Mortgages redux

[cute fuzzy bunny]

Without going back into that paying off the mortgage thing, what do y'all think about this:

My credit union is offering a 4.5% 5/1 mortgage with a 4.21% apr that I would easily qualify for. $300 back on the closing costs which I'd guestimate at $1500-2000.

I was starting to think that at these rates, perhaps it'd be a good idea to have a little mortgage that I'd pay off when the 5 year fixed portion expires.

The one catch is that at this moment in time, I cant see anything investment wise thats just screaming "buy me!" that I'm not already waist deep in.

Taking one out for $100k would put me at about a $500 a month payment.

Whats the thinking on this. I'm reminded of the "when its raining money, run around with a bucket" comment...

 

[adviceseeker]

Sorry....this is related to the "pay off the mortgage thing". It comes down to opportunity costs, and your willingness to take investment risks. I'm anxious to hear what others say, because the last discussion on this was that paying off the mortgage is the "right thing to do". My view is that it is a personal choice issue. There is a risk whichever way you go, but some people feel less stress with a paid off mortgage. There is an asset allocation issue involved that gets little discussion.

 

[Peter]

Without going back into that paying off the mortgage thing, what do y'all think about this:

My credit union is offering a 4.5% 5/1 mortgage with a 4.21% apr that I would easily qualify for. $300 back on the closing costs which I'd guestimate at $1500-2000.

TH, I guess my question would be: why? I'm guessing that you don't actually *need* the cash?

If you're pretty confident that you can find an investment that will give effective returns greater than 4.5% over 5 years, then sure. Otherwise, not. But you know that already!

OT (blue boxes) -- I had a colleague who wrote a word processor for the Intellec box, and printed out all his reports using a dot matrix printer. This would have been around 1979 ...

Peter

 

[JWR1945]

I view the investment risk as purchasing a special kind of (call) option. You will be paying $6K per year for the right to deploy $100K into a compelling investment that might come along within the next 4 or 5 years.

Some of that $6K would be a return of capital (i.e., building up you principal). Other factors can come into play as well, such as inflation and possibly taxes. [Taxes may be an explosive issue since you intend to invest the money. I am not current on this.]

For my personal analysis, I would assume that no compelling investment will become available in the next two years.

Throwing away $500 per month (actually, less) for two years is not necessarily a bad idea.

I hope that this clarifies your thinking. If nothing else, it is likely to give you a new perspective.

Have fun.

John R.

 

[unclemick]

Since we live in Hurricane Alley and are uninsurable(over water) checking equivalent rentals every couple years provides perspective.

 

[cute fuzzy bunny]

Mmmm, yeah. Its a borderline thing. At 5+% I wouldnt even consider the option. At this rate its starting to squeak into the "I might be able to make money on this..." area. But my thinking is that there isnt a compelling investment option right now. Some high yield and mortgage stuff that would make me some margin, but I'm leery of that due to the spectre of raised rates. While I'll take that risk on clean cash, taking it on borrowed cash isnt twangin' my string. I could take the cheap cash now, hold it and wait for a stock correction and use that to buy into a few areas I'm not as well exposed as I'd like (vanguard energy and perhaps their convertibles funds, or a little merger arbitrage fund. Most of those SHOULD make 7-8%+ annually. I *could* use the mortgage deduction to keep my taxes around zero while continuing to defer some of my capital losses to later higher earning years.

Its very borderline. 4% and below borrowing for me is a no-brainer. 5% and up keeping no mortgage is a no-brainer (for me).

Ahh word processors. Probably the thing that really cinched my interest in computers. The store I worked at in the mid 70's sported one of the first word processing systems I believe that was ever made. Big box, daisy wheel printer. When I discovered I could turn an 8 page school paper into the requisite 10 page school paper by making slight adjustments to the daisy wheel pitch and yaw, I was hooked. A few years later I brought a really smart kid from school in with me to the store and they contracted him to write a CP/M word processor we ended up calling (imaginatively) WPS. I went to work elsewhere after that and lost touch, but I see the kid went on to MIT and later authored the TFTP protocol. One of the other guys that hung around a lot ended up developing the BIOS and started phoenix technologies. Technologically, it was like the wild west. A truly fun time where everything was being invented day by day.

 

[sgeeeee]

Without going back into that paying off the mortgage thing, what do y'all think about this:

. . . Whats the thinking on this.  I'm reminded of the "when its raining money, run around with a bucket" comment...

You shouldn't do it. You might have good odds of making money, but it will make other posters on this board call you names and spit on you.

Actually, with only a 5 year horizon to make it work, I think you are taking on greater risk than a 5% rate over 30 years. From the Shiller data, the S&P 30 year average return has not fallen below 7% since 1900. But the S&P 5 year average has fallen below 4 % more than 15 times.

 

[John Galt]

I wouldn't do it. I've crunched the numbers all over
God's green pea patch, backward and forward.
With me, it's mostly the "hassle factor", rather than my
ability to make money with the mortgage proceeds.
When it comes to making money, I will always bet on myself. I just don't want to mess with it, and I like that
big unencumbered asset sitting there if I should ever need to tap into it. Right now I do not.

John Galt

 

[cute fuzzy bunny]

Okey dokey. I was 60/40 against but still was thinking about it. Maybe i'm just bored and was looking for something new to think about. Actually the "problem" is I'd like another 100k for a few new investment ideas and I dont want to take money out of anything else right now.

Plus I'd hate to be called names and spit on. It was very fortunate I wasnt sipping coffee at the time I read that or I'd be buying a new screen and washing the cat that was standing in front of it.

 

[brewer12345]

TH:

Just a thought, but what you are contemplating is akin to taking out a margin loan and investing the extra cash. Why not simply take a margin loan instead of a mortgage? You can get pretty attractive rates if you shop around and you won't be betting the house on your investments. You also wouldn't have the haslles and expense of taking out a mortgage.

 

[cute fuzzy bunny]

Well, mortgage interest and many associated costs are deductible. Margin loan interest isnt. Margins can be called, mortgages cant.

The rates were just so darn low, I figured I might take advantage of borrowing at the "right time" and using that money to make money at another "right time".

As the elder Bush used to say "naht gonna do it, wooden be prudent at this juncshah".

But if those rates head south of 4%...

 

[brewer12345]

Unless I am grossly misinformed, margin interest is in fact deductible as an investing cost. Plus, if you are conservative in the amount of margin that you use, the chance of having the loan called is remote.

In any case, its probably not something I'd be eager to do unless I saw an investment that was a real steal. I can't say that I see anything fitting that description at the moment, althogh MOVI does look awfully tempting at this level.

 

[unclemick]

My more than foggy memory says 7 and 14 - in the 70's I borrowed at 7% and invested in a REIT yielding 14% on my then brokers advice - worked for a while and then it didn't - part of my education 'fees'.

Now - if you can get 4% or under and invest in a 'sure fire' 14% - that's a real 'margin of safety'.

 

[wabmester]

I'm still trying to figure out how PenFed makes money.

4-yr CD @ 4.75%, 4-yr HEL @ 3.9%
5-yr CD @ 5.25%, 5-yr HEL @ 4.9%

Almost looks like a dot-com business model....

 

[REWahoo]

I'm still trying to figure out how PenFed makes money.

4-yr CD @ 4.75%, 4-yr HEL @ 3.9%
5-yr CD @ 5.25%, 5-yr HEL @ 4.9%

Almost looks like a dot-com business model....

They certainly don't do it through quality and efficiency, evidenced by screwing up my account on 4 separate occasions over the past 5 years. Once my last 3 year 7% CD (remember the good old days?) matured last year, I made a promise I would never do business with them again.

But for 7%.....never say never.

REW

 

[John Galt]

Yeah, I could put up with a lot of BS for a solid 7%.
On the other hand, I'm still getting a solid 7% in many
cases, just no FDIC insurance. But................no DJIA
gyrations either.

John Galt

 

[cute fuzzy bunny]

I'm still trying to figure out how PenFed makes money.

4-yr CD @ 4.75%, 4-yr HEL @ 3.9%
5-yr CD @ 5.25%, 5-yr HEL @ 4.9%

Almost looks like a dot-com business model....

They lose money on every transaction, but they make it up in volume.