Mortgage rates headed down - time to refi?

[jazz4cash]

Quote:

Originally Posted by Marquette That's it, I'm moving back home and living rent-free.

Go for it, but my grown 1st child is pretty close to paying rent to live at home (don't tell DW). Depending on how much rent I can get away with charging, I may bank some or all for her 1st house or whatever.

[ERD50]

Alright - I've done the FireCalc runs and 3X checked them. There is one very unexpected result - at least for me.

Here's the comp I used, with a 30 year $200,000, 5.5% mortgage:

Mr Cash:
$1M portfolio, no mortgage, $35,000 spend, 75% EQ.
Worst Case FireCalc result at 30 years, 75% EQ: $87K balance.


Mr Mortgage:
$1.2M portfolio, $35,000 spend, $13,632 annual mortgage pay, 75% EQ.
Worst Case FireCalc result at 30 years, 75% EQ: $103K balance.

Generally, people would say that the extra $200K in the portfolio should go to fixed income to reduce 'risk'. So that gives a 63% EQ ratio.

With that, Mr Mortgage gets:
Worst Case FireCalc result at 30 years, 63% EQ: $161K balance.

So, if you accept the dip in your Net Worth number as a measure of your real, personal, gut-check risk, it would appear that holding a mortgage decreases risk, right? It adds over two years to your portfolio life (difference /$35K = 2.1 years).

OK, now an interesting observation....

You better plan on holding that mortgage for about 25 years. Because if you cash it in at say, 20 years, your portfolio balance will be lower with the mortgage. At 20 years: $290K for Mr Cash vs $253K for Mr Mortgage. And it gets worse the earlier the cash in date.

So, that sure makes points for the Cash people - few of us can be certain of holding our mortgage that long. So, maybe Cash is King after all?

But, doesn't that also lead to....

If you already have a mortgage, this seems to say that paying it off early is the WORST thing you could do!!?? It looks to me like the 'deal has been done', and once you are in you should stick it out as long as you can.

Hmmmm. Let's say that again. Going w/o a mortgage is probably best since we can't be certain of holding for 25 years, but if you have a mortgage, keep it. Can that be right?

I think the explanation is - the whole thing is based on arbitrage of the mortgage. But, we need to go near full term for that arbitrage to 'work', because a mortgage is front-end loaded with interest, while the fixed-income loans that personal investors make are interest-only loans. Does that explain it? Help, my brain hurts!

So, I welcome anyone else running the numbers and reporting back; maybe I goofed somewhere, maybe my assumptions are out-of-line? And I'd love to see a 15 year loan (Twaddle?) - I tried one and it didn't look pretty, but I am not going to 3X check that tonight.

Regards - ERD50

[twaddle]

Quote:

Originally Posted by ERD50 If you already have a mortgage, this seems to say that paying it off early is the WORST thing you could do!!?? It looks to me like the 'deal has been done', and once you are in you should stick it out as long as you can.

I don't think that's the moral of the FIREcalc story. It's more like if you use a mortgage for leverage, and that leverage works against you, then you'll have to ride it out.

It's perfectly safe to pay off a mortgage if you used leverage successfully and didn't hit a worst-case returns sequence, which is the most probable case.

Bottom-line: you're making a bet when you invest your mortgage principal the FIREcalc way.

There are ways to reduce the risk of that bet, and that's what I'm doing. It's even possible to reduce the risk to almost zero, but then you also obviously limit the upside.

As brewer says, there are probably better ways to use leverage. Buy a leveraged fund, for example. Those institutions have access to cheaper capital than we do.

[myself]

Quote:

Originally Posted by laurencewill Can one get the child credits/deductions if one uses the standard deduction? Anyone?

The answer is yes. As long as they are eligible of course.
Tax credits are figured AFTER the appropriate level of taxation is determined, which is after the standard/itemized deduction choice.

[DJScrib]

Hi all, long time lurker, first time poster.

One aspect of the pay-off mortgage argument I haven't seen addressed is the "**** hits the fan" scenario for a person who is in the early stages of paying off a mortgage.

The scenario is for a 300K house, person #1 has paid 50k of it off, so has a 250k mortgage and 50k equity. person #2 has paid off 5k, and has a 295k mortgage and 5k equity.

If they wreck their car while drunk and get fired, and wind up in deep trouble for a year or so which one can survive the situation? Assuming no other appreciable buckets of money.

Person 1 can't get a home equity loan (since no job), and may be forced to sell their house and lose 6% in the process. While person 2 can dip into their savings, to survive much longer before biting the bullet.

Lastly, in the above scenario, a mortgage lender is going to foreclose person #1 first (becuase they can get some money out of it), while being more likely to work something out with person #2 since it would be an unprofitable foreclosure. In a cruel twist, the "better" mortgage holder gets penalized.

Anyhow, I've heard the above scenario outlined before and are curious if any variation of this theme enters into people's equations. Basically are you willing to sacrifice a percent or so of overall profit, in exchange for "peace of mind" in a sticky situation.

Now obviously people closer to ER probably have a large enough nest egg to raid, but again, even in that situation raiding the 401k and taking a tax penalty is not an ideal situation.

[myself]

Quote:

Originally Posted by ERD50 I think the explanation is - the whole thing is based on arbitrage of the mortgage. But, we need to go near full term for that arbitrage to 'work', because a mortgage is front-end loaded with interest, while the fixed-income loans that personal investors make are interest-only loans. Does that explain it? Help, my brain hurts! Regards - ERD50

Actually, ANY loan is front-loaded with interest. Whether it's a mortgage, or a credit card.
Why?
Simple. The interest is basically calculated off of the principle at that given moment in time. Mortgages are merely different in that they have fixed payment schedule, whereas other borrowing like on credit cards, etc., work on a fluctuating payment (i.e. 1%-4% of the principle).
Don't believe me, try this mortgage (although the rate is intentionally high).
$100,000 @ 12% for 30 years = payments of $1,028.61
First payment breakdown:
Interest: $1,000
Principle: $28.61

Since 1%/month is what is being charged, the first interest payment is 1% of the principle. So $100,000 x .01 = $1,000
Wow, amazing.

Try it for a 15 year mortgage, and you'd find the same thing. The only difference is that the person is paying a higher payment which is only due to the additional principle being paid (to get it paid off in a shorter timeframe).

[clifp]

Quote:

Originally Posted by DJScrib Hi all, long time lurker, first time poster. One aspect of the pay-off mortgage argument I haven't seen addressed is the "**** hits the fan" scenario for a person who is in the early stages of paying off a mortgage. The scenario is for a 300K house, person #1 has paid 50k of it off, so has a 250k mortgage and 50k equity. person #2 has paid off 5k, and has a 295k mortgage and 5k equity. If they wreck their car while drunk and get fired, and wind up in deep trouble for a year or so which one can survive the situation? Assuming no other appreciable buckets of money. Person 1 can't get a home equity loan (since no job), and may be forced to sell their house and lose 6% in the process. While person 2 can dip into their savings, to survive much longer before biting the bullet. Lastly, in the above scenario, a mortgage lender is going to foreclose person #1 first (becuase they can get some money out of it), while being more likely to work something out with person #2 since it would be an unprofitable foreclosure. In a cruel twist, the "better" mortgage holder gets penalized. Anyhow, I've heard the above scenario outlined before and are curious if any variation of this theme enters into people's equations. Basically are you willing to sacrifice a percent or so of overall profit, in exchange for "peace of mind" in a sticky situation.

The flexibility arguement is one fairly compelling argument for not paying off a mortgage. In fact, I'd argue that you don't even want to think about paying off your mortgage early until you have a sizable emergency fund in place. So in the example you give I wouldn't think it would be prudent to be accelerating the paying off of a mortgage.

On the other hand in the situation you describe where do something really stupid like being drunk and getting into an accident. If one person has $50K emergency fund and the other other has $50K in equity but no other money, in many/most? state home equity is fairly judgement proof so if you hit somebody while driving drunk better to only have home equity.

God protects fools, drunks, and children, and the law protects home owners.

[OAG]

IMO the example is extreme and these types of factors could be applied to any financial picture. Hurricane coming and comes and you forgot to pay the insurance bill on your fully paid for home. Your kid shoots the neighbors horse, you get sued. It would not be financially prudent for anyone to pay down the mortgage without access to other funds and/or an emergency fund. IMHO people who do pay down the mortgage and for that matter pay off the CC each month or pay down the car loan quickly are financial prudent.

Besides clifp makes the point well regarding the safety of the "homestead". Why do most all of the recently charged CEO, CFO, etc., all have LARGE FLORIDA estates? To protect large sums of money from law suits is why.

[DJScrib]

I may have poisoned my argument a bit with a overly extreme example. Better examples would be Mortgage Brokers in 2008, IT Workers in 2001, Boiler Room works in 2000, Auto Workers in the 80s, Steel workers in the US. People who were at the peak of their earning potential, and then had the rug yanked completely out from underneath them and were forced to retrain and shift industries in many cases.

I think it's been properly addressed, but having a nicely funded emergency fund + other liquid assets probably comes before paying down your mortgage, and maybe a 6 month emerency cash fund, and another 6 months in some non-retirement investment would be a good starting point.

The main point I was getting at is the irony in that come foreclosure time, the banks will hit the people who have diligently paid their principal down first.

[JohnDoe]

That Pen Fed H/E is looking pretty good these days. 4.99% for 10 years with 0 costs.

[JohnDoe]

Keep an eye open next week. I think 15yr will be under 5%.

[cardude]

Wasn't the 15 year conventional fixed 4.75% not too long ago?

[jazz4cash]

Quote:

Originally Posted by cardude Wasn't the 15 year conventional fixed 4.75% not too long ago?

If you go back to post #20 around 1/22/08, it was actually even lower than that at some institutions.

[JohnDoe]

Quote:

Originally Posted by cardude Wasn't the 15 year conventional fixed 4.75% not too long ago?

4.625 for 1 day...next day 5.125

[jblack]

Quote:

Originally Posted by JohnDoe Keep an eye open next week. I think 15yr will be under 5%.

I wish....I'm wondering if PenFed is not trying to be as competitive as it was a few weeks ago. Their rates have gone back up quite a bit this week. 15yr is now 6.125 (?!?!) and the 30yr is 6.5%. Huh?

[jIMOh]

Quote:

Originally Posted by jblack I wish....I'm wondering if PenFed is not trying to be as competitive as it was a few weeks ago. Their rates have gone back up quite a bit this week. 15yr is now 6.125 (?!?!) and the 30yr is 6.5%. Huh?

Watch the 10 year treasury- that signals where mortgage rates will go. And right now that market is driving mortgage rates UP.

[RockOn]

Quote:

Originally Posted by jIMOh Watch the 10 year treasury- that signals where mortgage rates will go. And right now that market is driving mortgage rates UP.

The mortgage market is falling apart, firms do not want mortgages on their books, no matter the quality. The rates went up 0.6% yesterday, according to a guy on Kudlow (it might have been Bloomberg) last night.

I'm sure Bernacke will "Shock and Awe" us again soon. I thought it was a mistake when he panicked and caused the last big stock (temporary) market rally. That mistake has been confirmed. The Fed needs to let markets set prices and not interfere. Free market capitalism. Keep your nose out of it Benacke, it's not your job to support free market prices. Supply the liquidity, keep inflation low, that's it, I'm sure he's listening.

[brewer12345]

Illiquidity in the markets have caused spreads for mortgage backed bonds to widen out hugely even as treasury rates have fallen. This is feeding back into the rates charged on mortgages, shoving rates up a lot. IMO, the Fed cannot allow a problem in the market for Freddie, Fannie and Ginnie MBS to persist for any length of time without imperiling the entire financial system, so I think y ou will see more and bigger responses like the expanded TAF and weekly 28 day repos announced this morning.

Just be patient and mortgage rates will eventually come in. But the volatility we have seen in these rates means you should be ready to jump when the window opens.

I suspect I will be sitting on my existing 15 year mortgage (10 years left) for the duration.

[ziggy29]

Quote:

Originally Posted by brewer12345 Illiquidity in the markets have caused spreads for mortgage backed bonds to widen out hugely even as treasury rates have fallen.

Isn't that the truth. One of my short-term investment grade bond funds was down almost 1% yesterday even as Treasuries rallied. This one has about 30% of its portfolio in CMOs, which I have to think was the cause. Many of these are government-backed, so if people would stop panicking they'll be fine. Instead, they're selling low.

[jblack]

Quote:

Originally Posted by jIMOh Watch the 10 year treasury- that signals where mortgage rates will go. And right now that market is driving mortgage rates UP.

Yeah, I have been watching the 10yr closely, and it's been falling recently. Not as low as it was in late Jan but still should drive lower rates than what we've seen.

Brewer's answer seems to explain what is going on (thanks!)....guess I'll just keep a watchful eye and/or reset the PenFed auto-alert to make sure I don't miss the next window.