and very quick to drop them, so I wonder if they're a harbinger of the industry. A rise of this magnitude this quickly from NFCU may signal that long-term rates are going up again and that the yield curve isn't going to invert after all. Which means that the next decade could include a situation where our 5.375% mortgage is less than the after-tax return on long-term CDs. Life is good!

[LEX]

I do not buy my clothing with the idea that I have made "an investment", same with my car, and in fact I treat my house as only a consumable expense. In all these classes of "asset" I pay cash or move towards payoff as soon as i can. Owning these mainstays for basic living is a fundamental risk hedge when ones cash flow can not be easily incresed, such as one retired on a fixed income. Playing with debt as if one can arb the banking system can work, especially in an inflationary economy, where interest rates will rise above the basis of the bank loan, or one that has a currency that will move down in real value, such as the recent situation in Argentina.

For me, I choose to treat my house as a form of prepaid rental annuity, where my pay off was a prepayment of future rental costs, minus tax, insurance and maintenance overhead, which are significantly lower than debt burden for capital replacement of the house. I would rather not do anything to leverage this annuitized position with a mortgage and interject foreclosure risk at this point in my financial planning cycle.

[sgeeeee]

Originally Posted by LEX

I do not buy my clothing with the idea that I have made "an investment", same with my car, and in fact I treat my house as only a consumable expense.* . . .*

Well . . . whatever you feel good about is okay for you. But I don't see any similarity at all between the financial implications of borrowing for a home and borrowing for my socks and underware.

I don't expect my clothing to last for 30 years so a 30 year loan doesn't make much sense for socks and underware. And if the right time frame for my socks and underware were only 3 or 4 years, then I might have trouble finding any interest rate loan (short of 0%) that I would feel good about. Also, the DW and I spend less than $1000 per year on clothing. Even if I could make money on the loan it would be insignificant and doubtless not worth the effort.

My car is only slightly different. I tend to keep a car for 6 to 10 years depending on mileage, etc. Even at 10 years, a loan rate would have to be pretty low to insure a high probability of financial gain and the amount of money involved is still pretty insignificant. I suppose if I could get a 1% or 2%, 10 year loan for my cars, I would consider it. But there is still more risk for that kind of purchase than there is for a 30 year mortgage on a home at 5%.

Also, I don't see much leverage in financing a depreciating investment like my Fruit of the Looms or Dodge Ram. But my home keeps going up in value and I'm getting that increase in net worth without having to committ current dollars.

Everyone should do what they feel comfortable with. But my view of things is that my home is not at all like my underware.

But I'm making real money on my low interest home mortgage.

[Nords]

Originally Posted by ((^+^)) SG

But I'm making real money on my low interest home mortgage.*

As long as you don't splurge on socks & underwear...

[HFWR]

Don't wear either.............

[Nords]

Originally Posted by Have Funds, Will Retire

Don't wear either.............*

It's good to know that you can always count on someone to explain the subtle jokes to the rest of the audience...

[LEX]

Originally Posted by ((^+^)) SG

But I'm making real money on my low interest home mortgage.*

...and your bank has a call to own your property outright under a very one sided deed of trust which the mortagee has over this primary asset that even california with its consumer friendly courts will yank the house right from your widows feet with the right set of circumstances. It always amazes me that so many of us are so smart that we must play with our money for a few points spread. I suggest that if you pay off the house and leave leave things simple you have taken care of one of the most difficult estate issues that can arise for your surviving spouse. She has a roof over her head and will not have the mortage to worry about.

I can and continue to make plenty of income on arb spreads in the copper and oil markets, both in equity and pure commodity trades. Its fun, and i am a seasoned professional. Perhaps because I have seen both short, margin and secured positions go bad and leave one totally broke, I refuse to do the same with the home my family lives in.

So, make your trades and good luck.

[sgeeeee]

Originally Posted by LEX

...and your bank has a call to own your property outright under a very one sided deed of trust which the mortagee has over this primary asset that even california with its consumer friendly courts will yank the house right from your widows feet with the right set of circumstances.* It always amazes me that so many of us are so smart that we must play with our money for a few points spread.* I suggest that if you pay off the house* and leave leave things simple you have taken care of one of the most difficult estate issues that can arise for your surviving spouse.* She has a roof over her head and will not have the mortage to worry about.

To me, this is a fear based, irrational argument. I have the money to pay off the mortgage tomorrow -- 25 times over. I'm in no danger of losing my house. That's absurd. If I did pay off the mortgage, I would have less nest egg. A lot of folks seem to miss that point. When you pay off the mortgage, you have less money working for you. And a house is far less liquid and versatile than money. Historical simulators don't lie about history. Throughout the 1872 to modern financial history, the safest financial move to make regarding a 5% 30 year mortgage is to keep it. That is a simple fact. People think they are being safe and conservative paying off their mortgage, but if their rate is low enough and the term is long enough they take on more risk by paying it off than by keeping it. If they feel better paying it off, then by all means they should do it. But they aren't tilting their odds toward safety.

Originally Posted by LEX

I can and continue to make plenty of income on arb spreads in the copper and oil markets, both in equity and pure commodity trades.* Its fun, and i am a seasoned professional. Perhaps because I have seen both short, margin and secured positions go bad and leave one totally broke, I refuse to do the same with the home my family lives in.

If that feels good to you, that's great. I personally don't like the risks of trying to make money on spreads in copper and oil markets. I don't feel comfortable with commodity trading and I wouldn't find it fun. That's too much risk for my blood. I'm a simple index investor with a smattering of individual bonds and stocks that I am very familiar with. But I do understand how to make money by making my normal balanced investments and making periodic fixed payments on my mortgage. I can measure how much money I am ahead at any time (thanks to Microsoft Money). The odds are heavily in my favor and I am way ahead in this investment choice.

But your confidence in your own investment prowess really makes me wonder -- if it is easy and safe for you to make plenty of money trading in this way, why would you pay off a low interest mortgage rather than use that money to build more comfort and safety for your family? What is your rate of return over the past 3 or 4 years? If it's better than ~6%, you could have been making a lot of money on the spread between your return and the mortgage(w/tax) rate.

Originally Posted by LEX

So, make your trades and good luck.

I will. Thanks. And good luck to you too.

[LEX]

I leave you with the last word on topic....good discussion.