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Old 05-02-2012, 10:32 AM   #41
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You may want to consider a no cost refinance where all of the cost is rolled into the interest rate... then you could get maybe a 3.625-3.875 but it won't cost anything or add anything to your balance. Essentially, all that happens is your rate drops another half a point or so.
Well, that's something to check out. But there is also the addition that I'd be extending the term of the mortgage another 18 months, which I don't want to have when I retire (personal choice).

Of course, it could be paid down early (so in the same timeframe we are set to now), but if we kept the payment the same, it would amount to cutting the mortgage term by only 5 months, and the total interest paid by slightly more than $9,310 (which equates to about $57/month). While that doesn't sound too bad, I'd still wonder if it's really worth that.
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Old 05-02-2012, 10:48 AM   #42
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Well, that's something to check out. But there is also the addition that I'd be extending the term of the mortgage another 18 months, which I don't want to have when I retire (personal choice).
You could set aside the difference into an index fund (which ideally would be making more than twice what the 3% loan is) and apply it to the final balance when it surpasses what is left on the mortgage.

I'm sure if you plugged the numbers into Excel that would allow you to refinance and also have the house paid off 2-3 years earlier depending on what rate of return you assume for the fund (6-7% would be a conservative guess)
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Old 05-02-2012, 11:02 AM   #43
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You could set aside the difference into an index fund (which ideally would be making more than twice what the 3% loan is) and apply it to the final balance when it surpasses what is left on the mortgage.

I'm sure if you plugged the numbers into Excel that would allow you to refinance and also have the house paid off 2-3 years earlier depending on what rate of return you assume for the fund (6-7% would be a conservative guess)
Very true, although 3.6%+ is leaning more towards 4% than 3%.
And there is one thing you're overlooking ... taxes. 25% tax bracket and taking the middle ground of 6.5%, really makes the interest earned @ 4.875%. 4.875% is just about what our current rate is now (4.625%), and a mere 1% higher than what the mortgage rate you mentioned was possible by wrapping the closing costs into the rate.

That's not to say it can't be worth it, and I will put it to more thorough analysis, once I get a true rate that I'd be given (even with FICO scores in the 810+ range).
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Old 05-02-2012, 11:20 AM   #44
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Very true, although 3.6%+ is leaning more towards 4% than 3%.
And there is one thing you're overlooking ... taxes. 25% tax bracket and taking the middle ground of 6.5%, really makes the interest earned @ 4.875%. 4.875% is just about what our current rate is now (4.625%), and a mere 1% higher than what the mortgage rate you mentioned was possible by wrapping the closing costs into the rate.

That's not to say it can't be worth it, and I will put it to more thorough analysis, once I get a true rate that I'd be given (even with FICO scores in the 810+ range).
If you're going to include taxes you'd want to also factor in that the 3.6% "automatic" return on money put into the mortgage is also diminishing the tax you can write off each year because the interest you're paying is decreasing.

Here is the math:
If I were to pay $100 down in principle on my mortgage that is 3.6%... that means every year I'm paying $3.60 less in interest. It also means that I write off $3.60 less in my taxes... which translates to $0.90 less in a tax refund. So the net gain for the year by paying down $100 on my mortgage is $2.70... or a 2.7% return on the $100 invested in the house at a 3.6% rate.


So essentially it does the same thing... the 3.6% rate of return you're receiving on money going towards principle is reducing the real growth rate of that cash flow down from 3.6% to 2.7%

So to compare apples to apples, it would be 4.875% (conservative estimate of index fund) vs. 2.7% (automatic return on money paying down house, through reduces interest)

Of course the real unknown is the market and how well its going to do over the next 15 years... historically you could assume something more like 8-10%... in all rolling 15 year periods over the last 100 years... 90% of them have returned 8% or more. 50% of them have returns 10% or more.

So 6-7% might be low balling... which is good for planning purposes as worst case is always best to assume
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Old 05-02-2012, 11:28 AM   #45
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If you're going to include taxes you'd want to also factor in that the 3.6% "automatic" return on money put into the mortgage is also diminishing the tax you can write off each year because the interest you're paying is decreasing.

So essentially it does the same thing... the 3.6% rate of return you're receiving on money going towards principle is reducing the real growth rate of that cash flow down from 3.6% to 2.7%

So to compare apples to apples, it would be 4.875% (conservative estimate of index fund) vs. 2.7% (automatic return on money paying down house, through reduces interest)

Of course the real unknown is the market and how well its going to do over the next 15 years... historically you could assume something more like 8-10%... in all rolling 15 year periods over the last 100 years... 90% of them have returned 8% or more. 50% of them have returns 10% or more.

So 6-7% might be low balling... which is good for planning purposes as worst case is always best to assume
We do currently take advantage of the mortgage interest writeoff. However, with the increase of the standard deduction, and paying less interest as the lien amortizes through the years, we'll only be able to take advantage of itemizing for another 7-8 years at the most. After that, it'll be standard deduction for us.

Besides, what good is paying 100% interest, just to get 25% back?
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Old 05-02-2012, 11:37 AM   #46
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We do currently take advantage of the mortgage interest writeoff. However, with the increase of the standard deduction, and paying less interest as the lien amortizes through the years, we'll only be able to take advantage of itemizing for another 7-8 years at the most. After that, it'll be standard deduction for us.

Besides, what good is paying 100% interest, just to get 25% back?
That's one way to look at it... but see the edit I added in maroon color to my previous post to explain it more thoroughly. Really the point was that the return you're getting by removing the mortgage is not 3.6%... but its 25% less than that because you have less to write off... when you pay your mortgage every month on a 3.6% rate, because of the tax write-off you're really only paying 2.7% interest, in reality.

At the end of the day what matters is the net gain and risk tolerance... if carrying a higher mortgage and applying the money to something that gets a better return makes sense for you then sometimes yes... it does make sense to pay 100% interest (on a 3.6% rate) to get back 25% (or 0.9%) if you are making a better return (than 2.7%) somewhere else.

There are three categories of people who own homes...

A) People who have the funds to pay down the mortgage, so they do and that's that. No mortgage necessary.

B) People who have the funds to pay down some or all of the mortgage, and have a choice to either pay 2.7% in hopes they'll get a better return somewhere else or... pay it down and get the 2.7% automatic returned on their money by putting it into the house.

C) People who have no funds to pay down the mortgage, and have little to no choice... they are paying someone to carry a loan regardless (they are LUCKY we have such low rates today)

Most fall in Category B for the majority of their time as a homeowner (at some point they are faced with a decision to apply money to the house... or invest it else ware)... some like to pay off the mortgage, others like to leverage it and invest the difference thinking they can beat the 2.7% on their own.

The warm and fuzzy of removing the mortgage debt entirely is real... and for some worth it to remove ALL the risk.

For those who have the funds to pay off a house entirely... really a mortgage is just like someone coming up to you saying "Hey I'll give you $500,000 if you pay me 2.7% a year for 30 years?... want to?" Some will say "no thanks, I'm comfortable where I am and don't want that risk right now..." while others will say "I think I'll do a good job to beat that return and come out on top"
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Old 05-02-2012, 02:58 PM   #47
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I am not going to pay mine off any faster. My rate is low and monthly payment is less than rent in most towns here. Plus, if things get really bad I have to option to walk away. If I plowed all the money into the mortgage I could still walk away but wouldn't have any money in savings.
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Old 05-02-2012, 03:38 PM   #48
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I think that the Fed is propping up the economy so that companies can delever there balance sheets and If I was in the States, I would be using the opportunity to do so with my "personal balance sheet".
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Old 05-02-2012, 05:48 PM   #49
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B) People who have the funds to pay down some or all of the mortgage, and have a choice to either pay 2.7% in hopes they'll get a better return somewhere else or... pay it down and get the 2.7% automatic returned on their money by putting it into the house.

The young wife and I fall into this category. We could pay off the current mortgage right now, but we're refinancing this week with PenFed at 1.99% (5 yrs). I'm pretty sure we can beat that.
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Old 05-03-2012, 05:13 PM   #50
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I think that the Fed is propping up the economy so that companies can delever there balance sheets and If I was in the States, I would be using the opportunity to do so with my "personal balance sheet".
What do you mean by that? I don't understand
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Old 05-04-2012, 02:07 PM   #51
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Feeling superior to those who have mortgages: priceless.
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Old 05-07-2012, 01:15 AM   #52
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Originally Posted by EvrClrx311

That's one way to look at it... but see the edit I added in maroon color to my previous post to explain it more thoroughly. Really the point was that the return you're getting by removing the mortgage is not 3.6%... but its 25% less than that because you have less to write off... when you pay your mortgage every month on a 3.6% rate, because of the tax write-off you're really only paying 2.7% interest, in reality.

At the end of the day what matters is the net gain and risk tolerance... if carrying a higher mortgage and applying the money to something that gets a better return makes sense for you then sometimes yes... it does make sense to pay 100% interest (on a 3.6% rate) to get back 25% (or 0.9%) if you are making a better return (than 2.7%) somewhere else.

There are three categories of people who own homes...

A) People who have the funds to pay down the mortgage, so they do and that's that. No mortgage necessary.

B) People who have the funds to pay down some or all of the mortgage, and have a choice to either pay 2.7% in hopes they'll get a better return somewhere else or... pay it down and get the 2.7% automatic returned on their money by putting it into the house.

C) People who have no funds to pay down the mortgage, and have little to no choice... they are paying someone to carry a loan regardless (they are LUCKY we have such low rates today)

Most fall in Category B for the majority of their time as a homeowner (at some point they are faced with a decision to apply money to the house... or invest it else ware)... some like to pay off the mortgage, others like to leverage it and invest the difference thinking they can beat the 2.7% on their own.

The warm and fuzzy of removing the mortgage debt entirely is real... and for some worth it to remove ALL the risk.

For those who have the funds to pay off a house entirely... really a mortgage is just like someone coming up to you saying "Hey I'll give you $500,000 if you pay me 2.7% a year for 30 years?... want to?" Some will say "no thanks, I'm comfortable where I am and don't want that risk right now..." while others will say "I think I'll do a good job to beat that return and come out on top"
I definitely agree with this post! One thing about advantage of having a mortgage is tax deduction. By having mortgage interest payments every month, it allows us to reduce our taxable income. We will not be able to have this benefits if we paid off our mortgage and don't forget that we have to pay property tax whether we own the house 100% or 20%. Government will tax us either way, but sometimes taking advantage of what our government offers will help us to get there faster.
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Old 05-07-2012, 09:27 AM   #53
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To some degree -- and this will *always* be a frequently debated question -- I think it depends on how long you think the War On Savers will continue. The Fed has pretty much indicated it will continue through 2014 and I suspect it will wage on considerably longer than that.

As long as savings yields are like 0.00003%, *if* the War On Savers rages several more years, I'd personally think almost *any* debt payoff, even at a low rate, makes more sense (as long as you don't eat too deeply into an emergency fund). Of course, if you think savings yields will go up after the next couple of years, locking in a long term loan at (say) 2-3% has its distinct advantages, especially if you can itemize.
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Old 05-07-2012, 09:33 AM   #54
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To some degree -- and this will *always* be a frequently debated question -- I think it depends on how long you think the War On Savers will continue. The Fed has pretty much indicated it will continue through 2014 and I suspect it will wage on considerably longer than that.

As long as savings yields are like 0.00003%, *if* the War On Savers rages several more years, I'd personally think almost *any* debt payoff, even at a low rate, makes more sense (as long as you don't eat too deeply into an emergency fund). Of course, if you think savings yields will go up after the next couple of years, locking in a long term loan at (say) 2-3% has its distinct advantages, especially if you can itemize.
+1

Add to that 5 years with no increase in salary and even a low interest mortgage begins to look expensive.
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Old 05-07-2012, 11:14 AM   #55
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As long as savings yields are like 0.00003%, *if* the War On Savers rages several more years, I'd personally think almost *any* debt payoff, even at a low rate, makes more sense (as long as you don't eat too deeply into an emergency fund). Of course, if you think savings yields will go up after the next couple of years, locking in a long term loan at (say) 2-3% has its distinct advantages, especially if you can itemize.
This (and the other similar comments) assumes that one is going to invest the difference in 'safe' money-market or CD style savings accounts. While it's true that you can look at the pay-down as 100% safe, does it matter?

I say (and have said) that one should pick an AA they are comfortable with and stick to it. There really is no reason to look at that mortgage money as anything different. So if one assumes a 3-4% long term real return for their AA - that should be the calculation, not current MM/CD rates.

If one really believed the mort money should be in MM/CD, that means that your recc to other, young accumulation-phase people would be to keep every penny of their savings in MM/CD until their mortgage is paid off. But we usually tell young people to take a fairly aggressive AA at their young age, even if they have a mortgage. It's not consistent, and therefore, I think it's wrong. Look at the overall AA, not MM/CD rates.

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Old 05-07-2012, 03:45 PM   #56
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Feeling superior to those who have mortgages: priceless.
eh, its all relative... many of those carrying a mortgage with the ability to pay it off in full consider those without mortgages 'suckers', or more politely: emotion driven investors

True there are some very poor decisions a person could make with $XXX,XXX in cash over equity in their house trying to beat out a 2.5-3% return... those who feel uncomfortable carrying a mortgage are probably more likely to make such mistakes...

Ultimately, as many have said in some form or another... there is no right answer that fits everyone. The only thing we can say definitively is some will land on one side of the fence and some will land on the other. Each will try their best to convince the other that they did it wrong.

In that sense, it's a lot like politics
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Old 05-07-2012, 04:19 PM   #57
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Here is how/why we made our decision re paying off the mortgage for our own purposes: In the retirement stage, for us, not having a mortgage means a pension and dividends cover all our expenses. The amount of the (now paid off) mortgage, when still invested, would not have reliably generated enough income to make the mortgage payments.

Don't care about the mortgage interest deduction--we try not to spend money to save money (i.e., we don't want to spend $5000, for example, in mortgage interest but save $1,500 or whatever on income tax). And property tax (mentioned above) is a fact of life, that even renters are indirectly paying in their rent (landlords aren't that generous that they're not passing it on); it's not really a factor in this decision.

Paying/not paying off a mortgage is a personal decision. Most of the people who have decided to keep a mortgage don't think they need to convince others to keep theirs, and the same is true for us who have paid it off.

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True there are some very poor decisions a person could make with $XXX,XXX in cash over equity in their house trying to beat out a 2.5-3% return... those who feel uncomfortable carrying a mortgage are probably more likely to make such mistakes...
Please tell me what these mistakes are that I am more likely to make, EvrClr, so I can avoid making them.

Signed,
Sucker/emotion driven investor
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Old 05-07-2012, 04:29 PM   #58
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I was agreeing with the logic of your post up until this:

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...those who feel uncomfortable carrying a mortgage are probably more likely to make such mistakes...
That's a serious example of how to offend people without really trying. But rather than fall victim to the same faulty reasoning I'm going to ask, were you trying?
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Old 05-07-2012, 04:45 PM   #59
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This time I'm just not going to get into the usual knock down drag out discussion on mortgages. I'm not!!! I'm not!!!

....Well, except to say that BestWifeEver's point of view is about what my spreadsheet said too, so I don't have a mortgage any more. We each need to determine what is best for us on the basis of our spreadsheets, making certain that we are painfully aware of what assumptions we are making and how they demonstrate the relationship between risk and reward. IMO there are few investments less risky than the extremely low risk of Chase Mortgage coming back to me and saying, "Hey, you know that mortgage we said you paid off? We lied!"
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Old 05-07-2012, 04:57 PM   #60
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were you trying?


That was certainly not a serious comment... but just a rebuttal to the "Feeling superior..." from which the reply grew

For the record, I think paying off the mortgage is the smarter (certainly safer) thing entering retirement. I plan to... when that day comes. While I'm still working, I'm on the opposite side of the fence and would much prefer cash over equity (beyond 20%)
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