Mortgage rates headed down - time to refi?

[jIMOh]

Quote:

Originally Posted by jblack No sure we're looking at the same thing or talking the same language. Where are you seeing 5.5% for a 30yr fixed? You mention Ameriprise but their website is showing 30yr fixed at 5.75% and that's with paying 1 point (6.0% with 0 points). The 15yr there is 5.625% with 0 points. Ameriprise Financial — Main Page PenFed is still the best I've seen given the no closing costs.

I am looking for lowest rate and I think the one I am tracking has some points on it. I am in year 2 of a 30 yr fixed, so paying points is not a huge issue for me.

I meant amerisave, not ameriprise. My error.

here's my search for today

e-loan
http://www.eloan.com/s/quotesubmit
5.375% with points
6.375 with no points

bankrate.com
Compare Mortgage Rates | CD Rates | Home Equity Loans Mortgages Quotes Best Rate Calculator Bankrate.com
5.64%


Mortgages and Mortgage Loan Rates in OH, Cincinnati Refinance $165,000 to $300,000 Fixed Rate 30 yr fixed mtg refi -- Free search for the best Mortgage rates
5.875% to 6.125%

Amerisave
Mortgage Refinancing | Mortgage Quote | Mortgage Loan at Amerisave=
5.25% with points
6.125% without points

My thought is we still have 1-3 months before we might see 30 year rates drop below 5%. I am not expecting an immediate drop right now. I am tracking the rates so I see the trending, but with a 5.75% right now, no hurry to see rates go down.

[myself]

Have you ever looked at an amortization schedule?
Even at 5%, you have paid more in interest than you have toward the principle until payment # 347 (almost 29 years).
Now, if you're putting at least the difference between a 30 year and a 15 year mortgage into retirement savings, I'd say that's OK. Otherwise, you're hurtin' for a while.
But, that's JMHO.

[OAG]

10 year, HEL, is still 4.99% FIXED as of today.

[cute fuzzy bunny]

Yep you've guaranteed a huge portion of your retirement spending risk at a low cost to your earning potential.

And by poll, the majority of the people on this site agree with that assessment.

But for those who wish to margin loan their home for the next 30 years in the plausible hope of earning a little more money to leave behind...go for it!

[W2R]

Quote:

Originally Posted by cute fuzzy bunny Yep you've guaranteed a huge portion of your retirement spending risk at a low cost to your earning potential. And by poll, the majority of the people on this site agree with that assessment. But for those who wish to margin loan their home for the next 30 years in the plausible hope of earning a little more money to leave behind...go for it!

Absolutely! I have no problems with any gloating, glee, and irrepressible happiness that ERD50 may be feeling these days. His life and financial situation are different from mine, and I'm sure he has made the choices that make him feel the most gleeful, as well.

[ERD50]

Quote:

Originally Posted by Want2retire Absolutely! I have no problems with any gloating, glee, and irrepressible happiness that ERD50 may be feeling these days. His life and financial situation are different from mine, and I'm sure he has made the choices that make him feel the most gleeful, as well.

I thought I was clear before, but I guess not - let me put it as succinctly as I can:

1) I don't think I've ever criticized your decision to prepay your mortgage. You have explained your case. It makes sense for you.

2) I have criticized how you present the financial analysis of pre-paying the mortgage. It's just wrong to ignore the time-value of money.

Based on #2, I do have trouble understanding your excitement over the pre-pay, but to each their own.

-ERD50

PS - this was not in response to your last post pls don't take in that context, - we need that ' a post was submitted' feature!

[W2R]

Quote:

Originally Posted by ERD50 I thought I was clear before, but I guess not - let me put it as succinctly as I can: 1) I don't think I've ever criticized your decision to prepay your mortgage. You have explained your case. It makes sense for you. 2) I have criticized how you present the financial analysis of pre-paying the mortgage. It's just wrong to ignore the time-value of money. Based on #2, I do have trouble understanding your excitement over the pre-pay, but to each their own. -ERD50

The "time value of money" is a lot of gobbledy gook when you are talking about a totally risk free use of that money for someplace I'll live in for life, versus an investment.

I have seen your argumentative tactics on this board before, especially with Twaddle, and I know that you will not give up on this and to tell you the truth, I do not respect you very much due to what I believe is your inclination to flood the board with hostile argumentation rather than to discuss. I think that most non-newbies here understand the non-emotional (as well as emotional) factors involved in CHOOSING to pay off a mortgage or not perfectly well, as it has been put forth on these boards numerous times. It is not that difficult for most people to understand the pros and cons of both decisions.

Personally I choose not to engage in argumentation (not discussion) and flamebait being put forth by a message board pitbull. I come to these boards for information, not to "be right" or seem like that on a message board. A person that needs that sort of validation probably feels pretty insecure and I guess I don't.

Now, if you will excuse me, I have an appointment to talk with my insurance agent about upgrading my insurance. I'm sure you can find something to do while I am away.

[ERD50]

Quote:

Originally Posted by Want2retire Personally I choose not to engage in argumentation

Opps, sorry W2R, that post also got submitted while I was typing the other, and I missed it.

Hey, I'm sorry if what I said came across as antagonistic or aggressive. I was just trying to make my point, I didn't mean it to be personal or attacking or anything.

Did Twaddle and I get in a 'battle'? I don't recall. Maybe I get a bit animated in the process of making a point, or too direct? - no harm intended, maybe some people see that as aggressive?

You can't please all the people., etc.... and I never claimed to even try

But I am sorry if I offended.

-ERD50

[myself]

Quote:

Originally Posted by ERD50 I thought I was clear before, but I guess not - let me put it as succinctly as I can: 1) I don't think I've ever criticized your decision to prepay your mortgage. You have explained your case. It makes sense for you. 2) I have criticized how you present the financial analysis of pre-paying the mortgage. It's just wrong to ignore the time-value of money. Based on #2, I do have trouble understanding your excitement over the pre-pay, but to each their own. -ERD50 PS - this was not in response to your last post pls don't take in that context, - we need that ' a post was submitted' feature!

With regards to #2, isn't it valid to present any financial analysis, whether it be pre-paying the mortgage, or investing and using the "time-value" of money?

The difference is pretty easy to calculate. Merely take what is paid if you pre-pay the mortage, minus the amount that would be paid for the regular term that you'd be paying on your mortgage.
See how much that would work out if you compounded it over the difference in length of the mortgage, and see if you'd have enough to pay the mortgage after that.

Where were you when Bush decided to use the "time value of money" to temporarily help stimulate the economy (but send the country into deeper debt). (Truly meant to be toungue-in-cheek)

[ERD50]

Quote:

Originally Posted by myself With regards to #2, isn't it valid to present any financial analysis, whether it be pre-paying the mortgage, or investing and using the "time-value" of money? The difference is pretty easy to calculate. Merely take what is paid if you pre-pay the mortage, minus the amount that would be paid for the regular term that you'd be paying on your mortgage. See how much that would work out if you compounded it over the difference in length of the mortgage, and see if you'd have enough to pay the mortgage after that. Where were you when Bush decided to use the "time value of money" to temporarily help stimulate the economy (but send the country into deeper debt). (Truly meant to be toungue-in-cheek)

I agree - the rub comes in when you try to calculate a reasonable investment return for the money that you hold (the money that you saved, but did not put towards the mortgage).

Since the mortgage pre-pay is 'risk-free', some feel that the only reasonable investment alternative is a 'risk free' investment. Truly risk-free investments don't pay very high interest. So that interest would offset some of the interest payment savings from a pre-pay, but probably not surpass it.

Others take the view that some risk is OK, and are willing to invest that money for the potential higher gain. Some even would say that 100% equities are OK compared with a 30 year mortgage, that equities usually outperform the mortgage interest rate over a 30 year period.

Those are two different view points. I think they are both reasonable. The first is an apples-to-apples comparison, the second isn't - but that does not make it invalid, it just depends on your view of the risk. Bottom line though, it makes discussion between the two camps pretty difficult. Neither is right/wrong, IMO, just different approaches.

I do have a question for the people in the first camp though. Have you held any investment at all (outside of an emergency fund in a MM) before you paid off the mortgage? It just seems to me that the only consistent answer is 'No'. Shouldn't any and all savings go towards that risk-free mortgage pre-pay first? So, not a single penny in stocks until the mortgage is paid off?

And yes, that stimulus package is just asking us to borrow money from ourselves.... sigh. I thought there was concern about the low savings rate and high debt rates, this just adds to it. Sad.

-ERD50

[jIMOh]

Two additional points- if the extra payments to prepay (payoff mortgage) are a large payment over a short period of time (want2retire's example), paying off early makes considerable sense.

If the extra payments are low (compared to payoff balance) and over a long period of time, investing them wins out without much competition.

Consider this:
Two people, with a mortgage balance of 282k (30 yr fixed), payments of around $1550/month (P&I).

If one person was making extra payments around $1550/month (19k extra per year), the mortgage would be paid off extremely quickly. Reduced from 30 years to just less than 10. The 20 years they saved (at 3k per month) is worth more than the $1550 extra could have compounded in 30 years (in some cases).

If second person paid only $1550 two times per year (2 extra payments), payoff is in 226 months (just short of 19 years). In 19 years the $1550 extra payments would have compounded considerably more if invested (because that side of time equation is greater).

Depends on the rate of loan (5.75% in above case) and the rate of return. But the most important factor is the TIME of the loan and TIME the money is invested. Weighing the opportunity cost as a function of time is needed.

In my case, we can only afford to make 1-2 extra payments per year, so we have chosen to invest these in a taxable account specifically for paying off the mortgage. If this investment earns more than the 5.75% of our mortgage, we will be able to pay it off sooner than if we just sent the extra payments to the bank. In addition if we lose a job or something catastrophic happens, we can tap the investment to help pay bills.

[cute fuzzy bunny]

Yep, we've all heard the same argument. But as usual it leaves out all the corollary items.

You cant compare different risk level costs/investments without adjusting for the risk. You cant compare the difference between an investment return and a cost of that investment without assessing the consequences of the investment. And its ridiculous to hold both scenarios in static form and not adjust the consequences of dramatic changes in risk tolerance.

Holding a mortgage virtually requires a lower risk tolerance to investing, or big brass balls when you get to those situations where you're down a lot. Go back to that discussion about firecalc results where you get through 100%, but in a bunch of cases nearly hit bottom before recovering. That reduced risk tolerance has a consequential series of actions the investor generally is forced to make...in the form of larger amounts of "emergency cash", higher fixed income allocations and less risky equities. That risk adjustment has a cost.

Its also prudent to factor in the spending risk reduction, yet that rarely happens. If your bills are small, what happens to you on the investment side is a lot less concerning.

Or you can go the entirely opposite direction, as W2R has. She's reduced her spending demands to a nearly completely controllable level and has invested more conservatively than she might need to do if she had a big mandatory payment to make every month for 30 years.

There can also be a huge tax profile change between the scenarios. In my early years of ER, without any debt to service I could keep my withdrawal rate low enough and in the right categories and as a result withhold and pay zero income taxes. With a mortgage, your withdrawal rate is going to need to be a lot higher and avoidance of income taxes is highly unlikely. Whats the cost of that?

So yes, its unreasonable to say "Let me measure this risk free return vs a high risk return, pretend the scenarios can and should remain the same, and ignore the spending risk, investment risk, costs of reacting to those or protecting oneself from them, and the tax implications."

In a nutshell, it makes my retirement completely foolproof. My budget is totally under my control and for a measly amount of money we can get by for months or even years if a severe economic situation arises.

And while the "I can *always* pay off my mortgage" comment also has some merit, I think you'd find that a pretty sucky option to attempt to execute when your portfolio is down 50% and theres no sign of an upturn.

If I can stretch this out to just ONE more paragraph, lets retrace our steps to the early years of the Bunny retirement. Quitting just before the market crash from 2000-2003. First thing I did when I retired was pay off my 6.25% mortgage. I then watched the markets drop like a rock. Pretty scary stuff. So I cut back non essential spending, dropped a few things and then in 2003 downsized my house. I 'made' 6.25%, avoided a huge loss on that cash had it remained invested, didnt pay any income taxes for three years, and frankly didnt lose any sleep at the market movements because they didnt mean that much to me.

[Bestwifeever]

I think it was very clear that W2R was talking only about her own decision being best for her and she even went out of her way to say others do other things that are best for them. I don't see how a newbie would read her posts and think Oh, that's the way everyone should do it, that must be gospel. I also don't think she or anyone else needs to post the flip side of anything--and most people don't. How long would your posts be if everytime you said "Oh I got a great rate at PenFed" and then had to say, "but you must remember of course, the flip side of that great rate is...."

[laurence]

Just to add, I have heard these arguments before, and come down on the paid off mortgage side, while seeing the possible merit of trying to beat the spread if that's your thing. But I certainly hope anyone reading this thread realizes if you decide to keep your mortgage and do a classic 60/40 stock/bond portfolio you're getting the bad half of both sides. As an accumulator, it's conceivable to have a 90%+ stock portfolio, but once you are in withdrawal phase it just doesn't seem worth the risk. Declining markets + big withdrawals = bad news!

[cute fuzzy bunny]

Like Brewer said, theres a lot of ways to invest with leverage. Using your house may not be the best first choice.

How about buying REIT's on margin? Doesnt that sound like a cant-miss?

[Nords]

Quote:

Originally Posted by cute fuzzy bunny I 'made' 6.25%, avoided a huge loss on that cash had it remained invested, didnt pay any income taxes for three years, and frankly didnt lose any sleep at the market movements because they didnt mean that much to me.

Quote:

Originally Posted by laurencewill Just to add, I have heard these arguments before, and come down on the paid off mortgage side, while seeing the possible merit of trying to beat the spread if that's your thing. But I certainly hope anyone reading this thread realizes if you decide to keep your mortgage and do a classic 60/40 stock/bond portfolio you're getting the bad half of both sides. As an accumulator, it's conceivable to have a 90%+ stock portfolio, but once you are in withdrawal phase it just doesn't seem worth the risk. Declining markets + big withdrawals = bad news!

Then there's the "Yes, but you sleep better at night with no volatility risk!" reasoning. Even if the bonds are earning less than the cost of the mortgage.

Sigh. 117 posts later we've established that paying off the mortgage can be a good thing. It can also be a bad thing. And that noodges will be noodges, no matter the subject.

While I'm adding this thread to the FAQ reciprocated diatribes archives, let me also add that spouse & I arb our mortgage because (1) it's so cheap to do so, (2) the volatility risk is reasonable for the size & asset allocation of our ER portfolio, and (3) if we've really screwed up and the markets take a decades-long black-swan holiday from a century of "Triumph of the Optimists", then we still have govt pension checks coming in each month.

Everyone should do their own math, and most people shouldn't try this at with their home.

There. All the impressionable newbies have been exposed to both sides of the debate.

But we did come within 1/8th of a percentage point of refinancing last month.

Quote:

Originally Posted by cute fuzzy bunny Like Brewer said, theres a lot of ways to invest with leverage. Using your house may not be the best first choice. How about buying REIT's on margin? Doesnt that sound like a cant-miss?

I've never received a margin call on a house. And the leverage we personally use for this case is called "landlording!"

Gosh, what a great idea for a new thread. "Should I carry a mortgage on my rental home or pay it off? But... but... but what about the opportunity costs of Schedule E?!?"

[cute fuzzy bunny]

Quote:

Originally Posted by Nords I've never received a margin call on a house.

You never used an ARM with a balloon payment.

[rayvt]

Huh A balloon payment isn't a margin call.

From a financial point of view:
* 30 years (or ever 20 or 15) is long term.
* Over the long term, the S&P500 return is 10.5% per year.
* 10.5% (earnings) is greater than 6% (cost)
* The 6% cost is fixed and constant.
* The 10.5% earnings is highly variable from year to year. Some years it is negative.
* It is highly risky to to have a large percentage of your net worth in any single asset.
* It is highly (nay: extremely) risky to not be able to service the mortgage.

As long as you can reliably service the mortgage, the best financial option is to have a mortgage and leave your cash in investments.

From an emotional point of view, many people feel better without a mortgage. Realize, however, that there is a significant financial cost to this choice. 450 basis points is a LOT of money to give up.

[cute fuzzy bunny]

Quote:

Originally Posted by rayvt Huh A balloon payment isn't a margin call.

You didnt get the joke. And apparently didnt read the thread either!

[rayvt]

When I announced at work that I was retiring early (at age 58 ), there was a constant stream of co-workers coming to my office to discuss finances and ask how I did it.

One of my close buddies was particularly interested, especially when I told him that I had just recently refi'ed my house (yet again) with a new 30 FRM. He had had a 15 year which they had finished paying off a couple of years earlier.

At today's rates, on a 250K mortgage the payment difference between 15 yr and 30 yr is $543 a month (2003 vs. 1460).

So we ran the numbers. Deposit $543 a month in an investment which earns 10.5% per year for 15 years. Final balance: $235,678. My balance after 15 years is just about the initial mortgage amount!

After 15 years:
He has a house worth $250k with no mortgage balance. Total assets: $250,000.
I have a house worth 250K with a $175,766 mortgage balance PLUS investments worth $235,678. Total assets: $309,912.
If I wanted to, I could pay off the balance and still have $135,146 in cash.

Of course, they had the emotional satisfaction of having a fully paid for house in 15 years. But sometime in the 12th year my account balance would be greater than my mortgage balance, so I could have liquidated it and had a fully paid for house 2-3 years before he did.

If we just keep it up for another 15 years, him investing his former mortgage payment of $2003 and me investing $543:
Both houses are fullly paid off.
His balance is 250K house + $869,361 investments = $1,119361.
My balance is 250K house + $1,366,405 investments = $1,366,405.
My net work exceeds his by almost $500,000.

That's the kind of thinking and money managing that is why I could retire at 58 and he's going to have to work until 65.