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Old 12-08-2014, 09:46 AM   #21
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Exactly.

OHHHHHH... my bad... I reread my post and I see that I wrote it wrong the first time... stupid me
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Old 12-08-2014, 09:56 AM   #22
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OP here: No matter how I look at it and take into consideration all these wise posts, if I bought for $500K and sell for $400K, in my mind I lost $100K but that loss does not occur until I sell. So I guess waiting until the last minute to sell gives the local real estate market time to inch upwards and minimize the loss.

Paying off the mortgage and then moving in a few years would save me the 4.8% I'm paying on the $333K mortgage, yet that gives me $333K less to invest and grow at the same time. So it seems it's a lose/lose situation: Take the $100K loss on the sale or pay off the mortgage but have 1/3rd less nest egg to invest.

I recently returned from a trip to the LA area near the water and real estate is going up 30% a year. I wish that would happen here...

Again... you are going with bad thinking.... you have lost that $100K... if your house never goes back up (hypothetical) then it is gone.... when did it go Prior to today... not the day you sell... So, as we are writing these posts you have a real loss of $100K... it is not imaginary...

As an example... if you needed to give a bank a financial stmt showing your net worth.... what price would you put down as to the value of the house If you put $500K down knowing it was worth $400K you could be charged with a crime.... (no joke... a friend of a BIL went to jail for doing something like this back in the S&L crisis here in Texas)....



Another point.... and my sister listened to this one and moved.... if your house is not going up as fast as where you want to live, then you would be 'losing' more if you do not sell and buy right now... Say both places are worth $400K today... and in a year your house will be worth $420K but the other house will be worth $450K.... you 'lost' $30K more waiting for your house to get back to $500K than doing what you want to do now.... and if you wait the whole time for your house to get back to $500K it could be much worse....
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Old 12-08-2014, 10:02 AM   #23
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Originally Posted by Cheesehead View Post
OP here: No matter how I look at it and take into consideration all these wise posts, if I bought for $500K and sell for $400K, in my mind I lost $100K but that loss does not occur until I sell. So I guess waiting until the last minute to sell gives the local real estate market time to inch upwards and minimize the loss.
Yes! You've got it!
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Paying off the mortgage and then moving in a few years would save me the 4.8% I'm paying on the $333K mortgage, yet that gives me $333K less to invest and grow at the same time. So it seems it's a lose/lose situation: Take the $100K loss on the sale or pay off the mortgage but have 1/3rd less nest egg to invest.
Arghhh! No, you lost it again. Those are unrelated events.

You either want to sell the house, or not. A better way to think of it is that you have a 400K house. What you paid for it is really immaterial. You could hang onto the house and hope you get back to your original cost, but in the meantime whatever house you might look to buy instead is also rising in cost. So just make the sell or stay decision based on where you want to live and what you can get for the house today. What you paid for it in the past is irrelevant.

If you stay, you have the decision to pay off the mortgage or not. If you pay it off you lose $333K or whatever it was out of your nest egg, but you are monthly budget is reduced by whatever your mortgage payment was. Ideally you will invest that money each month. If you think you can safely invest and get a better return than the mortgage rate + income tax deduction on it, keep the mortgage. Otherwise pay it off.

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I recently returned from a trip to the LA area near the water and real estate is going up 30% a year. I wish that would happen here...
I find that wishing for things to be different is not productive. Deal with reality.

The more I think about it, the more I think you should completely forget what you paid for the house. What does it matter if you paid $1M or $400K for it? It doesn't change anything. So, simplify your decision making and only consider factors that actually matter.
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How about a refi?!
Old 12-08-2014, 11:11 AM   #24
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How about a refi?!

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Originally Posted by Cheesehead View Post
Thanks pb4uski & Senator. I didn't get clarification from the last post and this time I mentioned about the nest egg being reduced 25% to pay off the mortgage of 4.8%. It seems to me that if the house is worth $100K less than what we bought it, and we lived here for 10 years, this means we paid an additional $833 a month on top of our mortgage to live here ($100K divided by 120 months) so in effect this has been one hell of an expensive rental. That's what I meant by "locking in a loss", sorry if I didn't word it properly.

I know we are above water and also our area's real estate values are not going to rise fast enough for us to get close to our purchase price in two years. So in sum, thanks to the advice I got from this post, and the last post's responses about the taxes and HOA, I feel that selling and taking the $90-100K in equity is the best option and I am not "locking in a loss", although I feel we still lost that amount on the house. I guess I equate it with a stock. All our previous homes we made money.

Also, I've read that in pre-retirement housing costs should not be above 30% of income and in retirement it shouldn't be more than 15%. So if we reduce the nest egg by 25% that would be a problem staying here.

Thanks all!
How about paying down your loan by $10k to get to 20% and refi... 15 year fixed is about 3.5%, 7/1 even a little lower.

Quick analysis:
4.8% 30 year fixed (in year ten now on $400,000), $26,200 annual payment with $9,600 prinicpal
3.5% 15 year on $320,000 refi, $27,600 annual payment, $16,2 principal-->$2400 payment to get $6,600 more equity
3.375 7/1 30 year on $320,000 refi, $17,000 annual payment, $6,000 principal--> $9,200 less spent on interest, with $3,600 less equity

Considering ~$2,000 refi cost, you have payback in 4-6 months with these published rates I found on Wells Fargo.

Might be worth considering...
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Old 12-08-2014, 11:24 AM   #25
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Good point!! I think Wisconsin is recourse state.

Non-Recourse and Recourse States List
Another thing to consider is the tax consequences of the default. When oil collapsed in the 1980s and the S&L Industry imploded, Congress implemented a "punishment" that the assets not recovered in a default by a bank could be assigned in a 1099 as "income" to the mortgage holder. Since IRS debt can't be erased in bankruptcy, the person that defaulted may find themselves perpetually targeted by the IRS. During the more recent crisis, this rule was temporarily blocked but I think it's now back in force.
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Old 12-08-2014, 11:48 AM   #26
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IMOP, the decision to pay off the mortgage is a short term decision that has got nothing to do with the financials on selling the house and whether or not the house is worth more than you paid for it. Lets say that you have decided that you are moving in 3 years when you retire and that housing goes up by 4%/year in your area (I picked a number out of the air).
Scenario A: you pay off the mortgage now so you are no longer paying interest.
Cost to you today: $330K
Cost of mortgage for 3 years: 0
Income from sale of house: = $400K + 3*.04*400 = 448K Actually its a bit more than this because of compounding but I'm too lazy to look that up.

Net: 448-330 = 118K realized from the sale

Scenario B: You keep the mortgage
Cost today: 0
Cost of the mortgage over 3 years: ~$43K in interest (I've not included principal reduction here because I've put it in the next line)
Financials when you sell:
Income: Same as before $448K
Payment to bank: $330K

Net take home: 448-330-43 = $75K

The bottom line is that unless you can guarantee that you can beat 4.5% interest with the 300K you have in the bank to pay off the mortgage, you are money ahead to pay it off. It doesn't matter if you sell the house or not. Note that I've also not put the original purchase price anywhere in this analysis as it doesn't matter to the result. The decision to buy the house is water under the bridge that can't be called back.
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Old 12-08-2014, 02:52 PM   #27
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The bottom line is that unless you can guarantee that you can beat 4.5% interest with the 300K you have in the bank to pay off the mortgage, you are money ahead to pay it off.

That's not the bottom line. OP is leaving out that they are eating HOA and property taxes to the tune of 18k per year. In your year example, subtract 60k from both of the realized sale amounts, and it becomes pretty clear what you should do.

OP is seeking confirmation that hoping real estate prices are going to rise in the future is a good idea, and I will tell you it isn't a good idea.
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Old 12-08-2014, 08:48 PM   #28
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Thanks all! I'm going to print these out and go over them with the wife and a calculator this weekend.
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Old 12-09-2014, 05:37 AM   #29
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If you bought during the bubble, then you may be 10 years into your payments. Take time to understand your amortization schedule. At this point you are making larger interest payments.

I wouldn't take a third of retirement savings and put it against the house.
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Old 12-09-2014, 06:20 AM   #30
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The first decision you need to make is how long you plan to be in this house. What you initially paid for it is not relevant to the decision (what is called a "sunk" cost). What is relevant is its current value of $400k and your best guess as to what home prices will do in your area and your personal needs/plans.

If you plan to keep it for more than a couple years, I would refinance to a lower cost loan even if you have to put money in to get the mortgage down to 80% of the value. The purpose of refinancing is only to reduce your interest costs without depleting your nestegg. If you are more comfortable with it, you could pay off the high interest 4.8% mortgage and your nestegg would be replenished with the proceeds from the when you do sell - in a way that is like "making" 4.8% less whatever you expect to make on what that $333k is invested in now.
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Old 12-09-2014, 07:31 AM   #31
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Any money put in to the mortgage you will get back when you sell, unless you plan to default. You are above water, so short sale is not an option.

Good luck with your decision.
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Old 12-09-2014, 08:27 AM   #32
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Are you expecting a different response from the last thread you started on this?

Should we pay off mortgage if it is a loss?
Pay it off.
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Old 12-09-2014, 08:28 AM   #33
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Pay it off.
Don't listen to that jackass, only a fool would pay it off!
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Old 12-09-2014, 08:45 AM   #34
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I never knew HawkeyeNFO was bi-polar.
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