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Old 04-05-2009, 07:43 PM   #41
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Just refi'ed with Pen Fed CU for 30 yr fixed at 4.87% no points. Got the lead on Pen Fed from this Board, will save 300+ per month. thanks
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Old 04-05-2009, 08:59 PM   #42
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There are also tax treatment differences between the amount of a mortgage used to purchase a house, the amount used to improve a house, cash out that was not used on the house at all, and cash out that was used to invest. And they are different for AMT of course.
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Old 04-05-2009, 09:55 PM   #43
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There are also tax treatment differences between the amount of a mortgage used to purchase a house, the amount used to improve a house, cash out that was not used on the house at all, and cash out that was used to invest. And they are different for AMT of course.
Yeah, and Professor Shiller has remarked that we got into this housing bubble (resulting in this global economic mess) when we started viewing the house more like an investment vehicle, with special tax treatment, as a way for everyone to get rich, instead of a place to live. It's like the current thread, right?

Haven't read this new book by Professor Shiller, but I have a signed copy from the authors. Akerlof, G.A. and Shiller, R.: Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism.
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Old 04-06-2009, 06:49 AM   #44
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Having a paid for house gives me priceless peace of mind and I wouldn't borrow on it to invest simply because I don't have the stomach for it. My dear friend has a husband who was in banking for his entire career. They paid off their home several years ago but then the husband decided to refinance the entirety of the home and invest the money in bank stocks. You can guess what the result was. They lost nearly everything and now they have to pay for the house all over again. Not good!
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Old 04-06-2009, 10:11 AM   #45
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I feel the same way, Shoe. But it's just a feeling, not exactly dispassionate analysis of the situation. Hopefully, our feelings about homeownership may get handed down to the next generation. My daughter, with the entire downpayment funding from the Bank of Dad and Mom, just placed a contract on a modest condo, which was accepted by the bank that foreclosed on the property. She's a teacher, excited about her first owned residence, and we're hoping we're sending (and she's receiving) all the right messages about home ownership; her credit score is even better than my score, so she's financially responsible. But if she ever places a HELOC on this property or decides she wants to put someone else's name of the deed, the Bank of Dad and Mom's gift become's a loan immediately due and payable, with God and her little sister as our witnesses.

Meanwhile, I could easily refinance or HELOC my own homes (or better yet, borrow from my 401K at .77% interest -- yep, it's .77 interest) and mess with arbitraging or investing -- I just don't view the house that way -- saw my dad save for his house, which kept him and my mom off the welfare rolls during their lifetime -- just wouldn't treat my home as an investment bank.
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Old 04-06-2009, 10:27 AM   #46
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Having a paid for house gives me priceless peace of mind and I wouldn't borrow on it to invest simply because I don't have the stomach for it. My dear friend has a husband who was in banking for his entire career. They paid off their home several years ago but then the husband decided to refinance the entirety of the home and invest the money in bank stocks. You can guess what the result was. They lost nearly everything and now they have to pay for the house all over again. Not good!
Rather extreme example, no?

To go from "I don't have the stomach for risk" to someone who put all their money in one sector just isn't meaningful.

It's a little like saying "I would never drive a car, because last night on the news they had a story about a guy who got drunk and drove his car off a cliff doing 120 mph".

So, based on your story about how someone can loose money in an investment, I take it you do not invest at all. What do you do with your money to keep it risk free? Or is it all in your house?

-ERD50
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Old 04-06-2009, 10:42 AM   #47
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We're kinda PushmePullyou people. No single definitive answer, no 100% money on black or on stocks. Most of our places are paid off, but we are carrying a 15 year mortgage on our home at 4.99 with PenFed. Could pay it off, but we would have to dip into the 6.25% PenFed CDs to do it. Weirdest bank situation i've ever been in. In January the CDs mature, but we will still carry the mortgage because the current rates are without precedent in my experience - 8% seems more like a normal amount. Hoping we can continue to find people willing to pay 10% to borrow from us, or maybe we'll be drawn kicking and screaming to buy more places. I agree that inflation and higher interest rates seem like a no brainer and that bettting on that is smart. Ten years from now we'll see just how smart that is....
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Old 04-06-2009, 12:42 PM   #48
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Rather extreme example, no?

To go from "I don't have the stomach for risk" to someone who put all their money in one sector just isn't meaningful.

It's a little like saying "I would never drive a car, because last night on the news they had a story about a guy who got drunk and drove his car off a cliff doing 120 mph".

So, based on your story about how someone can loose money in an investment, I take it you do not invest at all. What do you do with your money to keep it risk free? Or is it all in your house?

-ERD50
ERD50, if you read again , what I said was I couldn't stomach risking my house, not that I couldn't stomach risk. We have a COLA'd pension as well as a 403b and other investments. I am probably more sensitive to the type of risk we are talking about because I am directly affected. My mother lost her life long home this same way and now lives with me because she has nothing left but a very small SS check. My SIL lost her husband due to cancer and received $150,000 in life insurance. Rather than pay off her house, she gave it to a financial advisor(who also suggested she pay off the house) and between the drop in the markets and living beyond her means, she filed bankruptcy and the house was foreclosed on. Risk leaves wreckage sometimes.
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Old 04-06-2009, 02:12 PM   #49
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ERD50, if you read again , what I said was I couldn't stomach risking my house, not that I couldn't stomach risk. We have a COLA'd pension as well as a 403b and other investments. I am probably more sensitive to the type of risk we are talking about because I am directly affected. My mother lost her life long home this same way and now lives with me because she has nothing left but a very small SS check. My SIL lost her husband due to cancer and received $150,000 in life insurance. Rather than pay off her house, she gave it to a financial advisor(who also suggested she pay off the house) and between the drop in the markets and living beyond her means, she filed bankruptcy and the house was foreclosed on. Risk leaves wreckage sometimes.
As the other posts have covered, it's not a "Yes/No" question. It depends on what other investments you have and your overall portfolio (basic AA). And making bad choices is simply making bad choices, market risk or not.

Take your SIL's unfortunate circumstance - for simplicity, let's ignore the 'living beyond her means', as that will sink anyone (by definition). And again for simplicity, let's say the house had $150,000 remaining on the mort.

So, we need to know about her AA and portfolio. If this is the only $150,000 she has, she needs to invest it conservatively. And that is unlikely to earn more than mortgage rates, so it's not real attractive.

OTOH, if it *is* all the money she has, and she pays off the mortgage, she has nothing to cover an emergency. The liquidity of that $150,000 is important and valuable. And it will pay the mortgage for many, many months (years) while she gets situated. If she plans to keep the house she is going to need an income stream to support it. Don't forget, if she does not pay off the house, she HAS that $150,000 (which should be in conservative investments).

For example, GNMAs are paying ~ 4.5%, they do vary some in NAV, but not much and are not 'risky'. So, even if that is less than the mortgage rate, you can look at it as paying a small fee for liquidity. What's the option if an emergency comes up or she loses her job and she paid off the house? There are still bills to be paid, ins, utilities, taxes, food on the table, gas for the car, etc. You are going to pay for liquidity at that point, and it will probably be more expensive than the difference in the mortgage and GNMA rates, if available at all.

So, if you want to rephrase this as "Should a person who would do a really bad job of investing the money pay off the mortgage instead?" Well, then I'd say yes - but it would be better if that person got a little education instead, and made an informed decision. But that could still leave them in a liquidity crisis, so maybe they just swapped one problem for another?

Now, let's look at the 'living beyond your means' aspect of your SIL's situation. OK, if your SIL invested that money at the exact peak, $150,000 in the market would still be worth over $65,000 at the recent lows. So, if she blew that $65,000, then I'm also sure she would have also got into trouble if the house was paid for - she would have racked up CC debt, taken out a HELOC, something. I don't think a paid off house is a solution for a spend mentality.

This is a financial tool, and like so many other things - don't condemn a "tool" because it can be misused by some.

-ERD50
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Old 04-06-2009, 02:34 PM   #50
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ERD you have some very good points. For an educated investor, refinancing the family home in order to invest the money probably works a good percentage of the time. For Dh and me, though, a paid for home makes a soft pillow because we value peace of mind more so than a fatter bank account. I'm not saying that everyone has to have a paid for home in order to have peace. Just that WE do.
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Old 04-06-2009, 03:24 PM   #51
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There's a lot of basic financial "tools" one can use when looking at whether you should treat your home as an investment bank, arbitraging interest rate spreads or investing in other opportunities. The gravity of the risk and the probability of harm should be balanced against the "gain" one can have on the upside, when you turn your home into an investment house.

One can agree that being house rich and cash poor is not an enviable position to be in as well, but on balance there are many more things you have to consider (emotional as well as financial) which might tip the scale of being "stuck" with an illiquid asset (which can be monetized by a reverse mortgage after 62 and beyond) and not making a better return on your home. Indeed, taking into account creditor-debtor protection for jointly owned residential property by spouses, and favorable estate and Medicaid-long term health care planning -- the balance might actually tip in favor of having the illiquid asset of a house rather than leveraging it into better returns (and even safer ones too) from investments.
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Old 04-21-2009, 08:00 AM   #52
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I've been thinking about doing this myself, although circumstances are slightly different I think effect is the same. We are selling a more expensive house and can -- if we want -- use equity to buy new house outright. Nevertheless, I have been wondering whether it would be good to finance some part of the new place in hope/expectation that interest rates will rise during next 30 years and low-risk investment opportunities (eg Munis) will be available that will pay more than the mortgage rate. Add to this, the tax benefits from the mortgage and a 5% mortgage rate will cost me more like 4% net. After lots of thought, I am leaning against it though, because cost of carrying loan will add up until inflation takes hold again and it will undoubtedly take time to make up that ground. I could certainly understand someone doing this, but don't think it will be me.

If you are ready to invest in something with higher risk/return immediately, it seems to me that another way to look at this is that the cost of the loan will subtract from your net rate of return. That is, if expected rate of return is 10% and cost of loan is 4%, then your net expected upside is 6%. But the risk commensurate with a 10% ROR remains. Let me know if you think there is a better way to look at it, though.
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Old 04-25-2009, 02:06 PM   #53
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I think the safest place to be these days is debt-free.
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Old 04-25-2009, 04:39 PM   #54
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eeeehhhhhhhhhhh wrong. Fixed debt is awesome as interest rates rise(as they soon will be) and devalue your debt. The answer to the OP is a most definite yes. Take the money and put it in reward checking at 5% and arbitrage the difference. Don't put refi cash out money in a riskable investment(such as equities), but there are plenty of places that will pay out more than mortgage interest minus deduction and dont carry any or much risk. And even if today you were taking a minor loss between the investment and the mortgage interest that will not last long at all and when interest rates do rise again you will see some very beautiful profits on the spread.
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Old 04-25-2009, 07:06 PM   #55
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How will you like your debt (at any interest rate) if we should fall into deflation? IMHO, the best time to leverage your home, to raise cash to invest, is NEVER. YMMV.
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Old 04-25-2009, 08:19 PM   #56
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I'm thinking about it also.Prudent ,out of debt people like us have become a rarity in this society.The vast majority want inflation big time.With the fed printing & treasury racking up huge debt ,sooner or later they'll get what they want.Then holding a 30yr mortgage at 4-5% will put a smile on your face.
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Old 04-25-2009, 09:35 PM   #57
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I also like the idea of having the cash on hand instead of locked up in the house.

I need to run the numbers and talk with the bank before I chose. More than likely I will put it off and rates will rise before I pull the trigger.

I am really supprized that others arn't looking into this.
we're thinking of this. In our 30's, paid off home. We are moving (to an area that we both love), and will rent for the next year. If a good buy comes up, then we'll buy. Meanwhile, with the primary residence, thinking of parking the money taken out in someplace "safe" and just waiting for the double digit interest rates.
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Old 04-26-2009, 09:43 PM   #58
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Lets just establish the fact that large scale deflation shouldn't be a concern right now. First of all, in order experience more deflation either the fed has to raise rates significantly or the market has to experience another huge crash/crisis on top of our current one. The latter is economic armageddon and everybody is pretty much screwed anyway. The former isn't any big secret, large increases in the fed funds rate are visible to all, and so all you would have to do is take the money and pay off the mortgage (because you should have it in something that is both liquid and no/low risk).

Lets just say that when other people have lots of debt, you don't want any. And when everybody wants to be debt free that is when you want lots of it. And right now everybody is absolutely petrified of debt.
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