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Old 02-16-2012, 02:07 PM   #61
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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.
I never knew that, that banks hated to refinance their own mortgage. I figured they'd rather refinance and keep their customer, and keep some money, rather than lose everything.

And no, if I was in the bank's position, I wouldn't let a customer refinance to a lower rate, just out of the goodness of my heart. But I'd rather refinance that customer, rather than have the customer do a strategic default. I guess I just don't think it's fair that someone can keep paying faithfully on their mortgage, and no concession is made for them, but if you decide to stop paying, then the banks might try to work with you. Or, if you do a strategic default and the bank takes it possession of you, they're going to end up selling it at a lower price, anyway.

I don't think my friend is really that far underwater, though. He paid $430K for the place back in 2005. It's in a fairly nice neighborhood in Northwest Washington DC. I'm not sure what it's appraised at, but I'm sure it still has to be more than $300K, from looking at comps in the neighborhood.

So while a ~$130K drop is nothing to sneeze at, it could always be worse! There's a house in my neighborhood that sold for $375,000 back in late 2007, about when the market peaked around here. It just went on the market a few months ago as a short sale, for $162K. It sold, but I don't know what it ultimately went for, as the data hasn't been posted yet.
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Old 02-16-2012, 02:14 PM   #62
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The biggest reason is that for the lions share of all mortgages, the bank does not hold the note, it is held in mortgage backed securities that are owned by investors.

The banks you pay are just the servicers, they do not hold the note.
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Old 02-16-2012, 02:15 PM   #63
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I never knew that, that banks hated to refinance their own mortgage. I figured they'd rather refinance and keep their customer, and keep some money, rather than lose everything.
Of course, most banks sell their mortgages to investors anyway, at which point they'd be happy to get "repeat business" to package a new loan to sell to investors.
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Old 02-16-2012, 02:17 PM   #64
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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.




-ERD50
I guess it would depend on the nature of the market downturn wouldn't it? a run of the mill 50% drop in the market and then rebound as we've had, sure no problem. A 95% drop with all attending calamities - I'd rather not have to worry about making mortgage payments. As I've said, this is not a mathematical calculation for me - it's a psychological requirement for my emotional well being as part of being ER/FI.
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Old 02-16-2012, 02:45 PM   #65
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We have been mortgage free for over a decade now. The peace of mind has been worth it for sure.

I hate that in the US if you don't pay your property taxes the government can take the home you have "paid off" away from you. Which for all practical pursposes means you never really "pay off" your home, you just eliminate the mortgage portion.

Still worth doing IMO.
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Old 02-16-2012, 02:53 PM   #66
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I hate that in the US if you don't pay your property taxes the government can take the home you have "paid off" away from you. Which for all practical pursposes means you never really "pay off" your home, you just eliminate the mortgage portion.
Not necessarily - depends on your age and where you live:

Texas Property Taxes: Taxpayers' Rights, Remedies & Responsibilities
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If you are a homeowner age 65 or older, you may defer or postpone paying any delinquent property taxes on your home for as long as you own and live in it. To postpone your tax payments, file a "tax deferral affidavit" with your appraisal district.

You may suspend any lawsuit by filing an affidavit with the court. The deferral is for all delinquent property taxes of the taxing units that tax your home.
Of course there is no free lunch...

Quote:
A tax deferral only postpones paying your taxes. It doesn't cancel them. Interest is added at the rate of 8 percent a year. Once you no longer own your home [die] or live in it, past taxes and interest become due.
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Old 02-16-2012, 06:09 PM   #67
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Originally Posted by ERD50

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.

-ERD50
I guess it would depend on the nature of the market downturn wouldn't it? a run of the mill 50% drop in the market and then rebound as we've had, sure no problem. A 95% drop with all attending calamities - I'd rather not have to worry about making mortgage payments.
95% is pretty extreme, but OK, let's take a look:

Two people have portfolios of $1M. Mr NoDebt pays off his $200K mortgage and is left with an $800K portfolio. Mr OKDebt has his $1M portfolio and $200K debt.

A 95% market drop hits, each has a pretty typical 50/50 AA, so that leaves us with (assuming the fixed side has held its value):

Mr NoDebt port = $400K fixed and (.05*400)= 20K EQ = $420K.
Mr OKDebt port = $500K fixed and (.05*500)= 25K EQ = $525K.

A $200K, 4%, 30 year fixed mort is ~ $1K/month. So the delta alone would fund 105 months of mortgage payments, almost nine years worth. Plus the flexibility to apply those $ elsewhere, if that makes more sense for the situation.

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As I've said, this is not a mathematical calculation for me - it's a psychological requirement for my emotional well being as part of being ER/FI.
Oh, so the 95% number you threw out had noting to do with mathematical calculations? Was it just to sound scary, and then you can fall back and say math has nothing to do with it? To each their own, I just don't think you are doing yourself any favors by ignoring the math.

-ERD50
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Old 02-16-2012, 06:32 PM   #68
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A 95% market drop hits, each has a pretty typical 50/50 AA, so that leaves us with (assuming the fixed side has held its value):


Oh, so the 95% number you threw out had noting to do with mathematical calculations? Was it just to sound scary, and then you can fall back and say math has nothing to do with it? To each their own, I just don't think you are doing yourself any favors by ignoring the math.

-ERD50
What makes you think that the 50% of fixed assets would retain its value and continue paying interest/dividends given a calamity of such nature? Even if US government debt, what makes you think that it is immune to default? If you examine the math, there are always assumptions that may or may not hold up. I think I'm doing myself an immense favor for my peace of mind by going with my feelings and ignoring your math but of course, this only works for myself. I have a very strange suspicion I'm not going to convince you of my position and that is just as it should be - you follow your own math all you want. I'll abstain.
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Old 02-16-2012, 07:07 PM   #69
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What makes you think that the 50% of fixed assets would retain its value and continue paying interest/dividends given a calamity of such nature?
I don't like to make any assumptions at all. I prefer to see what FIRECALC says, as it replicates the scenarios that were the worst in history. So it replicates the way stocks, fixed and inflation all interacted (with some deflation during the GD).


And when I plug in $35,000 spend, and a $1,000,000 portfolio for 30 years, I get min/avg/max results of $87K/$2.17M/$6.12M.

When I plug in $35,000 spend, plus a $12,000 fixed added spend for the mort, and a $1,200,000 portfolio for 30 years, I get min/avg/max results of $180K/$2.4M/$6.56M. Every number is higher, even when tested against the worst times in that history.


So one might feel safer with a paid off mortgage, but I don't see any basis for that feeling. This discussion reminds me of some similar ones recently - people claiming they are playing it 'safe' with a high % of fixed income. But the numbers all say that portfolio is more prone to failure than a higher mix of EQ. Are they being well served by their 'feelings'?

If you want to do it because it feels right to you, then do it. I only object when people try to tell me they are doing it to reduce risk, when there is no evidence for that (and I'm not saying that you said that, I've lost track of who said what at this point, and I'm not going to go review each post now). And in saying that they are reducing risk, they are implying that anyone taking the opposite stance is taking on more risk, when if anything, the opposite would be more applicable.

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Old 02-16-2012, 07:08 PM   #70
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....I hate that in the US if you don't pay your property taxes the government can take the home you have "paid off" away from you. ....
What do you expect them to do? Let freeloaders mooch off the rest of the citizens who pay their property taxes?
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Old 02-16-2012, 07:51 PM   #71
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I don't like to make any assumptions at all. I prefer to see what FIRECALC says, as it replicates the scenarios that were the worst in history. So it replicates the way stocks, fixed and inflation all interacted (with some deflation during the GD).


-ERD50
I think reliance in FIRECALC is perfectly reasonable IF the future replicates the past. There have been a number of threads recently that have pointed out how exceptional the experience in the US has been. For example most industrialized countries have not been able to reliably support a 4% distribution for 30 years from a balanced portfolio. (some countries could barely manage a 1% withdrawal!) The US became the world's preeminent industrial power over the period FIRECALC's history covers plus it has been spared by and large from direct war damage. I certainly hope that economic development and the absence of war impacts at home continues into the far, far future but I'm not going to count on it. One small part of my peace of mind is paying off the mortgage. You feel better with a larger balance in the FIRECALC run - GOOD -we are both happy!
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Old 02-16-2012, 08:11 PM   #72
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I think reliance in FIRECALC is perfectly reasonable IF the future replicates the past.
Fair enough. Or more accurately, if the worst of the future is no worse than the worst of that FIRECALC history. I'm focusing on the min numbers, or failures, and only the worst scenarios come into play there. We can ignore how good the good years are, or how many good years there were- the failures are what matters. Could the future be worse? Sure.

But, if the 'holding a mortgage' scenario did better than 'paid off mortgage' in this 'really bad' case, is there any reason to think the situation would reverse if things got even worse? I can't see how that would work. I even moved equities to a nose-bleed 90% level to make it more sensitive to market dives, and there was still a very substantial positive outcome for the debt holder. Mr NoDebt runs a negative $5K, and Mr OKDebt hits a positive $77K as the min number.

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Old 02-16-2012, 08:40 PM   #73
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Mr NoDebt runs a negative $5K, and Mr OKDebt hits a positive $77K as the min number.

-ERD50
Fair enough, if an $82 K difference for a portfolio of 1 million dollars using theoretical scenarios run over a period of 30 years based on historical data that may or may not repeat is indicative of the superiority of not paying the mortgage early then clearly that's the way to go isn't it? And of course, those that agree with this analysis should not pay their mortgages early. For myself, I'm still happy I paid it off 10 years ago.
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Old 02-16-2012, 10:06 PM   #74
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Fair enough, if an $82 K difference for a portfolio of 1 million dollars using theoretical scenarios run over a period of 30 years based on historical data that may or may not repeat is indicative of the superiority of not paying the mortgage early then clearly that's the way to go isn't it? And of course, those that agree with this analysis should not pay their mortgages early. For myself, I'm still happy I paid it off 10 years ago.
Actually, I don't think the difference is great enough, and there are still unknowns, to state that holding the mortgage is clearly better. And likewise, I can't see making a case that paying off the mortgage would be clearly better.

That is why I gristle at the comments about what a great/smart financial move it is to pre-pay a mortgage (which also infers it must be a really terrible/stupid thing to hold one - you can't have it both ways). I think it is a rather minor move, either way.

So once again, if it feels good, do it. Just don't expect me to accept that it is clearly financially advantageous, w/o some back up.

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Old 02-16-2012, 10:44 PM   #75
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In terms of net worth, having a mortgage vs. having it paid off there is no difference. Your net worth is the same, it's just a matter of whether your assets are in the house or saved/invested somewhere else.

The chief risk of a mortgage is in being unable to make the payments. If you have sufficient liquid assets to easily make the payments, that risk disappears. If you have 3 or 4 times the mortgage balance in investments, where is the risk? Do you lay awake nights worrying about paying for a paperback book out of your paycheck? With $1,000,000+ investment portfolio, the $1000 payment on a $200K mortgage is comparably negligible.

OTOH, if you have only 1 or 2 times the mortgage balance, you arguably do have a significant risk. But if that's all you have, it's dumb to put so much of your net worth into a single, illiquid, non-diversified asset. You'll wind up like my neighbor, with the paid-for house -- but he works as part-time janitor and she cleans houses because they sunk nearly all of their cash into the house.
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Old 02-17-2012, 12:53 AM   #76
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What do you expect them to do? Let freeloaders mooch off the rest of the citizens who pay their property taxes?
And what about non-home owners? Freeloaders as well? Why should they get a free ride on the backs of people with the discipline to save enough to make a down payment and keep up with a mortgage?

And here's another thing; all those folks who do not own property are voters who vote to raise property taxes so they can have better public services. Sorry, voting on a tax that only someone else pays and you don't shouldn't be legal.
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Old 02-17-2012, 01:11 AM   #77
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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.
Ditto. We refi'd a 400K mortgage to a 20 year at 3.85%. We have $375K in a pot from selling our last home kicking off 7-8% in preferred and dividend stocks that easily pays the mortgage plus some. 35% of our mortgage interest reduces our self-employment tax due to the business use of the home deduction; our SE+Fed+State taxes total 45%.

When the mortgage is paid off, we'll still have a pot of money. It's nice to know we can pay it off at any time, but we can't see why. It's the cheapest money anyone has every given us (I remember 8% and up mortgages around ten years ago).
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Old 02-17-2012, 06:07 AM   #78
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And what about non-home owners? Freeloaders as well? Why should they get a free ride on the backs of people with the discipline to save enough to make a down payment and keep up with a mortgage?

And here's another thing; all those folks who do not own property are voters who vote to raise property taxes so they can have better public services. Sorry, voting on a tax that only someone else pays and you don't shouldn't be legal.
Their landlords pay property tax, which is incorporated in the rent. But hey, why let a small thing like fact get in the way of a good rant?
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Old 02-17-2012, 07:52 AM   #79
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And what about non-home owners? Freeloaders as well? Why should they get a free ride on the backs of people with the discipline to save enough to make a down payment and keep up with a mortgage?

And here's another thing; all those folks who do not own property are voters who vote to raise property taxes so they can have better public services. Sorry, voting on a tax that only someone else pays and you don't shouldn't be legal.
Yeah, come on. THINK. Non-homeowners also pay property taxes - it is include in their rent.
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Old 02-17-2012, 08:14 AM   #80
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But renters have no skin in the game. Rent is determined by market conditions - supply & demand. The tax that the owner pays is just one of his costs, and is not directly reflected in the rent.
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