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Old 03-07-2012, 09:56 AM   #41
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I used to make heavy prepayments and try to progress toward no mortgage. In retrospect, I did it wrong. If you want to be mortgage free, the optimal way to do so is to pay the minimum and accumulate assets until you are ready to pay it off in one fell swoop. To do anything else imprints on liquidity and at today's rates probably loses you a lot of money over time.
I agree it is foolish to completely drawdown your liquidity to accelerate mortgage payments. But a prudent emergency stash is all you probably need.

Ultimately, it comes down to whether you're alternative uses for that cash are more productive than the cost of carry on the mortgage. Proponents of having a big mortgage always conclude that they can get returns that exceed their cost of capital. Maybe, maybe not.

In my case, I'm confident that repaying my 9.75% second mortgage in Feb 2001 (SPX ~1,300) and my 7.5% 1st mortgage in June 2007 (SPX ~1,500) was a far better financial move than plowing that same money into equities. Leveraging equities may be a better bet today than it was then, but it certainly isn't as much of a slam dunk as many like to think.
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Old 03-07-2012, 10:12 AM   #42
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I agree it is foolish to completely drawdown your liquidity to accelerate mortgage payments. But a prudent emergency stash is all you probably need.

Ultimately, it comes down to whether you're alternative uses for that cash are more productive than the cost of carry on the mortgage. Proponents of having a big mortgage always conclude that they can get returns that exceed their cost of capital. Maybe, maybe not.

In my case, I'm confident that repaying my 9.75% second mortgage in Feb 2001 (SPX ~1,300) and my 7.5% 1st mortgage in June 2007 (SPX ~1,500) was a far better financial move than plowing that same money into equities. Leveraging equities may be a better bet today than it was then, but it certainly isn't as much of a slam dunk as many like to think.
Not a slam dunk, but never discount the value of flexibility and having options. I think that is the bigger value for someone in the accumulation phase rather than any purported gains from leveraging equities at any given point in time. There are LOTS of ways to leverage equities aside from using a mortgage.
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Old 03-07-2012, 10:35 AM   #43
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Not a slam dunk, but never discount the value of flexibility and having options. I think that is the bigger value for someone in the accumulation phase rather than any purported gains from leveraging equities at any given point in time.
Yep, when I was working I had a fairly large adjustable rate mortgage. Rather than paying off the mortgage, I kept an amount equal to the mortgage balance in Treasury bills, so the rates more or less floated up and down together. I looked at the after-tax cost of the spread as being liquidity insurance, should I lose my job and become unemployed for a significant length of time.
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Old 03-07-2012, 10:44 AM   #44
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Money was used to pay-off the mortgage, so that would be taxed right? Isn't it a wash? If that money was tax free, it could be pulled tax-free over the life of the mortgage. If it wasn't, wouldn't it take a big tax hit to pull it to pre-pay?
There are instances where the higher AGI necessary to make the mortgage payment can increase taxes, e.g. a retiree on Medicare where the higher AGI may trigger Parts B and D means testing.
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Old 03-07-2012, 11:19 AM   #45
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Of course it isn't 'divine'. But running the numbers in FIRECALC gives a perspective that I can't get otherwise. Is there a better alternative?
While there may or may not be "a better alternative", an alternative would just duplicate the same overreliance error. But there is no harm in adding other information like social wisdom from the ages, or intuition from the right brain, that may suggest avoiding overreliance on computer runs, or machines, or anythng else.

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A formerly active poster would use this line. I don't think it holds water (but maybe I'm not looking at it right, and I am on my first cup of coffee). Money was used to pay-off the mortgage, so that would be taxed right? Isn't it a wash? If that money was tax free, it could be pulled tax-free over the life of the mortgage. If it wasn't, wouldn't it take a big tax hit to pull it to pre-pay? Esp in the case where people are doing this during working years where taxes might be higher.


-ERD50
I am not sure I follow you here, but you seem to assume that everyone has mostly or only 401k or IRA funds. I and plenty of others who have lived a less corporate life have money in the bank. As best I can tell, one does not incur a tax liability in writing a check.

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It is still not clear if Ric Edelman is advocating leverage or real estate, or both.
Perhaps even less clear is why this should matter to anyone?
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Old 03-07-2012, 03:03 PM   #46
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Perhaps even less clear is why this should matter to anyone?
Mr. Ha, it wasn't clear to me if Ric Edelman's recommendation was really about buying real estate vs another type of investment, or just financing. Didn't mean to bother you.
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Old 03-07-2012, 03:13 PM   #47
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Not a slam dunk, but never discount the value of flexibility and having options.
Agreed. Flexibility and options are important.

Now that I'm in the process of selling my property, I can fully appreciate the flexibility I have in doing so without having to repay a large mortgage from an equity portfolio that would be worth far less today than the loan outstanding.

Someday when I have time, and am feeling blue, I'll cheer myself by calculating just how many thousands of dollars richer I am because I had never heard of Ric Edelman until now.
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Old 03-07-2012, 03:17 PM   #48
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Agreed. Flexibility and options are important.

Now that I'm in the process of selling my property, I can fully appreciate the flexibility I have in doing so without having to repay a large mortgage from an equity portfolio that would be worth far less today than the loan outstanding.

Heck, I can understand paying off a high rate mortgage and some of the other ones here, but this comment has me stumped...

Why would you have to pay off a mortgage from equity if you are selling Unless you are under water, wouldn't the money needed to pay off the loan come from the sales proceeds??
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Old 03-07-2012, 03:20 PM   #49
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Agreed. Flexibility and options are important.

Now that I'm in the process of selling my property, I can fully appreciate the flexibility I have in doing so without having to repay a large mortgage from an equity portfolio that would be worth far less today than the loan outstanding.

Someday when I have time, and am feeling blue, I'll cheer myself by calculating just how many thousands of dollars richer I am because I had never heard of Ric Edelman until now.
Finally decided to become unmoored, eh? Well, pay teh transfer tax as required by NY and you can wash your hands of it.
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Old 03-07-2012, 03:22 PM   #50
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Well, one can never be free of costs associated with a house mortgage or not. There is always the carrying costs of taxes, utilities, upkeep, etc.
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Old 03-07-2012, 03:42 PM   #51
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Finally decided to become unmoored, eh? Well, pay teh transfer tax as required by NY and you can wash your hands of it.
If I rent it out for another year I'll lose the residential mortgage capital gain exemption . . . so it's got to go.
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Old 03-07-2012, 03:44 PM   #52
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Well, one can never be free of costs associated with a house mortgage or not. There is always the carrying costs of taxes, utilities, upkeep, etc.
I see that Mr. Edelman makes that point. What I don't understand is how it influences the decision of whether to borrow money or not.
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Old 03-07-2012, 03:52 PM   #53
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Why would you have to pay off a mortgage from equity if you are selling Unless you are under water, wouldn't the money needed to pay off the loan come from the sales proceeds??
Technically I wouldn't have to repay the mortgage with the equity portfolio. But my time as a home owner is ending and the loan has to be repaid from some portion of my net worth. I can now calculate definitively whether I'd be richer, or poorer, had I followed the advice to "take out the largest mortgage you can afford and invest the proceeds." In my specific case, I'd be tens of thousands of dollars poorer. YMMV.

Edit to add:
It actually could have been a whole lot worse than that. If I had followed his advice to "Sell without selling" (Reason #7) I could have easily borrowed a couple hundred extra g's in 2007. Now I'd be significantly underwater on the property, and have an equity portfolio 15% below where I bought it, less my interest on all that borrowed money and whatever drag experienced by selling equities to make mortgage payments during all the recent volatility.

Sound financial advice.
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Old 03-07-2012, 04:28 PM   #54
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Mr. Ha, it wasn't clear to me if Ric Edelman's recommendation was really about buying real estate vs another type of investment, or just financing. Didn't mean to bother you.
No bother. I am sorry to seem short. I am always baffled by how much attention these gurus command, since they basically know nothing about most of these issues beyond what we already know.

Maybe it is hoping to get agreement with what a person already thinks, but he nevertheless seeks reassurance.

If Robert Shiller were comenting about RE and RE financing, that would be different, since he does know things beyond what most of us know.

Ha
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Old 03-07-2012, 06:59 PM   #55
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I have been able to pay off my mortgage for the last ten years but I refuse. After factoring in the interest deduction, it's almost free money. I still have a sizable amount of equity in my house and I am thinking of refinancing and pulling some of it out. I am in the wealth accumulation phase and it just does not make sense for me to have all this money tied up in a house when I have reasonable good alternative investments. I think the trick is to carry a mortgage that you can comfortably afford. I feel a lot better knowing I have access to the cash very easily rather than have it tied up in a house. For me, cash is king. I would rather have it sitting in an investment account where I can see it and pay the off in one lump sum upon retirement, if I want to rather than being mortgage free right now. It might even make sense to continue with a mortgage in retirement as long as it's factored into my retirement plan.
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Old 03-07-2012, 08:19 PM   #56
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I have been able to pay off my mortgage for the last ten years but I refuse. After factoring in the interest deduction, it's almost free money. I still have a sizable amount of equity in my house and I am thinking of refinancing and pulling some of it out. I am in the wealth accumulation phase and it just does not make sense for me to have all this money tied up in a house when I have reasonable good alternative investments. I think the trick is to carry a mortgage that you can comfortably afford. I feel a lot better knowing I have access to the cash very easily rather than have it tied up in a house. For me, cash is king. I would rather have it sitting in an investment account where I can see it and pay the off in one lump sum upon retirement, if I want to rather than being mortgage free right now. It might even make sense to continue with a mortgage in retirement as long as it's factored into my retirement plan.
+1....Took the words right out of my post.
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Old 03-07-2012, 08:47 PM   #57
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No bother. I am sorry to seem short. I am always baffled by how much attention these gurus command, since they basically know nothing about most of these issues beyond what we already know.

Maybe it is hoping to get agreement with what a person already thinks, but he nevertheless seeks reassurance.

If Robert Shiller were comenting about RE and RE financing, that would be different, since he does know things beyond what most of us know.

Ha
Got it. Agree on Shiller. He has been in the news lately, at least over the past few months. Nothing positive to say yet on residential real estate as I recall, and I would imagine him to be generally in favor of mortgages when used intelligently. If such a thing is possible.
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Old 03-07-2012, 08:55 PM   #58
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looks like the internet ate my earlier reply...

RE FIRECALC:
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While there may or may not be "a better alternative", an alternative would just duplicate the same overreliance error. But there is no harm in adding other information like social wisdom from the ages, or intuition from the right brain, that may suggest avoiding overreliance on computer runs, or machines, or anythng else.
Agreed. I like FIRECALC for its fairly straightforward 'numbers' approach. But I must be applying some other information (whether wisely or not, I can't say), since I still shoot for something more conservative than its 100% success number. So it is just one factor (admittedly a big one for me).

RE - tax liabilities in pre-pay vs no pre-pay:

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I am not sure I follow you here, but you seem to assume that everyone has mostly or only 401k or IRA funds. I and plenty of others who have lived a less corporate life have money in the bank. As best I can tell, one does not incur a tax liability in writing a check.
No, I'm thinking in terms of money outside tax deferred accounts also. If someone can pre-pay a mort with $100K that has a $100K cost basis (no tax liability), then can't they use that same $100K to make the monthly mortgage payments with no tax liability? Over time, they hope to have gains on that money (that's the whole point!), but those gains will represent only a portion of the mort payment, not the whole thing.

-ERD50
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Old 03-08-2012, 12:52 AM   #59
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No, I'm thinking in terms of money outside tax deferred accounts also. If someone can pre-pay a mort with $100K that has a $100K cost basis (no tax liability), then can't they use that same $100K to make the monthly mortgage payments with no tax liability? Over time, they hope to have gains on that money (that's the whole point!), but those gains will represent only a portion of the mort payment, not the whole thing.

-ERD50
Now I understand what you mean. Yes, that could be done. But there is a considerable mismatch between the cash flow needed to make the loan payments, and the cash that could be thrown off by a bond with the absolute security that many of us would want in retirement to fund the mortage loan liability. Even with a mortgage at 4%, which I don't think I could have gotten, if I funded it with an online savings account at 1% I am losing, and will be losing until who knows when. Meanwhile I am taking the standard deduction, and not paying any tax on interest to fund the mortgate payments. Another thing is the savings upfront, with fees and insurances that don't have to be paid, and hassles that didn't have to be endured.

But it certainly is not an open and shut case; there are many reasonable responses to this question.

Ha
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Old 03-08-2012, 09:36 AM   #60
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RE income taxes on mortgage payments:
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Now I understand what you mean. Yes, that could be done. But there is a considerable mismatch between the cash flow needed to make the loan payments, and the cash that could be thrown off by a bond with the absolute security that many of us would want in retirement to fund the mortage loan liability. Even with a mortgage at 4%, which I don't think I could have gotten, if I funded it with an online savings account at 1% I am losing, and will be losing until who knows when. Meanwhile I am taking the standard deduction, and not paying any tax on interest to fund the mortgate payments.
But I never look at replacing the mortgage with something with 'absolute security', I add it to my overall AA. I'm talking about a mort of maybe 10%-20% of one's portfolio value, and that is not an amount I would be changing my AA over. So I look at total return of my entire portfolio, not some low-yield, secure bond. I think one would be unlikely to 'win' with that approach, other than gain liquidity.

No hassles either, it's a direct deposit, all automatic. One of the things that keeps me from paying it off, if I thought that might be a good thing, is that would be a (very minor) 'hassle' compared to what I do now, which is nothing (as I watch my payment go down, as I have an adjustable).

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Another thing is the savings upfront, with fees and insurances that don't have to be paid, and hassles that didn't have to be endured.

But it certainly is not an open and shut case; there are many reasonable responses to this question.

Ha
I can't think of any fees or insurance that I'm paying now that I would not pay w/o a mort. Prop taxes are the same, I don't have PMI or any other fees.

Totally agree with your last comment. I only take issue with anyone who tries to make an extreme case for the potential benefit/loss with or w/o a mort.

-ERD50
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