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Old 02-16-2012, 09:53 AM   #41
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good guess!!! $370k * (4.25%-3.5%) = $2,775 /12 = $231.25

Not sure how much luck he would have getting 3.5% when he is upside down without paying a high fee.
That's just it...right now he's having no luck whatsoever getting refinanced, because of the upside-down factor. So he'd probably have to come to closing with some major cash to pay the existing mortgage down.

Personally, I think it's annoying that the banks will do that. I think that if you're in good financial standing and show the ability to pay, why shouldn't they refinance you even if you're upside-down? If my friend can afford the payments at 4.25%, it's obvious he should be able to afford them at 3.5%, so there's little danger of him defaulting.

Now, I can see the rationale of not writing a new mortgage, for more than a house is worth. But in this case, the mortgage already exists! Only reason I can see, is that the bank stands to lose money if they let him refinance his current amount. But, if he pays it down and refinances, don't they lose even more?
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Old 02-16-2012, 10:16 AM   #42
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Most re-fi's are a new mortgage. Banks HATE to re-fi their own mortgages unless they have too.

Look at it from the Banks/business side of the deal...

The bank has lent your friend $370k at 4.25% why would they want to refinance that down to 3.5%? To do that would cost them $2,775 a year in interest. Would you do that out of the goodness of your heart?

The other banks do not want to offer your friend a $370k mortgage on a house worth less than that.

They other reason is the banks you are paying your mortgage to, in all likelihood, do not hold the mortgage note, they are just servicers. The collect the payments and distribute the proceeds to the bondholders of the Mortgage Backed Securities that the mortgage (with thousands of others) are part of.
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Old 02-16-2012, 10:28 AM   #43
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I'd rather pay down my 4% mortgage than buy 10 year treasuries yielding 2%.

Although currently I'm not doing either.
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Old 02-16-2012, 10:33 AM   #44
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Never said it was base 'solely' on the way I made me feel - those were your words you are trying to put in my mouth to make a point.

It was, without a doubt, the best financial decision I ever made - I stand by that statement - go ahead and prove I am wrong.
OK, drop 'solely' from my comment, sorry if I didn't phrase it correctly.

I've run many, many FIRECALC runs on this subject, you could search my old posts. Of course results vary depending upon your conditions (mortgage interest rate and term, etc), but for reasonable numbers, any differences were pretty marginal, and usually favored keeping the mortgage.

So yes, it's tough for me to reconcile what I've seen as possibly only a very marginal financial benefit (ignoring the emotional side for this) becoming 'without a doubt, the best financial decision I (you) ever made'. I sincerely hope other decisions you made were better, as this is most likely very marginal. That's my point, not whether you feel better for doing it or not.

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Old 02-16-2012, 11:47 AM   #45
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Its always fun to read these pay it off early threads because they reflect 2 very different camps. The psychological feels great not to have any debt vs the analytical given these assumptions why pay it off camp. I am personally in the FarmerEd camp and a stack of spreadsheets from here to the moon wouldn't make me change my mind. I know that come hell or high water I 'll have a roof over my head value of this to me? - priceless. Come to think of it, its sort of like the SS discussions take it at 62 or 70? same two camps seem to emerge.
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Old 02-16-2012, 11:58 AM   #46
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Paying off the mortgage last year as a 38yo was a purely number driven decision for me. I had recently changed to part time work due to a health issue. We wanted to ease the budget by refinancing our 6.5% to the 4% going rate. Loan officer told us our loan was under $50k, so we'd have to pay higher refi fees than standard-about $5k. We could pay the loan off without trouble out of our investments. In that years market we didn't see any of our other investments making a guaranteed 6.5%, so we paid it off. Have been putting the former mortgage money into investments ever since.

Guess you could say I ride the fence on both camps. I made the decision mathematically, but being debt free is an unbeatable feeling!
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Old 02-16-2012, 12:10 PM   #47
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Guess you could say I ride the fence on both camps. I made the decision mathematically, but being debt free is an unbeatable feeling!
This sums it up for me, too.
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Old 02-16-2012, 12:16 PM   #48
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I'm sure some of this is due to an increase in debt-aversion in this economy, with a major assist from people tired of sitting on piles of cash earning 0.0000038% in the bank.

Some would say paying off a 4% mortgage is a bad idea, but with "safe" interest rates below 1% and probably will be for years, it's not so certain.
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Old 02-16-2012, 12:26 PM   #49
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I refi'd about 3 yrs ago at 4.5% for 30 yrs. Its the cheapest money I've gotten in years. I'm not paying it off as long as it's subsidized and I'm making 20% in equities with it.
We refi'd last December at 4.00% for 30 years. Cheapest money I've *even* gotten. I'm making 7.5% dividend yield in preferred stocks, and there's no way I'd even consider paying off the mortgage early.
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Old 02-16-2012, 12:32 PM   #50
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Wouldn't it be just the opposite? Rough numbers:

Say you've got a $100K mortgage, and P&I payments ~ $500/month. The $100,000 you have in the bank can pay that mortgage for over 16 years, even with zero growth. That should be plenty to get you over any bad patch.

As is often said, you can't eat your house.

If the bread winner dies, what is the difference (financially)? Pay off the mortgage or not does not affect your net worth. The family may need that liquid cash more than they need that money locked up in the house. If things are tight, they are probably going to downsize anyway. Mortgage or no mortgage seems like a minor issue.

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Quickly paying off mortgage doesn't suit everyone's need, that's for sure. But it does help to quickly build up principle and reduce your total mortgage interest payment to the lender over years. Once mortgage is fully paid off, it will be much quicker and easier to build cash reserve or other liquidity for any possible bad patch ahead. One of the main reasons for some homeowners who got into trouble is that they didn't have enough mortgage principle and cash cushion build up quickly enough, for various reasons, within or beyond their control.

If the breadwinner dies, the family probably will be better off to move on without a large percentage of mortgage balance left, emotionally, psychologically and financially.

Owning a house does have its downside, as the Italian word for "Real Estate" is "Immobiliare". Yes I have heard that you can't eat your house. May I also say that you can't live without a roof either. Also depending what kind of house/property it is, if it has a decent size patch of land, even if you live in a trailer on it, most likely you won't be starved to death if you can grow something on it (definitely not the grass ).
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Old 02-16-2012, 12:37 PM   #51
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Thoughts on this thread (and who knew we could have a fresh thread on refinancing vs. paying off the mortgage! It's an e-r.org miracle!):

I think the author of the linked story is making his own assumptions. Maybe people are not re-fi-ing for cash out simply because they don't have enough equity left (I know several serial re-fiers) or the banks aren't doing it; some are bringing money to the table to re-fi because they have to with their underwater mortgage (DD is in this position) to take advantage of several percentage points of lower rates, not because they "want" to.

When the pre-boomer generations paid off their mortgages, refinancing was not an option. If they didn't move, their mortgages got paid off sooner or later.

Re the percentage of retired people holding mortgages is getting smaller, some retired people don't have mortgages because they rent--maybe there are more renters in our cohort than previously.

One thing about paying off the mortgage--at least at the moment you do it, you have the exact same net worth, but now part of it is likely less liquid. Is liquidity always important?

And finally--refinancing to pay off your mortgage is like getting your hair cut because you want to grow it out. And in some cases you might then say, hmm, I like it this way after all, I won't pay it off/grow it out.
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Old 02-16-2012, 12:48 PM   #52
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I am personally in the FarmerEd camp and a stack of spreadsheets from here to the moon wouldn't make me change my mind.
Really... Let's say you had a 3.5% mortgage on you house for $150k.... US Treasury rates move back up to 6%, and you then "win the lottery" and find yourself with $150k in cash...

You could pay off your house and be debt free, or put you money in USTs and have the interest pay your mortgage and at the end of 30 years still have money left over from the $150k.

What would you choose?

I agree, for some people paying off the mortgage is the right choice. Especially for people that have a hard time leaving money in the bank and not spending it. But, some people feel they can get better returns on their money than the "4%" you would get by paying off your mortgage.

But then again, that guaranteed "4%" sure looks good when the market is down 25%!!
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Old 02-16-2012, 12:56 PM   #53
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Its always fun to read these pay it off early threads because they reflect 2 very different camps. The psychological feels great not to have any debt vs the analytical given these assumptions why pay it off camp.
I'm not in either camp. I was just responding to comments that mix the two. One can do it because it feels good, fine. But that doesn't make it a great financial decision. It could be both, one, or neither, depending upon the individual and the circumstances.



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Once mortgage is fully paid off, it will be much quicker and easier to build cash reserve or other liquidity for any possible bad patch ahead.
And if you don't pay it off, you already have that liquidity available.

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Old 02-16-2012, 12:59 PM   #54
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Thoughts on this thread (and who knew we could have a fresh thread on refinancing vs. paying off the mortgage! It's an e-r.org miracle!):
Pfffft. Getting a thread going here on paying off the mortgage is about as difficult as getting wet in water.
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Old 02-16-2012, 12:59 PM   #55
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I think that at this moment, a person's risk tolerance is pretty key to this discussion.

"Safe" assets are currently priced for near zero returns. So paying off a mortgage at 4% makes a whole lot of sense as an alternative to buying those assets.

However, with rates at all-time lows and stock valuations at reasonable levels, it probably makes more sense than usual to consider buying stocks instead of paying down the mortgage. You need to have the stomach to take this risk, though.

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I'm sure some of this is due to an increase in debt-aversion in this economy, with a major assist from people tired of sitting on piles of cash earning 0.0000038% in the bank.

Some would say paying off a 4% mortgage is a bad idea, but with "safe" interest rates below 1% and probably will be for years, it's not so certain.
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Old 02-16-2012, 01:10 PM   #56
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Really... Let's say you had a 3.5% mortgage on you house for $150k.... US Treasury rates move back up to 6%, and you then "win the lottery" and find yourself with $150k in cash...

You could pay off your house and be debt free, or put you money in USTs and have the interest pay your mortgage and at the end of 30 years still have money left over from the $150k.

What would you choose?
As I said, I would always pay off the house because for me having a roof over my head that cannot be taken away if things turn upside down is far more valuable than any hypothetical financial gain. My thinking is greatly influenced by reading about events during the great depression. Those that had no debt seemed to fare much better than those that did have debt. I've been retired and debt free for 10 years now. The events of 2008-2009 only reinforced my thinking.
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Old 02-16-2012, 01:18 PM   #57
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As I said, I would always pay off the house because for me having a roof over my head that cannot be taken away....
Don't tell that to the folks who send you the property tax bill....
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Old 02-16-2012, 01:28 PM   #58
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Don't tell that to the folks who send you the property tax bill....
Actually, I would be happy to tell that to the folks that send me the tax bill since in the State of Oregon, a person over age 65 is allowed to continue to live in their house indefinitely even with no payment of taxes. The state will place a lien against the house and collect their share upon the owners death. Although I haven't researched it, I would imagine that there are other states with similar provisions.
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Old 02-16-2012, 01:31 PM   #59
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Don't tell that to the folks who send you the property tax bill....
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Old 02-16-2012, 01:53 PM   #60
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I think that at this moment, a person's risk tolerance is pretty key to this discussion.

"Safe" assets are currently priced for near zero returns. So paying off a mortgage at 4% makes a whole lot of sense as an alternative to buying those assets.

However, with rates at all-time lows and stock valuations at reasonable levels, it probably makes more sense than usual to consider buying stocks instead of paying down the mortgage. ...
Right. People will try to make an apples-to-apples comparison to the risk-free pay-off, and compare to very low risk investments. But I don't think it's useful in this case. Once should look at their overall AA and risk tolerance.

If you gathered up $100 from your 'penny jars' and sofa cushions, would you insist that money gets invested in something as risk-free? Not likely, you would best be served by looking at your total AA - big picture. The mortgage money does not need to be risk free, assuming reasonable ratios of debt for a FIRE candidate.

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As I said, I would always pay off the house because for me having a roof over my head that cannot be taken away if things turn upside down is far more valuable than any hypothetical financial gain. My thinking is greatly influenced by reading about events during the great depression. Those that had no debt seemed to fare much better than those that did have debt. ...
But this seems out of context with a FIRE candidate. That sort of person isn't at risk of losing their house in a market downturn. They would still have sufficient equity to make the payments, or just pay the mortgage off if they wanted. For one, they have a larger portfolio to begin with.

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Next I expect everyone will be ditching their credit cards, too.
I may mention to my DW, that a sign of early dementia for me might be deciding to give up 2% rewards, and 4-6 weeks float which allows me time to plan withdraws for any unexpected expense, and trade that in for a debit card that hits the account immediately. Not for me, no thanks!

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