6 Mortgage Myths

[maddythebeagle]

Here we go again

[Tulsaboyw]

I meant that including trust $$ I have over 1mill .
And much of that was via DRIP investing and leveraging my equity.
Often using 80/xx.

I would rarely consider paying off a mortgage just for the sake of paying it off, unless I have enough cash to burn.. since all of us can invest that same $$ at much greater rate.

[donheff]

TBoy, why the heck did you resurrect this old thread? Why don't you just take out a mortgage and invest the proceeds and leave this topic alone.

[cute fuzzy bunny]

Hey, how come we cant thank someone for thanking someone?

[Notmuchlonger]

Im hoping that little thumb icon gets added to the smilies. That thing is awesome.

[Softball]

Believe it or not this board helped me in my decesion to pay off my mortgage last week. I'm still celebrating. After reading and running numbers I realized nobody ever said they were unhappy with the decision to pay a mortgage off early.

Here is my advice... Paying off a mortage requires several areas to be handled first. This was a tall order:

1) No credit card debt
2) Max out the 401k. It is a gift
3) Max out the Roth or IRA Another gift
4) In my situation have an extra 100k available

Once you complete step 1 - 4 go and pay off your house.

Some friends get hung up on saying they have enough to pay their house off and I tell them they need to pay off their house twice before they run to the bank to set up a wire transfer.

Take your time. Good luck.

[Patrick]

Quote:

Originally Posted by Tulsaboyw .. since all of us can invest that same $$ at much greater rate.

Really? Where?

[Johnphx]

Here is my situation:

I owe 179k on my First Mortgage @ 6.125, PITI = 1400
I owe 27k on my Second Mortgage @ 8.25 P&I = 400

I bought the house for 233k in Oct 2005, I estimate its present value to be 115-120k. I currently have about 30k liquid and I have considered strongly paying off the 2nd Mortgage. 20k is sitting in savings earning about 2.2% and 10k is sitting the Vanguard Star Fund.

Oh and last but certainly not least, my wife is about 3 months pregnant. I figure the addition of a child will cost about 1k per month in additional expenses ($850 just for daycare). I have currently figured the higher level of spending to put our household expenditures at $4100 per month (this includes a modest level of spending money).

As you can see, paying down the 2nd would pretty much wipe out my current level of savings and save me about $400 per month which helps to offset the additional cost of the child.

At my current level of liquidity I have about 7 months of reserves at what I figure will be the higher level of spending. Unfortunately I am paying a price for that liquidity in the difference between the 8.25% loan and the 2.2% interest rate (half of the level of inflation perhaps?) I am getting on my money (the Star fund is negative so far for the year).

So what do you guys think?

[DblDoc]

I'd pay of the second unless that is your emergency fund.
my 2C worth

DD

[maddythebeagle]

Quote:

I bought the house for 233k in Oct 2005, I estimate its present value to be 115-120k.

If you are saying that you are substantially underwater, I would consider NOT paying down at this point...

[cute fuzzy bunny]

Yeah, I'd be packing my bags right about now...

[Johnphx]

Quote:

Originally Posted by maddythebeagle If you are saying that you are substantially underwater, I would consider NOT paying down at this point...

Why not?

[Ronnieboy]

Quote:

Originally Posted by cute fuzzy bunny Yeah, I'd be packing my bags right about now...

So are you saying that after you purchased your house for what you considered a fair value at the time, if there is a downturn you would just walk away? No matter if you gave your word to the bank that you would pay as agreed?

[cute fuzzy bunny]

Yes, absolutely. I'd suggest you walk a mile in this fellows shoes.

Then you'd have gotten some exercise and you'd be a frickin mile away from me.

[Johnphx]

Ronnie,

I have already tossed the idea around about walking away. Does it seem ethical, of course not. Then again do you think the banks care?

Given my wife's and my income and the fact we have zero (non-mortgage) debt, they would loan to us again. The interest rate would change because of a new level of percieved risk. But its not like they would turn around and say "hey, you gave us your word and you didn't keep it, we don't like you anymore."

I am not the only person this far upside down, my entire neighborhood didn't exist until 2005. So every single person who bought then is upside down unless they put more than 50% down on their homes.

It has occurred to me that staying and paying like "a good boy" is extremely financially detrimental. I can rent this same property (actually I can rent a bigger one) for half or less of my current payments.

In the end, do you think the bank cares about what is in my financial best interest? I don't. This is a business transaction.

When banks determine interest rates to charge people it is a function of percieved risk of prepayment or default, etc on that loan. My wife however is very much dead set against moving. She, like alot of others, is emotionally attached to our first home and sees it through that lens. She doesn't care if moving would make us financially more stable in the long run.

[brewer12345]

Quote:

Originally Posted by Johnphx Why not?

If you are into the bank for considerably more than the house is worth, I would stay liquid. Paying it off is chucking meringues into a black hole: you reduce the options available to you and you will not pay down to what the house is worth. Instead, keep your cash/liquid assets so you have options. That goes quadruple with a kid on the way.

[Ronnieboy]

Quote:

Originally Posted by cute fuzzy bunny Yes, absolutely. I'd suggest you walk a mile in this fellows shoes. Then you'd have gotten some exercise and you'd be a frickin mile away from me.

fade in-

Your basically saying that your word and signature aren't worth the paper they are printed on.

I guess I could see if the issue involved losing a job or major medical expenses but it seems the op didn't mention any of these, just the addition of a baby.

I admit is sucks for the value of the house to go down, but if I agreed to pay an amount then I would do it.

--fade out

[Johnphx]

Quote:

Originally Posted by brewer12345 If you are into the bank for considerably more than the house is worth, I would stay liquid. Paying it off is chucking meringues into a black hole: you reduce the options available to you and you will not pay down to what the house is worth. Instead, keep your cash/liquid assets so you have options. That goes quadruple with a kid on the way.

Thanks Brewer,

That is where I am at now. I hate servicing the loan month in and month out knowing I am house trapped, but there are worse places I could be. Of course isn't there a common rule about not paying interest on a depreciating asset?

Now lets hope that the large number of empty homes that are accumulating in my subdivision begin clearing and don't begin to deteriorate too badly.

My worst fear is that we get ourselves into a Japanese style housing deflation.

[brewer12345]

Quote:

Originally Posted by Ronnieboy fade in- Your basically saying that your word and signature aren't worth the paper they are printed on. I guess I could see if the issue involved losing a job or major medical expenses but it seems the op didn't mention any of these, just the addition of a baby. I admit is sucks for the value of the house to go down, but if I agreed to pay an amount then I would do it. --fade out

If we are just talking about financial gain or loss, I would also meet my commitment. But in OP's case, he is seriously underwater, doesn't have a lot of liquid assets, and has a kid on the way. If things went pear-shaped and I were in his shoes, I would not hesitate to walk away if it were necessary. Same thing a business does when the commode hits the windmill: default on its debt.

[Ronnieboy]

Quote:

Originally Posted by Johnphx Ronnie, I have already tossed the idea around about walking away. Does it seem ethical, of course not. Then again do you think the banks care?

No it isn't ethical and no I don't think the banks care. I suppose it is what your core beliefs and values are.

It is the "big business has big pockets" theory, they make a lot of money so it won't hurt them. In the end everybody pays more.

If it were me, I would stay and wait for the market to rebound, it will eventually or at least you won't be upside down in a few decades.
And it doesn't seem like you are in a hell hole type of place where you need to get out for the safety of your family. It is a pleasant place to live and it will be a little tight for the next few years.

I can only assume that you would not be to happy if you loaned money to 5 people and 2 of them walk away and decide no to pay you back.

JMO