Analyzing the mortgage payoff option

[HFWR]

Haven't run the numbers officially, but being in the 25% bracket, and a 5.5% IR, it wouldn't be hard to beat 4.125%. Not to mention the tax-deferred status of the 401k money. Don't want all my eggs in one basket kinda thing...

 

[sgeeeee]

An alternative strategy.  I was talking with a friend last week who lives in Schaumburg, IL.  He has been re-financing his house about every other year for the past 10+ years using very low interest ARM loas.  He's way ahead of where he would have been had he paid off his house or financed with a conventional loan.  He has the money to pay off his loan at any time, so there really is no risk.  I don't know how you could perform an analysis of the historical value of such a strategy, but it is pretty easy to see how this has worked to his advantage so far.  

 

[laurence]

Even including the refi cost? Does he roll that into the loan or take a higher rate to get credit with the lender?

 

[HFWR]

Attending a closing EVERY year!! Just go ahead and shoot me...

 

[cute fuzzy bunny]

The problem, TH, is that you have completely polluted those threads with your nonsense accusations. Nobody wants to read that crap -- not even you or me.

To be truthful, this is as far as I've read or will read of this foolishness. The 'accusations' occur only between your ears.

You're right. You are the good mortgage fairy, I'm the wicked mortgage witch of the west.

 

[unclemick]

Pssst - RENT!

Not that I take my own advice though. She made me an offer I couldn't refuse.

Heh, heh, heh, heh.

 

[sgeeeee]

Even including the refi cost?  Does he roll that into the loan or take a higher rate to get credit with the lender?

Hi Laurence,

I don't really know the details. I just looked up rates on one of the online mortgage calculators and it claimed the going rate on 30 year fixed was 5.21% while the 5/1 ARM was 4.6%. That would translate into loan payments of $6596.76 for the 30 year fixed and $6151.68 for the ARM on $100,000. The saving would be $445.08 per year per $100,000. He indicated that he refinanced approximately every other year, so he would be saving about $900 per $100,000 over that period. My reccolection is that the spread between 30 year fixed and ARMs has been greater than that in recent years, but I'm not sure. I think that would probably more than pay for the refi charges, but it wouldn't pay enough to make me want to fill out the paper work.

Have funds will travel:

Attending a closing EVERY year!! Just go ahead and shoot me...

I agree.

 

[sgeeeee]

. . .
You're right.  You are the good mortgage fairy, I'm the wicked mortgage witch of the west.

Ahhhhh. . . At last you have realized the truth. I am glad I was able to lead you down the road to enlightenment. I'll work on your other problems later -- in another thread.

 

[laurence]

Yes. When I bought my first house many years ago, the amount of interest I was going to pay played a major part in my loan decisions. I realize today that this arguement is not very sophisticated because it completely ignores the time value of money. A shorter term loan can work to your long term advantage, but it isn't guaranteed to. The long term loan gives the economy a better chance to smooth out any short term kinks that could work against you.

My point there was specifically for those advocating paying off the loan early. If you want to do that, do it the right way and get a lower rate while you are at it.

Paying off the house is like any conservative investment. Nobody seems to have a problem with holding some bonds in your portfolio. But I get it, there are scenarios that could play out to the advantage of investing vs. early payoff.

BTW, even if your friend made $3600 minus closing costs every two years, I don't think it's worth the years off his life going attending all those closings!

 

[Mr._johngalt]

Ahhhhh. . . At last you have realized the truth.      I am glad I was able to lead you down the road to enlightenment.  I'll work on your other problems later -- in another thread.

I question whether this site has the capacity to cover those "other problems". However, if you enjoy it, why hold back? Good luck with
this

JG

 

[Mr._johngalt]

My point there was specifically for those advocating paying off the loan early.  If you want to do that, do it the right way and get a lower rate while you are at it.

Paying off the house is like any conservative investment.  Nobody seems to have a problem with holding some bonds in your portfolio.  But I get it, there are scenarios that could play out to the advantage of investing vs. early payoff.

BTW, even if your friend made $3600 minus closing costs every two years, I don't think it's worth the years off his life going attending all those closings! 

That's pretty interesting. I enjoy real estate closings, but then I still
am partial to real estate of all kinds. Doubt very much if any more closings are in my future. We discussed this recently. DW says she "loves" it where
we are (I am much less enthused) and our southern digs are in place
now. So............... But, if I was 10 years younger I'd be back in with
both feet.

JG

 

[HFWR]

My point there was specifically for those advocating paying off the loan early.  If you want to do that, do it the right way and get a lower rate while you are at it.

Paying off the house is like any conservative investment.  Nobody seems to have a problem with holding some bonds in your portfolio.  But I get it, there are scenarios that could play out to the advantage of investing vs. early payoff.

BTW, even if your friend made $3600 minus closing costs every two years, I don't think it's worth the years off his life going attending all those closings! 

I chose a 30yr to keep my minimum payment lower, in case of emergency.

 

[laurence]

Who knows, if I get close to ER, but have three years worth of payments on the house, I may refi into a 40 year loan and plan on paying $100 a month for the rest of my life....if interest rates are low enough.

 

[REWahoo]

Who knows, if I get close to ER, but have three years worth of payments on the house, I may refi into a 40 year loan and plan on paying $100 a month for the rest of my life....if interest rates are low enough.

When I had paid off 75% of our mortgage, I took out a home equity line of credit (lower interest rate than my mortgage, no closing costs, no fees, etc.). I used the LOC to pay off the mortgage, then over the next couple of years paid off the LOC. Now I have the LOC as an emergency source of funds if needed.

REW

 

[cute fuzzy bunny]

Ahhhhh. . . At last you have realized the truth. I am glad I was able to lead you down the road to enlightenment. I'll work on your other problems later -- in another thread.

Blow me.

 

[cute fuzzy bunny]

I question whether this site has the capacity to cover those "other problems". However, if you enjoy it, why hold back? Good luck with
this

You get 'clean up duty'.

 

[Patrick]

Hi Laurence,

I don't really know the details.  I just looked up rates on one of the online mortgage calculators and it claimed the going rate on 30 year fixed was 5.21% while the 5/1 ARM was 4.6%.  That would translate into loan payments of $6596.76 for the 30 year fixed and $6151.68 for the ARM on $100,000.  The saving would be $445.08 per year per $100,000.  He indicated that he refinanced approximately every other year, so he would be saving about $900 per $100,000 over that period.  My reccolection is that the spread between 30 year fixed and ARMs has been greater than that in recent years, but I'm not sure.   I think that would probably more than pay for the refi charges, but it wouldn't pay enough to make me want to fill out the paper work.   

Have funds will travel:
I agree.   

OK, but did he figure in the amount of time he would have to pay on each loan?  I.E. with the 30-year fixed he has only 28 years (the original 30-year loan term minus the 2 years he's already paid on it) to go to payoff: $6596.76X28=$184,709.28 paid out over the lifetime of the loan.  With the 5/1 ARM refi, he has to pay for 30 more years: $6151.68X30=$184,550.40.  The savings is $158.88.    Surely the refi costs are more than that . . . 

 

[laurence]

OK, but did he figure in the amount of time he would have to pay on each loan? I.E. with the 30-year fixed he has only 28 years (the original 30-year loan term minus the 2 years he's already paid on it) to go to payoff: $6596.76X28=$184,709.28 paid out over the lifetime of the loan. With the 5/1 ARM refi, he has to pay for 30 more years: $6151.68X30=$184,550.40. The savings is $158.88. Surely the refi costs are more than that . . .

My bet is he views it as a car lease. Why tie up the money now? I'm just going to trade up, and I'm always going to have a house payment.

Not for me but to each his own.

 

[sgeeeee]

OK, but did he figure in the amount of time he would have to pay on each loan?  I.E. with the 30-year fixed he has only 28 years (the original 30-year loan term minus the 2 years he's already paid on it) to go to payoff: $6596.76X28=$184,709.28 paid out over the lifetime of the loan.  With the 5/1 ARM refi, he has to pay for 30 more years: $6151.68X30=$184,550.40.  The savings is $158.88.    Surely the refi costs are more than that . . . 

Yes. He did mention that he had calculated how much he needed to add to the loan to stay ahead of the creeping terminal time limit. I also believe that I've gotten regular junk mail offers for ARM loans that were quite a bit lower than the numbers I found on the web last night. Plus, comparing the 30 year costs without accounting for inflation, etc. is probably not a very reasonable thing to do.

By the way, I'm not interested in pursuing this myself for a number of reasons, but I thought it was interesting that someone (who is fairly sophisticated financially as far as I can tell) wanted to pursue such an approach.