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Old 03-09-2011, 07:25 PM   #1
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File under the category of someone who must have spent the last five years living under a rock.

Saving up for a big down payment? Sucker! (Corrected) | Prism Money | Analysis & Opinion | Reuters.com

Even if you have the money for a bigger down payment, there can be good reasons to save your cash. Mortgage rates continue to skirt all-time lows: Why not put your money to work for yourself and borrow as much as you can reasonably afford, on a monthly basis, at today’s rates? You can put the money you’re not paying into a down payment to work elsewhere. If home values rise, you will have done your best to leverage a small down payment into bigger equity. If they fall, you’ll have less skin in the game, and that could put more pressure on your banker to improve your loan terms lest you walk away.
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Old 03-09-2011, 07:36 PM   #2
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Well, it has been a couple of years ... time to start forgetting.
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Old 03-09-2011, 07:39 PM   #3
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File under the category of someone who must have spent the last five years living under a rock.

Saving up for a big down payment? Sucker! (Corrected) | Prism Money | Analysis & Opinion | Reuters.com

Even if you have the money for a bigger down payment, there can be good reasons to save your cash. Mortgage rates continue to skirt all-time lows: Why not put your money to work for yourself and borrow as much as you can reasonably afford, on a monthly basis, at today’s rates? You can put the money you’re not paying into a down payment to work elsewhere. If home values rise, you will have done your best to leverage a small down payment into bigger equity. If they fall, you’ll have less skin in the game, and that could put more pressure on your banker to improve your loan terms lest you walk away.
I would imagine that most who don't approve of paying off the mortgage, would agree with this strategy. Borrow as much as you can at low rates, and then invest at presumably higher rates. I wonder if banks might offer a lower interest rate to those coming up with a high down payment. That might be a Catch-22, here (if they still do that).
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Old 03-09-2011, 08:22 PM   #4
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That's OK, the junk markets are way ahead of these folks. I see an increasing number of covenant lite, sponsor dividend and even PIK bond deals getting done these days, all of which are hallmarks of the junk market getting stoopid. I have sold all my junk and will wait for the next implosion to buy back in.
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Old 03-09-2011, 09:03 PM   #5
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That's OK, the junk markets are way ahead of these folks. I see an increasing number of covenant lite, sponsor dividend and even PIK bond deals getting done these days, all of which are hallmarks of the junk market getting stoopid. I have sold all my junk and will wait for the next implosion to buy back in.
I would presume crappy second lien and mezz deals are also on an uptick.
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Old 03-09-2011, 09:59 PM   #6
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I agree with the idea of maxing out a mortgage which costs relatively little to invest elsewhere with a reasonable expectation of earning higher returns provided that (i) your time horizon is long enough and (ii) you have the ability to service the debt through other means should it be necessary. At the risk of uttering some famous last words, it's worked for me ..... so far. Once I FIRE, (ii) may no longer apply so I will most likely prefer not to have a mortgage against the home.
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Old 03-09-2011, 10:30 PM   #7
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I agree with the idea of maxing out a mortgage which costs relatively little to invest elsewhere with a reasonable expectation of earning higher returns provided that (i) your time horizon is long enough and (ii) you have the ability to service the debt through other means should it be necessary. At the risk of uttering some famous last words, it's worked for me ..... so far. Once I FIRE, (ii) may no longer apply so I will most likely prefer not to have a mortgage against the home.
I think reasonable fixed mortgage debt under the American plan is almost a gift from god. How else can you get uncallable, putable, 30 year fixed debt at <=5%?

Ha
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Old 03-09-2011, 10:38 PM   #8
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I think reasonable fixed mortgage debt under the American plan is almost a gift from god. How else can you get uncallable, putable, 30 year fixed debt at <=5%?

Ha
More like a gift from Uncle Ben.

I only wish I could get fixed rate mortgages out here in HK....but then I shouldn't complain too much. Interest rates may get reset every month, but they're still below 1% at a time when inflation (as measured by HK CPI) has risen to 3.6%.
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Old 03-10-2011, 07:01 AM   #9
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I agree with the idea of maxing out a mortgage which costs relatively little to invest elsewhere with a reasonable expectation of earning higher returns provided that (i) your time horizon is long enough and (ii) you have the ability to service the debt through other means should it be necessary. At the risk of uttering some famous last words, it's worked for me ..... so far. Once I FIRE, (ii) may no longer apply so I will most likely prefer not to have a mortgage against the home.
I did the same for many years. As I approached ER I set aside a portion of my portfolio to pay off the mortgages when I dropped into a lower tax bracket. They are paid off now.
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I think reasonable fixed mortgage debt under the American plan is almost a gift from god. How else can you get uncallable, putable, 30 year fixed debt at <=5%?

Ha
Sounds like god (Fannie/Freddie courtesy of Uncle Sam)may drop out of the business. Bye, bye, 30 year fixed.
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Old 03-10-2011, 07:15 AM   #10
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I would presume crappy second lien and mezz deals are also on an uptick.
Yes, especially in commercial real estate and middle market deals. Capital markets participants really have learned absolutely nothing.

The only saving grace thus far is that all of this is being done at much lower leverage levels. In 2006 and 2007, every LBO/leveraged recap deal I spreadsheeted had its debt load sized such that the target's cash flow would just about cover cash coupons on the debt, assuming nothing went wrong with the underlying business. That means there was no cash left over for maintenance capex, debt paydown, business expansion, etc. We are nowhere near there these days (yet).
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Old 03-10-2011, 09:23 AM   #11
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You would think at some point 30 year fixed low rate mortgages will disappear. So you should load up while you can. I still think mortgages and retirement don't mix but we have beaten that one to death many times.
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Old 03-10-2011, 01:19 PM   #12
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I think reasonable fixed mortgage debt under the American plan is almost a gift from god. How else can you get uncallable, putable, 30 year fixed debt at <=5%?

Ha
It makes me wonder if we won't see some real bank troubles in the future if rates rise. I know the average length of a mortgage is ~ 6 years (or was, last time I checked), but those would include a lot of active re-financing. I wonder if enough hold their mortgages for 20-30 years to get the banks in trouble?


Yes, uncallable, putable, 30 year fixed low rate loan is quite the offer. Darn it, you're tempting me to take a big old honking mortgage out, rather than the small variable (now @ ~ 3%) one I have 20 years left on.

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Old 03-10-2011, 01:21 PM   #13
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You would think at some point 30 year fixed low rate mortgages will disappear.
I think they should disappear. You just can't project 30 years out, and it probably causes all sorts of odd side effects, or maybe crashes later. IIRC, a poster from Australia was saying there is no such thing there. You get a 10 year loan max I think, refi or sell when the time comes.

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Old 03-10-2011, 02:06 PM   #14
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I wonder if enough hold their mortgages for 20-30 years to get the banks in trouble?
My understanidng is that most of these are very rapidly securitized and shipped out by the originator. Then they go live at Fannie or Freddie. In my moderately large city I know of only one portfolio lender. Most banks learned during the late 70s->80s how quiclky they could be hurting financing long term assets with short term liabilities. Today, the buck stops with J.Q. Taxpayer.

There is a new member who spent her career in the mortgage industry, I hope she will comment.

Ha
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Old 03-10-2011, 02:10 PM   #15
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I think they should disappear. You just can't project 30 years out, and it probably causes all sorts of odd side effects, or maybe crashes later. IIRC, a poster from Australia was saying there is no such thing there. You get a 10 year loan max I think, refi or sell when the time comes.

-ERD50
I totally agree. Most terms in Canda are initially 5 years or less. Big penalties to refi. Our banks have done remarkably well and the fact we have a better mortgage model here is a big part of the reason.
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Old 03-10-2011, 02:39 PM   #16
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ha - I think I am probably the person you are referring to. I have spent the past 30 years in the mortgage industry- retiring last October and now living the good life. My experience may not parallel that of banks or other mortgage lenders. In my organization, we were a housing authority that made loans to first time, low to moderate income buyers. We obained our funding by selling mortgage reveue bonds on Wall Street. The interest rate we achieved on the sale of our bonds dictated what interest rate we could offer our borrowers. There are many federal rules/laws that govern how we could lend the money back out, what kind of spread we could make, who we could lend to, how the loans must be insured, etc., etc. Given that, we were still able to lend our $$$ at rates which were below market rates - not a lot below - maybe just 1/4 or 1/8 below. We made FHA, VA, RHS and Fannie Mae conventionl loans. Since the loans and the interest rates were tied to a specific bond indenture with a specific debt service that was all determined at the time the indenture was made, holding onto a loan for a 20-30 period would not have created any problems for us. However, as someone already mentioned, seldom does a loan live for its entire life. Most loans payoff, either through refinance or sale, in about 7 years.
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