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sgeeeee 11-07-2004 07:35 AM

6 Mortgage Myths
 
Here's a topic that is always good for some lively debate. And as far as I can tell it has nothing to do with the election: :)

https://pf.channel.aol.com/bankrate/r...rtgagemyth1104

"Six Mortgage Myths That
Can Cost You Money
By Holden Lewis
October 21, 2004"

Myth 1: A 30-year fixed is always the best way to go.

Myth 2: Pay off that mortgage as soon as possible.

Myth 3: You need a down payment of 20 percent or at least 10 percent.

Myth 4: You have to pay mortgage insurance if you don't have enough money for a 20 percent down payment.

Myth 5: You can't get a mortgage if you have blemishes on your credit.

Myth 6: The term of the mortgage has to be the term on the note.


azanon 11-07-2004 08:21 AM

Re: 6 Mortgage Myths
 
#4 is generally not a myth, unless one uses the technique of getting a second loan to come up with the 20%. *As a general rule, you have to pay PMI if you put less than 20% down, for most lenders. My lender, USAA, requres 20% down, for example.

retire@40 11-07-2004 09:27 AM

Re: 6 Mortgage Myths
 
Quote:

Myth 2: Pay off that mortgage as soon as possible.
I'm curious why paying off your mortgage as soon as possible is a myth?

cute fuzzy bunny 11-07-2004 10:02 AM

Re: 6 Mortgage Myths
 
Cant use the link, it wants me to log in with an aol screen name.

Myth #7: believing anything from an online article where the author makes sweeping generalizations without comprehending anything having to do with anyones individual situations, circumstances or needs.

sgeeeee 11-07-2004 10:12 AM

Re: 6 Mortgage Myths
 
Quote:

#4 is generally not a myth, unless one uses the technique of getting a second loan to come up with the 20%. *As a general rule, you have to pay PMI if you put less than 20% down, for most lenders. *My lender, USAA, requres 20% down, for example.
"What's called 'piggyback financing' is now almost 50 percent of home purchases," says Peter Bonnikson, senior vice president for E-Loan. A piggyback loan lets you avoid paying for mortgage insurance.

Piggyback financing consists of two loans. The first is for 80 percent of the purchase price. Then there's a second "piggyback" loan for the rest of the purchase price, minus the down payment. An 80-10-10 mortgage has a 10 percent down payment and a 10 percent piggyback loan; an 80-15-5 has a 5 percent down payment and a 15 percent piggyback loan; and an 80-20 doesn't have a down payment at all.

The piggyback loan has a higher rate than the primary mortgage for 80 percent of the price. But for people with good credit, piggyback financing usually costs less than getting one mortgage for more than 80 percent of the price and then paying for mortgage insurance.

Bonnikson favors piggyback loans because "one, they can maximize the house that they can buy, but two, they also maximize the tax deduction." That's because the mortgage interest on the piggyback loan is tax deductible, whereas mortgage insurance premiums are not. (An attempt this year to extend the tax deduction to mortgage insurance failed in Congress.)

Walters says: "There's two reasons why some lenders would push people to take PMI" -- private mortgage insurance. The first reason is that the lender doesn't offer piggyback loan programs, "so limited options make for clear choices." Other lenders have investments in mortgage insurance companies, so they profit from increased business, he says.

sgeeeee 11-07-2004 10:14 AM

Re: 6 Mortgage Myths
 
Quote:

I'm curious why paying off your mortgage as soon as possible is a myth?
Accelerating mortgage payments is another area where emotion often trumps reason, Walters says. "We're not talking about finances; we're talking about psychology, or at least where the two meet," he says.

Walters advises people to imagine a scenario where they have a 5- percent ARM and are able to deduct the interest from their federal income taxes. That lowers their effective interest rate to somewhere in the neighborhood of 3.75 percent. Instead of paying extra principal on such a mortgage, it makes more sense to pay down higher-interest debt, such as for credit cards and auto loans, or to invest the money where it can earn a return greater than the mortgage interest rate after taxes.

"The way people deal with money and risk is often irrational, and they put much more of a premium on security and safety than they do on getting a return," Walters says.

It's perfectly fine to pay off a mortgage early if doing so satisfies a long-term financial goal. Doug Perry, senior vice president of Countrywide Home Loans, says a lot of aging baby boomers want to eliminate their mortgage debt so they can retire debt-free. That makes sense, especially for retirees who won't exceed the standard deduction on their income taxes and therefore won't be able to deduct their mortgage interest.

sgeeeee 11-07-2004 10:25 AM

Re: 6 Mortgage Myths
 
Quote:

Cant use the link, it wants me to log in with an aol screen name.

Myth #7: believing anything from an online article where the author makes sweeping generalizations without comprehending anything having to do with anyones individual situations, circumstances or needs.
Sorry about the link. I didn't realize aol kept non-aol subscribers off the site. The full article supplies significantly more detail. Although this subject is complex and the optimum solution is unique to the individual, I thought the article (and even the title) were actually pretty accurate. Notice it is titled, "Six Mortgage Myths that Can Cost You Money". In other words, if you accept these broad generalizations as fact in all situations, it could produce a less than optimum financial solution. In the description of each myth, the article points out that the "myth" does not necessarily apply to everyone.

Of course any article about financial issues that appears in any media will have limitations. This is a pretty basic overview of a few issues related to mortgage. :)

retire@40 11-07-2004 10:38 AM

Re: 6 Mortgage Myths
 
Quote:

Walters advises people to imagine a scenario where they have a 5- percent ARM and are able to deduct the interest from their federal income taxes. That lowers their effective interest rate to somewhere in the neighborhood of 3.75 percent. Instead of paying extra principal on such a mortgage, it makes more sense to pay down higher-interest debt, such as for credit cards and auto loans, or to invest the money where it can earn a return greater than the mortgage interest rate after taxes.
I like sticking to the topic. The myth doesn't say don't pay down your mortgage so you can pay off higher interest rate credit cards. It just says it's a myth to pay off your mortgage as soon as possible.

But let's take the scenerio you posted. If you get your net after-tax mortgage interest rate to 3.75%, comparing apples to apples, where are you going to get a risk-free return after-tax return of 3.75%?

cute fuzzy bunny 11-07-2004 10:54 AM

Re: 6 Mortgage Myths
 
Quote:

where are you going to get a risk-free return after-tax return of 3.75%?
Nowhere.

sgeeeee 11-07-2004 11:36 AM

Re: 6 Mortgage Myths
 
Quote:

I like sticking to the topic. *The myth doesn't say don't pay down your mortgage so you can pay off higher interest rate credit cards. *It just says it's a myth to pay off your mortgage as soon as possible.

But let's take the scenerio you posted. *If you get your net after-tax mortgage interest rate to 3.75%, comparing apples to apples, where are you going to get a risk-free return after-tax return of 3.75%?
Over the 30 year life of the mortgage you are likely to get much better than 3.75% return in a number of places -- almost any equity and/or real estate markets.

Deciding how to make the best 30 year financial decision based solely on the rates and returns today could be a significant error. Historically that has certainly been the case. You can see this with FIRECALC by running the cases with and without a mortgage. For many historical situations, holding a 30 year fixed mortgage at current rates would have produced both higher SWR and higher average terminal value than paying off the mortgage would have produced. Try it. :)

retire@40 11-07-2004 01:11 PM

Re: 6 Mortgage Myths
 
Quote:

Over the 30 year life of the mortgage you are likely to get much better than 3.75% return in a number of places -- almost any equity and/or real estate markets. *
The key word is "likely." Since you cannot guarantee at least a 3.75% after-tax rate anywhere today, it doesn't make sense not to pay off a mortgage even at a 5% rate today (and that's assuming you are in the 25% tax bracket AND that you itemize on your tax return.)

That said, I know what you are saying and my personal feelings are that the equity markets will probably grow at a rate better than 3.75%, but since we are comparing a "guaranteed" interest expense savings to a "guaranteed" income vehicle, that vehicle cannot be the equities market.

John Galt 11-07-2004 04:54 PM

Re: 6 Mortgage Myths
 
I'm a bit muddled. I can get a guaranteed 3.75%
after tax return for myself any number of places.
Are we only talking equities here? Too lazy to go back and read all the posts (would rather reread my own stuff :) ).

John Galt

Ishmael 11-07-2004 06:37 PM

Re: 6 Mortgage Myths
 
After reading some of the earlier threads on this topic, I had drawn the conclusion that that old saw needed to be revised: The three things one should never talk about in polite company are religion, politics, and whether to pay off the mortgage. Talk about some heated exchanges--I was afraid to bring up the subject although I'm still confused.

I ER'd last month quite unexpectedly, if you catch my drift, and don't have all my financial ducks in a row, yet. With my new found time I've been struggling with the question of whether I'd be better off paying off the mortgage (I've got plenty of bond investments to do so) to reduce cash flow needs, or keep the mortgage as an inflation hedge.

I've got a fixed rate mortgage just at under 5% with a remaining principal balance equal to about 15% of my liquid assets.

The threads I've found on this board seem to tell me that I would need to be earning 5% on a risk-free investment just to break even considering the 5% I'm paying on the mortgage. I'm wondering, though, if implicit in this assertion is an assumption that inflation is 0%? To put it another way, wouldn't I also break even if I were earning 0% on my risk-free investments if inflation was running at 5%?

I'm not the financial expert that many of you all seem to be, so I could use your advice on whether this makes any sense. (and since I'm pretty slow to catch on, I'd appreciate it if you'd type slowly and clearly if you chose to respond).

I know 5% is unattainable today in what anybody would consider a risk-fee investment, and certainly inflation is much below 5% as well. But, to my (perhaps confused) way of thinking, perhaps the two together need only exceed my mortgage interest rate to make it beneficial to keep the mortgage? Say if I-bonds were paying 3.5% and inflation was running at 2.5% (I haven't checked either recently but I think they are around there), wouldn't that 6% beat the 5% I'm paying and argue for holding on to the mortgage?

I'd like to hear what you think.
Thanks,

sgeeeee 11-07-2004 07:17 PM

Re: 6 Mortgage Myths
 
Hi Ishmael,

A lot of people feel more comfortable paying off the mortgage than taking a chance that they earn at a rate higher than their mortgage rate over the rest of the life of the loan. Of course, another way to look at this is that paying off the mortgage is taking the chance that inflation and/or returns on investments run up over the next 30 years and make the payoff more costly than you thought.

Historically, the odds are with those who keep making payments on loans with rates less than about 5.25%. But, of course, past performance is no guarantee of future results.

The comparison you need to make to a fixed mortgage rate is the absolute rate of return on your investments. If inflation were to increase to 6% with a 0% return on investments, you would be better off invested than paying off your 5% mortgage. That's really one of the biggest advantages of keeping your mortgage. It is a form of inflation protection that payoff does not offer.

One of the biggest financial dangers to the recent retiree is an extended downturn in the markets. But since markets that fall usually rise again, the best way to protect yourself from this danger is to have money in the market when healthy returns resume. The larger the nest egg invested in the rising markets, the more rebust the recovery. By keeping your money invested rather than sunk in a home, you improve your potential recovery from the period of poor returns.

You can use FIRECALC to look at how you would have done historically by paying off your mortgage or how you would have done by continuing payments. Each case is different and payoff is the best choice for many people. It's worth the effort to look at the results. But you also have to do what is comfortable to you. If that monthly payment drives you crazy, then pay off the loan. ;D

azanon 11-07-2004 08:11 PM

Re: 6 Mortgage Myths
 
Not paying off loans is more risky than some people think. You're basically "margining" in effect, when you have the cash flow to pay off a loan, but instead invest the money somewhere else. If you really think this is the way to go, what is stopping you from margining through your brokerage as well? You'll find the rates are actually quite comparable to a mortgage. Yeah the interest on mortgages is tax-deductible, but for someone cheap like me, its hard enough to break the standard deduction to even get that benefit in its entirety.

I like David Ramsey's no-nonsense approach to debt; he basically thinks its dumb. Paying off my debt will be a high priority for me in my early career.

sgeeeee 11-07-2004 08:41 PM

Re: 6 Mortgage Myths
 
Quote:

Not paying off loans is more risky than some people think. *You're basically "margining" in effect, when you have the cash flow to pay off a loan, but instead invest the money somewhere else. *If you really think this is the way to go, what is stopping you from margining through your brokerage as well? *You'll find the rates are actually quite comparable to a mortgage. *Yeah the interest on mortgages is tax-deductible, but for someone cheap like me, its hard enough to break the standard deduction to even get that benefit in its entirety.
*

I don't see the comparison here at all. A big difference between keeping a mortgage and margining stock investments is what you are betting on in each case(your house vs a specific stock). You can evaluate the risk historically using FIRECALC and it's just not that great. With a 5.5% or lower mortgage, your odds historically are that you are taking more risk by paying off the mortgage than be keeping it.

Quote:

I like David Ramsey's no-nonsense approach to debt; *he basically thinks its dumb. *Paying off my debt will be a high priority for me in my early career.
That may sound like no-nonsense to you, but a hard stance against real-estate debt sounds incredibly nonsensical to me. If every person and every business took that attitude, almost no one would ever own property. You should do what you feel comfortable with, though. :)

cute fuzzy bunny 11-07-2004 09:48 PM

Re: 6 Mortgage Myths
 
For starters, counting the tax break on the mortgage interest without factoring in the tax on the increased withdrawal rate to pay the mortgage and mortgage interest is taking the good and leaving the bad.

If you dont have a mortgage and you're withdrawing $25k a year, you're paying income tax on $25k a year. If you have a mortgage of $15k a year, you're withdrawing $40k a year and paying income tax on $40k, then getting the mortgage interest back as a deduction. Best case it nets out to zero during the first few years of the mortage, whereas you get no deduction in the last few years. Hence paying off that 5% mortage gives you a risk free 5% return. Period. Not 3.75%. Its also a TAX FREE 5% return, note please that you have to pay taxes on your investment gains before using them to compare to your mortgage payments.

Second point, for the 575,293rd time, comparing the "return" of paying off a mortgage - a risk free investment - with a mix of stocks and bonds historic return is not an apples to apples comparison. Retire@40 hit the nail on the head...

Pay the mortgage off with a portion your bond allocation which except for high yield corporates, you cant get average mortgage rate returns on...definitely not risk free ones. Keep the higher resulting stock allocation. Win every time. Up market, great. Down market, even better...you had less money on the line.

So SG, do you bring this up every 3 weeks like clockwork just to give me something to do? You do realize that insanity is defined by doing the same thing over and over and expecting a different result? Havent we discussed this enough? Isnt there a FAQ on this already?

John...let me know where I can get 5%+ liquid returns risk free. I have one hell of a lot of money headed there tomorrow morning. Nearest things I can find are 20 year TIPS and high yield corporates, both of which barely make more than 5-5.5%, neither of which is risk free, and both of which create very interesting tax problems. I can get 4.61% on a 5 year CD, but lose six months interest if I tap into it.

Treasuries are close to risk free, but dont have anywhere near the returns.

This is absolutely not an emotional or psychological thing. Of course, it depends very much on your personal scenario. People building to ER should try to get as much money invested as possible and keep a reasonable mortgage while they still have a paycheck/income stream they're already paying income tax on - I presume most of these folks are not setting aside 300-400K+ into treasury bonds. Those who have complex tax situations where a mortgage deduction somehow helps a lot more than the additional withdrawal hurts, great. Those who somehow get their hands on 3%-4% mortgages or who want to jump through hoops to squeeze a quarter percent arbitrage, do it.

Got a million bucks or more? Own 400k in investment grade bonds earning 3-4% a year as part of a 60/40 portfolio? Have a 150-200k mortgage at 5%? Nuts.

Believe the stock market is going down a lot or sideways for a long time? No brainer to take a risk free return by taking some money out of the market and putting it into your house.

John Galt 11-08-2004 01:47 AM

Re: 6 Mortgage Myths
 
Hey TH! Excellent post. So, it was the 575, 293rd time?
Thanks for keeping on top of this :)

John Galt

Ishmael 11-08-2004 03:26 AM

Re: 6 Mortgage Myths
 
Quote:

John...let me know where I can get 5%+ liquid returns risk free. *I have one hell of a lot of money headed there tomorrow morning. *Nearest things I can find are 20 year TIPS and high yield corporates, both of which barely make more than 5-5.5%, neither of which is risk free, and both of which create very interesting tax problems. *I can get 4.61% on a 5 year CD, but lose six months interest if I tap into it.
What I've been struggling with is whether I should be considering the effect of inflation when I do my payoff vs. not payoff analysis. The dollars I would spend in the future to make the mortgage payments would have less purchasing power than the dollars I would spend today to pay off the mortgage. But is that a relevant consideration?

If inflation is running at, say, 2.3% wouldn't I just need to make another 2.7% on my investments to offset the 5% I'm paying on the fixed rate mortgage? And if I'm able to itemize deductions on my taxes, the reduction in taxable income from the mortgage interest would exceed the increase in income from the 2.7% earnings on my investments. That could be an added benefit.

But maybe this is just voodoo economics?

Thanks,
Ish

John Galt 11-08-2004 03:38 AM

Re: 6 Mortgage Myths
 
Hello Ish! I see no voodoo, just good questions.
TH will help you sort it all out. I'm going fishing :)

Hope everyone has a great day
(dems, libs and other left of center types included) :)

John Galt

azanon 11-08-2004 03:55 AM

Re: 6 Mortgage Myths
 
Quote:

I don't see the comparison here at all. *A big difference between keeping a mortgage and margining stock investments is what you are betting on in each case(your house vs a specific stock). *You can evaluate the risk historically using FIRECALC and it's just not that great. *With a 5.5% or lower mortgage, your odds historically are that you are taking more risk by paying off the mortgage than be keeping it.
The comparsion is perfect, actually. *Seems like you think margin accounts can only be used to buy individual stock. *That's incorrect. * You can buy whatever you want with the borrowed money actually, including you guys beloved index funds. * And isnt that the real investment you're saying is so much better than paying off a loan first? *Or name one you like? *Yep, you can use a margin loan for that too. *Its almost a crime how easy a loan is to get.

Investing borrowed money is margining. *That's a fact, Jack. *Just because you have a loan over here, and an investment over there with a different name doesnt make it all of a sudden, not margining.

Quote:

That may sound like no-nonsense to you, but a hard stance against real-estate debt sounds incredibly nonsensical to me. *If every person and every business took that attitude, almost no one would ever own property. *You should do what you feel comfortable with, though.
David makes an exception for your own house, but even in that case, he advocates paying it off early. *One could do a lot worse than working towards paying off their debt. *David does thing debt is dumb for things besides your personal home, and champions several blue-chip businesses for refusing to go in debt.

.....

I think people are forgetting why banks and the like are willing to give you a loan anyway, of any type. Because they think they'll come out better in the end that you by lending you the money and you taking the risk for them. There is no win/win scenario with lender vs borrower. Risk and Reward is a balance scale, and when someone loans you money, they set the rate such that they think the scale will come out in their favor by the time its all said and done.



Capricious 11-08-2004 04:03 AM

Re: 6 Mortgage Myths
 
"...Walters advises people to imagine a scenario where they have a 5- percent ARM and are able to deduct the interest from their federal income taxes. That lowers their effective interest rate to somewhere in the neighborhood of 3.75 percent..."


Does this rate of return take the standard deduction
into consideration? One may be "paying" for a deduction that one would get "for free" anyway.








".. One could do a lot worse than working towards paying off their debt. .."



I intend to refinance my mortgage (currently less than
a third of the value) through my IRA , but it will be
about two years before I can meet the Dept. of Labor's
requirments for doing that. Then I will set up an interest-only adjustable rate note and pay my interest
into my IRA rather than to GMAC (who bought my note
from the last outfit that bought it.)



Capricious

brewer12345 11-08-2004 07:28 AM

Re: 6 Mortgage Myths
 
Quote:

What I've been struggling with is whether I should be considering the effect of inflation when I do my payoff vs. not payoff analysis. *The dollars I would spend in the future to make the mortgage payments would have less purchasing power than the dollars I would spend today to pay off the mortgage. *But is that a relevant consideration?

If inflation is running at, say, 2.3% wouldn't I just need to make another 2.7% on my investments to offset the 5% I'm paying on the fixed rate mortgage? *And if I'm able to itemize deductions on my taxes, the reduction in taxable income from the mortgage interest would exceed the increase in income from the 2.7% earnings on my investments. *That could be an added benefit.

But maybe this is just voodoo economics?

Thanks,
Ish

Ish, I think there are two ways to look at the payoff decision. One, historically would you have been better off with the mortgage paid off given your resulting portfolio and income needs? I think FIREcalc can help you address this. The other, can you earn enough after tax on your marginal fixed income investments to come out ahead of the after tax cost of the mortgage? I suspect the answer here is no, but you would best be able to tell. If you can tell us what the remaining period on the mortgage is, what your marginal fixed income investemnt is, and what tax bracket you are in, we could probably help you figure the second bit out.

Personally, if I were you, I would probably take out a HELOC and then pay off the mortgage. That way you can pretty easily re-leverage if you need to, but in the mean time you have the mortgage off your back.

sgeeeee 11-08-2004 09:19 AM

Re: 6 Mortgage Myths
 
Quote:

What I've been struggling with is whether I should be considering the effect of inflation when I do my payoff vs. not payoff analysis. *The dollars I would spend in the future to make the mortgage payments would have less purchasing power than the dollars I would spend today to pay off the mortgage. *But is that a relevant consideration?

If inflation is running at, say, 2.3% wouldn't I just need to make another 2.7% on my investments to offset the 5% I'm paying on the fixed rate mortgage? *. . .
Hi Ish,

You're right. Since the mortgage payment is fixed, then the comparison you should make is to the absolute return. If your rate of return on investments is 6% with 6% inflation, you're real rate of return is 0% . . . but you are still ahead of paying off a 5% mortgage.

If we hit a spell of inflation, then the fixed mortgage is an almost guaranteed boom to your investments. That is precisely why a low rate mortgage has actually been a safer financial decision than paying off a house historically.

Of course no one can tell you for sure whether it will be true in the future, but people can analyze how they have done with their investment decisions. People who kept their sub 5.25% mortgage over the past several years are already likely ahead of where they would be had they decided to payoff their mortgage.

There is a lot of passion from some people about this decision and many seem to feel that they have to attack any ideas that suggests that the answer to the question might vary depending on mortgage rates and other economic conditions. People who feel that way should clearly pay off their mortgage. So should a lot of other people who are near the end of the loan terms or have high mortgage rates.

But as you can see from the original article posting, not everyone sees the situation that way. A dispassionate analysis of the numbers leads many knowledgeable people to a different conclusion. It is worth the time to do the analysis -- even if you decide that the numbers are not compelling for your situation.

FIRECALC can be used to look at this situation in detail. Run one simulation where you start with your initial portfolio reduced by the amount of your payoff and run the simulation for the length of the loan (for example 30 years if you just established a 30 year fixed loan). Run a second simulation that uses your full portfolio but that includes a regular annual payment for the amount of the 12 loan payments. You should compare the terminal values as well as the SWR from both simulations. This simulation will not include tax effects (positive or negative). If you want to include these, you will need to include the effects of tax deductible interest payments as well as taxes on any additional withdrawal required for the payments. My own experience is that the tax effects are of second order importance, but your tax situation could be different.

:)

sgeeeee 11-08-2004 09:55 AM

Re: 6 Mortgage Myths
 
TH,

You have given qualitative reasons to make comparisons on this issue a number of times. You decide how you want to compare things and state them as if they are rules. You are simply stating your opinion and clearly (as the article shows) your opionion is not shared by everyone. Why does this bother you so much?

Let me be specific. You state that paying off is a 5% guaranteed return. But you are making no guarantees for your real return over the next 30 years. If inflation were to jump to 5% with a 5% real return averaged over the next 30 years, then your payoff would have been a 0% real return move or a loss of 5% real return over 30 years. Historically, that is qualitatively what would have happened to anyone choosing the payoff option. You can come up with a quantitative historical result using FIRECALC. You may prefer not to analyze your mortgage situation like this, but many people do. The article clearly proves that there people who view the situation differently than you.

You also claim that the payoff is a risk free investment. But again, as the above example shows, that is only true if you only consider one kind of risk. There are other risks to home ownership too. Certainly, each person needs to establish their own risk profile. And that can be more important to an indivdual's decision than the fact that historically they would benefit from keeping a mortgage. Again, in your case, you have decided that the only way to compare mortgage and investment is using fixed income investments at today's rates. That clearly means that you should pay off your mortgage. I believe that you already have. You made the right decision for you. But as the article clearly shows, not everyone shares your view of risk. People who feel comfortable with the minimal risk of keeping a mortgage have been able to do very well in recent years. You feel that they are taking terrible risks, but they don't.

Let me point out, TH, that I was not the author of this article that I posted. Clearly there are people who look at the mortgage payoff differently than you. So let me also point out that it is you that continues to take the inflexible position. Our continuing discussion on this issue runs like this:

SG: Mortgage payoff is not a black and white issue. Historically, keeping a low interest loan with a balanced investment portfolio can result in both an increased SWR and increased terminal value. The investment results are only one aspect of this decision, but it is probably worth it to look at the numbers before you follow blind, inflexible advice.

TH: No, you're wrong. I don't trust historical results and I think it's risky. The only decision anyone should ever make is to payoff your mortgage. ;D

I'm only kidding. (See the little smiley.) Actually, although I had difficulty reading through your whole post, I appreciate that your final paragraph showed much balance.

cute fuzzy bunny 11-08-2004 12:41 PM

Re: 6 Mortgage Myths
 
Perceptions are funny arent they?

I was starting to think you're trolling me for bringing this much beaten dead horse up so often.

I've ALWAYS said that everyone should do their own math. I've even on occasion presented scenarios in support of both decisions. So far I've never seen you air a scenario that isnt pro-mortgage, although you do give lip service to "do your own math".

I've only stated facts as facts, and tried not to muddy the water or use extreme examples. For example, calculating this as a 30 year scenario when hardly anyone in the US stays in a home for more than 10 years. Or fudging in mortgage interest savings without factoring in income tax on the increased withdrawal.

I didnt read the article, but I'm betting the writer had non retirees in mind, and I agree with him if thats the case. If you're drawing a big salary and paying a lot of income tax, pulling a mortgage and putting your money into the stock market makes a world of sense. If you're increasing your withdrawal rate 30-50% to pay a mortgage, and you're paying taxes on that increased withdrawal, and support of that higher withdrawal is dependent on after tax rates of stock return that are higher than 5-6%, then I question that decision.

If you're retired and have a substantial heap of money and investments, and you're paying 5-6% on a mortgage (the national average right now), while making 3-4% on a similar amount of bonds, you're crazy. Thats a fact. 5>4. 5>3. 6>4. 6>3.

Azanons point is quite valid. If you're issuing a bond to the bank with your house as collateral, and then using the free cash gained from the bond to invest in the stock market, you're investing on margin. Gambling. Historically over a 30 year period, that is a winning proposition. Thats a fact. Historically over a 10 year period, its not always so. Thats a fact. In the meanwhile, if you're using part of that gain to buy bonds or bond funds, you're losing money in the arbitrage. Thats a fact. But investing in stocks and keeping a bond on your home is far riskier than not. Thats a fact. Therefore, comparing paying off a mortgage to investing in stocks is not an equal comparison. Thats a fact.

If you want to put the mortgage money in the market and hope that the expected average annual 6-8% pretax earnings beats your mortgage, and that risk feels good to you, then do it. But thats an opinion on where the future markets are going. Considering Morningstar has the overall market 12% overvalued, and that is the highest its been since early 2000...I wouldnt want to make that bet right now.

If you can find a low risk instrument that gets you a quarter or half percent after taxes to offset your mortage and squeak a few dollars out of that arbitrage, then do it.

However, it is my OPINION that for most ER's with a large investment portfolio and a mortgage, they'd probably be better off paying the mortgage from their bond portfolio and reducing their SWR. I ran those numbers for myself, and I've posted a lot of reasonable scenarios using firecalc that showed that in the vast majority of cases you're better off without the mortgage. In fact, I proposed a scenario where someone without a mortgage can retire on $100k less than someone with one, maintaining the same lifestyle. With no more or less risk than having the mortgage, according to the historic numbers you rely on.

So what we're saying is we'd rather have to get more money before retiring, then put a home and the portfolio at considerable increased risk in hopes of ekeing out a marginally higher long term rate of return? I'm afraid I've misjudged this whole thing, because that just sounds way too enticing for me to pass up. Fortunately its monday and my credit union is open so I can call them up and get me a mortgage.

As far as calling in the risks of homeownership and saying that paying off the mortgage is not risk free...well, you have those risks with or without a mortgage, there is no difference. Hence they cancel on either side of this equation. Unless you want to suggest that you might default on the mortgage if something bad happened to home values or godzilla steps on your house. You can also always take out a mortgage. You can also hold a HELOC like I do, just in case. More muddying of the waters...

May I propose that the reason you keep bringing it up is because you're uncomfortable with your own decision and are looking for some support and validation, rather than some problem with my reasoning? :)

cute fuzzy bunny 11-08-2004 12:50 PM

Re: 6 Mortgage Myths
 
Quote:

What I've been struggling with is whether I should be considering the effect of inflation when I do my payoff vs. not payoff analysis. The dollars I would spend in the future to make the mortgage payments would have less purchasing power than the dollars I would spend today to pay off the mortgage. But is that a relevant consideration?

If inflation is running at, say, 2.3% wouldn't I just need to make another 2.7% on my investments to offset the 5% I'm paying on the fixed rate mortgage? And if I'm able to itemize deductions on my taxes, the reduction in taxable income from the mortgage interest would exceed the increase in income from the 2.7% earnings on my investments. That could be an added benefit.

But maybe this is just voodoo economics?

Thanks,
Ish

Inflation has different effects. Essentially for a retired person you dont need to compensate for inflation to pay the mortgage. For someone drawing a paycheck, which indexes upwards faster than inflation (on average), a mortgage payment smells pretty good after 15 years when its still the same amount as it was originally, while your take home pay has gone up 2-3% a year.

In the latter case, consider your paycheck a zero value bond that generates your annual salary as a dividend, inflation adjusted, while the mortgage is a sliding value bond you issue to the bank and pay a fixed dividend to (the interest rate), callable by you, non inflation adjusted.

haha 11-08-2004 02:58 PM

Re: 6 Mortgage Myths
 
Quote:

Seems like you think margin accounts can only be used to buy individual stock. *That's incorrect. * You can buy whatever you want with the borrowed money actually, including you guys beloved index funds. * And isnt that the real investment you're saying is so much better than paying off a loan first? *Or name one you like? *Yep, you can use a margin loan for that too. *Its almost a crime how easy a loan is to get.
Investing borrowed money is margining. *That's a fact, Jack. *Just because you have a loan over here, and an investment over there with a different name doesnt make it all of a sudden, not margining.
<snip>
I think people are forgetting why banks and the like are willing to give you a loan anyway, of any type. *Because they think they'll come out better in the end that you by lending you the money and you taking the risk for them. *There is no win/win scenario with lender vs borrower. Risk and Reward is a balance scale, and when someone loans you money, they set the rate such that they think the scale will come out in their favor by the time its all said and done.
Azanon, if I understand you, you are saying that a home mortgage is functionally equivalent to a margin loan.This assertion is flawed on several counts. One, you can't fix the rate on a margin loan while you can on a home mortagage loan. Two, a home loan is only callable in a few instances-eg, you sell the house, or you fail to make a certain number of timely payments. As long as the physical collateral (your home) still exists, it doesn't matter what its market value is, your loan cannot be called. Not so with a margin loan. That is why experienced people have a healthy respect for margin calls.

Additionally, there are safeguards for mortgage borrowers on a primary residence, for example rules about forclosure. Ask anyone who got caught with margin debt in the 1987 equity downturn how fair a deal he thinks he got from his broker/lender.

Your second point, about how the lender and borrower cannot have a win-win deal is also flawed because you evidentally have forgotten or do not know that there is third party to this tranaction in most cases. The lender merely originates the loan, and then sells it to any number of repackagers, who then resell in securitzed form to individuals and instituions who for whatever reason want securities with these characteristics. These low interest loans are hot-potatoes. Without the ability to pass them on, most would never be made, at least by a banker older than 30.

But with securitization the originator can benefit from fees and the borrower can benfit from a low cost loan. Truly a win-win. :)

Mikey

cute fuzzy bunny 11-08-2004 03:17 PM

Re: 6 Mortgage Myths
 
Mikey - you're arguing fine points. Azanons point is that they ARE functionally equivalent where it matters, and I agree. You're borrowing money at one rate for investment purposes in the hopes that your investment returns will exceed the borrowing rate.

However your points on the increased risks and issues associated with borrowing on margin are well taken.

As far as mortgages callability...you might go back and re-read the fine print on yours. If there is no clause that allows the mortgage company to "call" your mortage, then its a rare one. Many mortgages do in fact allow the mortgage company to bail on you. That its done infrequently is why most people arent aware of it.

The reasons for enabling a cancellation are varied, and the time frame before cancellation becomes effective is usually plenty to get a replacement mortgage.

Cut-Throat 11-08-2004 03:42 PM

Re: 6 Mortgage Myths
 
Well I'm really glad I paid off my 9 year 5.25% Motgage last year. Yes it saved me a few bucks as my portfoilio is only up about 3.4% this year.

But the real reason, is I hate people telling me what to do. As long as there is a string attached to your house (debt) - There always seems to be paperwork arriving in my mailbox telling me which Hoop I have to jump through.

I'm 53 years old and sick of jumping through hoops! >:(

cute fuzzy bunny 11-08-2004 03:53 PM

Re: 6 Mortgage Myths
 
Wanna send me all your old hoops then so I can jump through them until I'm sick of it? ;)

Cut-Throat 11-08-2004 04:31 PM

Re: 6 Mortgage Myths
 
Quote:

Wanna send me all your old hoops then so I can jump through them until I'm sick of it? ;)

TH,

You mean you didn't have to jump through hoops at your former employer? ???

- One more sexual Harrassment training seminar would have put me in the funny farm. :(

cute fuzzy bunny 11-08-2004 04:50 PM

Re: 6 Mortgage Myths
 
They didnt send me to any of those. Apparently I was already good enough at it to not warrant it ;)

Bob_Smith 11-08-2004 05:03 PM

Re: 6 Mortgage Myths
 
Quote:

But the real reason, is I hate people telling me what to do. As long as there is a string attached to your house (debt) - There always seems to be paperwork arriving in my mailbox telling me which Hoop I have to jump through.

I'm 53 years old and sick of jumping through hoops! >:(
Cut-Throat, we paid off our mortgage years ago. In view of the thoughtful analysis provided on these pages by both TH and SG, I'm ashamed to admit why we paid it off, but I will anyway...

We were paying 9%, which was higher than the going rate at the time; we were busy and it just got away from us. One of the bank's loan officers got snotty with my wife over a small fee they tried to add to a savings account that was set up to receive our mortgage payments. So we paid off the mortgage in full - just for spite.

A bank VP called and tried to dissuade us, and he forced that snotty loan officer to call and apologize, etc. I never did the math, but if we did lose money, it was worth every penny. If there was a contest for the dumbest reason to pay off a mortgage, we'd be serious contenders. ;D

haha 11-08-2004 05:49 PM

Re: 6 Mortgage Myths
 
Quote:

Mikey - you're arguing fine points.
TH, mea culpa. I apologize to you and anyone else who feels this way. I just can't help myself from being more interested in demonstrable facts than blanket assertions.

But I really cannot see how the difference between a floating margin loan and a fixed mortgage can be called a fine point. If so, the difference between a man and a woman is a fine point. After all, the margin loan and the mortgage loan are both loans, and a man and a woman are both people. And the other things I said are simple facts, that were ignored by the original poster. Whether they are important differences or fine points I think might depend more on the situation of the borrower, rather than on your opining one way or the other.

I wonder too if you may feel that readers of this forum can't make up their own minds about what is meaningful and what isn't, without being told by TH. As helpful as you are on many topics, I imagine that as ERs they probably are capable of that task on their own. In fact, I would even expect as experienced men and women of the world, most of us probably already know much of the broad aspects of many of these topics. What is left are details. Or we can just ignore data and argue.

I also have doubts about what you assert is the callability of home mortagage loans, absent nonperformance on the part of the borrower. I am not a real estate attorney, so I really can't comment on when this might be true. If you can supply some instances of what you are talking about, I and possibly many others would be very interested in these "details".

However, it seems to me that if your idea on this were broadly true, we would never have experienced the S&L breakdown of the 80s. The banks that could no longer fund their 7% mortgages except at a loss would just call the loans. If fixed loans were callable in the sense that you are suggesting, what is the difference between a fixed and a floating rate home loan? Why would anyone take a fixed loan? Why in fact are they called fixed loans? :)

Mikey

BigMoneyJim 11-08-2004 06:32 PM

Re: 6 Mortgage Myths
 
Quote:

So we paid off the mortgage in full - just for spite.
I think that's the best reason for paying off a mortgage I've heard yet.

John Galt 11-08-2004 06:56 PM

Re: 6 Mortgage Myths
 
Please allow me a little repetition.

I never really did the math for our situation, but
I believe I could come up with reasons to go either
way (pay off vs. keeping a mortgage). We carry no mortgages on any
of our real estate (50% of net worth). It keeps things simple and helps to protect me from myself in making the
cash a little harder to access, if only psychologically.
Taxes are not a factor with me as I pay no federal income taxes at any level.

John Galt

cute fuzzy bunny 11-08-2004 08:56 PM

Re: 6 Mortgage Myths
 
Quote:

TH, mea culpa. I apologize to you and anyone else who feels this way. I just can't help myself from being more interested in demonstrable facts than blanket assertions.
[...more hostile blah blah]
Gee mikey, I thought I was pretty nice in my response to you, since we were talking about the analogy in terms of borrowing money to invest...which a margin loan and taking out a mortgage to invest both are. I said your points were well made, but in fact they had nothing to do with that core point. They almost seemed argumentative rather than adding anything to the discussion.

As far as the rest of your rant, I'm not sure where you're coming from or what your problem is. I certainly dont need your hostility when I havent been hostile to you. So shove it back into your pampers and keep it, m'kay?

haha 11-08-2004 09:54 PM

Re: 6 Mortgage Myths
 
Quote:

*So shove it back into your pampers and keep it, m'kay?
Sorry big guy. But I reread my post and I can't see anywhere that I veered from the topic at hand. OTOH, your hostility, or need to prevail, is written all over your post as is pretty clear by the invective above quoted.

sgeeeee 11-08-2004 09:56 PM

Re: 6 Mortgage Myths
 
Quote:

I think that's the best reason for paying off a mortgage I've heard yet.
I agree, Bob. If I could pick the person my payoff would spite, I would pay it off tomorrow . . . and maybe the day after too. ;D

sgeeeee 11-08-2004 10:03 PM

Re: 6 Mortgage Myths
 
Quote:

. . . OTOH, your hostility, or need to prevail, is written all over your post as is pretty clear by the invective above quoted.
Forget about it, mikey. TH feels a lot of stress from his need to time the markets and apparently from eating too much fish oil. But he gets over it. :)

Nords 11-08-2004 11:45 PM

C'mon, guys.
 
I time the markets, I eat fish oil, and we have a huge whompin' mortgage for investment purposes.

As TH has pointed out before, I think that we're all agreed that a mortgage held for investment purposes should have a lower interest rate than any other bonds in the retirement portfolio. Otherwise you're effectively taking out a higher-interest loan to buy lower-interest bonds. No matter how good it makes you feel, you're losing money.

I don't remember who made the point first (SG?), but investing the cash generated by having a mortgage gives you a larger "retirement portfolio" (if you will). And that larger portfolio is demonstrably more survivable in FIRECalc's database, which theoretically makes a retirement portfolio more survivable in the future. But taking out a mortgage requires accepting those odds, and not everyone is comfortable with doing so. Either decision is valid and neither is "wrong".

Ishmael makes a good point about inflation, too. With the Fed ensuring that we never see "deflation", we get to pay off a fixed amount for 30 years with dollars that are worth less every year. Great deal! But very difficult to quantify.

Because a portfolio based on mortgage debt has a higher percentage of stocks (or at least riskier bonds paying more than the mortgage costs), it's more subject to volatility risk. Not everyone is willing to endure a volatile portfolio. And there's no risk-free guarantee that the invested mortgage money will even come close to outperforming the cost of the mortgage. Although the odds are on our side, that doesn't guarantee any future performance. Once again, sounds like a personal choice whose validity is not subject to question.

So, nothing new here, having a mortgage (or paying it off) is an extremely personal choice. Do the math for your situation, evaluate the odds and your risk profile, and consider how well you'll sleep at night. If it makes you feel better and you won't be losing money, then do it. If you're attracted to investing mortgage dollars because the odds are better than 50/50, then do it.

If you want to know why we're carrying such a big mortgage, then read the "Mortgage/ass(ets)" thread on the subject and PM me with more questions. If you can poke a hole in my logic then I'll thank you for saving us from a grievous error and we'll pay that puppy off tomorrow. However, if you're going to tell me that it's too volatile or that it's too hard to sleep at night-- well, that's a personal choice.

But let's not call each other dumb for doing so-- if we're so firm in our convictions then we should be loaning each other the money!

I have to point out, SG, that you could be accused of trolling TH-- he rises to the bait every time you bring up a post containing the word "mortgage". And, TH, I can understand setting the hook once or even twice. But every time? You know better than that.

I enjoy reading the links & ideas posted on these subjects. But there's no need to let controversial subjects degenerate into endless reciprocated diatribes...

unclemick 11-09-2004 04:15 AM

Re: 6 Mortgage Myths
 
And then there's rent. That's the first thing I'd do - should living in Hurricane Alley make me an offer I couldn't refuse. I would be hard pressed to take money out of my ER portfolio to buy something frivolous like a house. But that's just me.

Jane 11-09-2004 04:57 AM

Re: 6 Mortgage Myths
 
Interesting. I didn't know mortgage can be such an exciting topic.

I thought about this a while back and realized the numbers can go both way. The wild cards are inflation, real estate rate of return and my portfolio return rate. And I decided (being a little risk averse maybe?) that I don't like the wild cards offered so I decided that I would like to pay my mortgage early (7 years).

I think mortgage (like many other investment vehicles) depends on each individual's discipline, investment knowledge, time horizon, level of comfort etc, etc and it is hard (though many finance writers always seem to try) to make a sweeping generalization. If you think you can come out ahead by investing the cash instead or paying the mortgage, then go ahead. If you think money saved by paying mortgage early is better than distant 30-year something market payout then pay your mortgage. There is no myth either way.

There is a lot of clamouring and song and dance in financial reporting community (they do have to churn out articles to put food on their table). There are very few financial concepts that work for everyone (LBYM is one of them) and lots of noise in between.

Jane

azanon 11-09-2004 05:00 AM

Re: 6 Mortgage Myths
 
Quote:

Azanon, if I understand you, you are saying that a home mortgage is functionally equivalent to a margin loan.This assertion is flawed on several counts. One, you can't fix the rate on a margin loan while you can on a home mortagage loan.
What difference does that make? *At the point you think the margin interest rate becomes unacceptable, you simply give them their money back either with the money you borrowed, or god-forbid, with another loan. *You make it sound like after the point you margin, you can't undue it for whatever reason you deem necessary (such as the interest rate going up).

Quote:

Two, a home loan is only callable in a few instances-eg, you sell the house, or you fail to make a certain number of timely payments. As long as the physical collateral (your home) still exists, it doesn't matter what its market value is, your loan cannot be called. Not so with a margin loan. That is why experienced people have a healthy respect for margin calls.
Again, what difference does that make? First, its not like you lose anything of substance if the margin loan is called. *Second (Mikey), I am one of those that does not distinguish between a paper loses and real loses. *What "changes" if you get called on a margin loan? *They simply sell you out to cover the loan. *Your net equity before and after the margin call is the same. * *
..... *Thus, for all practical purposes, the risk being taken in my analogy is still the same; *you're intentionally investing borrowed money to try to exceed the interest rate on the note.

Quote:

Additionally, there are safeguards for mortgage borrowers on a primary residence, for example rules about forclosure. Ask anyone who got caught with margin debt in the 1987 equity downturn how fair a deal he thinks he got from his broker/lender.
I imagine they paid back the exact amount owed at the time of the call. *They cant tack *on a few thousand for good measure Mikey, lol.

Quote:

Your second point, about how the lender and borrower cannot have a win-win deal is also flawed because you evidentally have forgotten or do not know that there is third party to this tranaction in most cases.
If anything, that strengthens my argument. *You're telling me two people (or more) are profitting from me agreeing to take a loan, and i'm supposed to believe the loan is good for me as well? *Me, and David Ramsey, smell a rat.

Again, for clarily, i'm not advocating not getting a loan for a personal residence. *But, I do think its a good idea, for personal investing, to avoid loans in all other instances by being proactive and planning expenses AND paying off the mortgage ASAP. *The way i see it, if you owe "Jack" 100K, and you have 30K in the bank, that's Jack's 30K, not yours.

Martha 11-09-2004 05:05 AM

Re: 6 Mortgage Myths
 
Quote:



I also have doubts about what you assert is the callability of home mortagage loans, absent nonperformance on the part of the borrower. I am not a real estate attorney, so I really can't comment on when this might be true. If you can supply some instances of what you are talking about, I and possibly many others would be very interested in these "details".


Mikey

Most home lenders use what is called the Fannie Mae mortgage form. This form is used for loans that are sold on the secondary market. Each state has its own variant of the form so that the mortgage complies with state law requirements.

Under this form, the mortgage is in default if the borrower fails to comply with a terms of the mortgage. For example, the borrower doesn't make payments, doesn't pay property taxes, doesn't maintain insurance, sells the property, doesn't use the property as his residence for at least a year (yeah, that's what the form says), allows the property to deteriorate, lies on the loan application, etc. There must be a breach by the borrower of a term in the mortgage for a default to occur. Most states also require a time period where the borrower can cure the default.

On commercial property, many mortgage forms provide that the lender can call the loan in default if the lender "deems itself insecure". These "insecurity" clauses needless to say are disliked by commercial borrowers and sometimes they are able to negotiate out of them. I never have seen an insecurity clause in a home mortgage. Even in commercial loan, a lender is unlikely to start foreclosure just because it deems itself insecure.

John Galt 11-09-2004 05:25 AM

Re: 6 Mortgage Myths
 
Good post Martha! Re. "deemed insecure", there is a school of thought in business that if you get deep enough into a lender's pockets and things get ugly, you are better off than if you had borrowed little. The theory is
if you are way overborrowed (and thus the lender
is way overcommitted) they don't dare foreclose, but must ride out the storm with you.
I know from personal experience this can work,
but here is the standard disclaimer: I am not suggesting
this path to anyone.

John Galt

Capricious 11-09-2004 08:15 AM

Re: 6 Mortgage Myths
 
"...if you are way overborrowed (and thus the lender
is way overcommitted) they don't dare foreclose, but must ride out the storm with you..."





I read a story in the Wall Street Journal a couple years
ago about the "world's poorest man:" a Japanese
business man who owned lots of Tokyo real estate,
purchased with borrowed money, that
had depreciated to the extent that he had a negative
net worth of several billion dollars, hence his ranking
as the world's poorest man.

The banks holding the notes did not want to forclose as
they did not know what to do with the property, so they
let him continue to manage it.

He lived in a penthouse and had a chauffered limo drive
him around. Lived like a king.

Hyperborea 11-09-2004 08:19 AM

Re: 6 Mortgage Myths
 
Quote:

Under this form, the mortgage is in default if the borrower fails to comply with a terms of the mortgage. *For example, the borrower doesn't make payments, doesn't pay property taxes, doesn't maintain insurance, sells the property, doesn't use the property as his residence for at least a year (yeah, that's what the form says), allows the property to deteriorate, *lies on the loan application, etc. *There must be a breach by the borrower of a term in the mortgage for a default to occur. *Most states also require a time period where the borrower can cure the default.
Yeah, IIRC this wasn't always the case but it was laws made by society for the greater good after the experiences of the great depression where lenders were calling mortgages that weren't in default. Because of the tight lending at the time they couldn't get a replacement mortgage or sell it and so defaulted losing whatever equity was built up. It really exacerbated the already bleak conditions at that time.

JohnBlake 11-09-2004 11:00 AM

Re: 6 Mortgage Myths
 
I paid off the mortgage because my bond portfolio was paying significantly less interest than my mortgage (what I was paying to the creditors). I didn't have to touch the stock portion in order to pay the remainder on the mortgage. Although the interest on the mortgage payments was partially tax deductible, the interest on the bond payments was taxable. The interest on the bond portfolio didn't even come close to making the monthly mortgage payments.

My analysis leads to the following general rules:

a) if the interest rate on your mortgage is low relative to long term interest rates, keep the mortgage.

b) if you are a conservative or moderately conservative investor, and the remaining balance on the mortgage is less than ~20% of your portfolio, and you have a significant bond allocation that's paying less than your mortgage, it probably make sense to pay it down.

c) If you are an aggressive investor and don't use a significant bond allocation to reduce the volatility of your portfolio, then consider the mortgage as a tax deductible margin loan.

d) If you are just starting out, and you don't have significant assets yet, then keep the mortgage and keep saving until you have a significant portfolio, then see a&b above.

sgeeeee 11-09-2004 11:38 AM

Re: C'mon, guys.
 
hi Nords,

Quote:

I time the markets, I eat fish oil, and we have a huge whompin' mortgage for investment purposes...
Maybe Wab was wrong and it's not the fish oil that makes TH so disagreable. ;D


Quote:

As TH has pointed out before, I think that we're all agreed that a mortgage held for investment purposes should have a lower interest rate than any other bonds in the retirement portfolio. *Otherwise you're effectively taking out a higher-interest loan to buy lower-interest bonds. *No matter how good it makes you feel, you're losing money...
Well now. . . Think about that for a minute, Nords. I don't believe that, and I don't think many people will if they think about it for a few minutes. That's a lot like saying you should look at your investments each day and take everything out of the underperforming ones and put it all in your top performing one. If one of your investments earned 2% today and some of your investments earned 0.5%, do you conclude that you're losing money? Understanding the time frame of this decision is critical to understanding why keeping a low interest mortgage can be very valuable.

You have an allocation in large cap stocks, short term bonds, real estate, . . . whatever because you know that the performance today is not the performance tomorrow. You don't expect every one of those investments to perform the same (or even well) throughout the life of the investments. You have to consider the time frame of the investment and why you have it. One of the first questions unclemick always asks of people looking for investment advice is what purpose that investment is supposed to serve. That applies here too.

Quote:

I have to point out, SG, that you could be accused of trolling TH-- he rises to the bait every time you bring up a post containing the word "mortgage". *. .

Nords, people could accuse me of all sorts of things. They could call me names and spit at me. I really don't expect to let that bother me much (unless their spitting is on target) :). I read an article that dealt with an issue that has been discussed on this board, so I posted a summary and answered some questions. You may feel like this was an unproductive diatribe, but I actually felt like this was the closest we've come to having an honest, factual discussion of this issue. I really think that the messages from several other posters indicate this too.

nfs 11-09-2004 12:17 PM

Re: C'mon, guys.
 
Quote:

I don't believe that, and I don't think many people will if they think about it for a few minutes. That's a lot like saying you should look at your investments each day and take everything out of the underperforming ones and put it all in your top performing one. If one of your investments earned 2% today and some of your investments earned 0.5%, do you conclude that you're losing money? Understanding the time frame of this decision is critical to understanding why keeping a low interest mortgage can be very valuable.
Can be, sure. But Nords' point was not that it could not be valuable. It was that it was not valuable in the case where the asset side of your balance sheet contains bonds that pay a lower rate of interest than you are paying on the mortgage.

A mortgage is just a callable bond with a duration shorter than that of regular callable bonds. So anyone paying a 5% 30 year mortgage and holding, for example, an intermediate term corporate bond or bond fund that pays 4% is burning their own money.

sgeeeee 11-09-2004 01:06 PM

Re: C'mon, guys.
 
Quote:

. . . *So anyone paying a 5% 30 year mortgage and holding, for example, an intermediate term corporate bond or bond fund that pays 4% is burning their own money.
Ahh . . . Now you've added something about timeframe. And even this is only true if you assume that you are holding the bond for the entire time of the mortgage.

nfs 11-09-2004 01:26 PM

Re: C'mon, guys.
 
Quote:

And even this is only true if you assume that you are holding the bond for the entire time of the mortgage.
Under what circumstances do you expect the bond position to disappear?

This really isn't that hard. If you own $200k worth of bonds (individual or in a fund) that pays you 4% and you owe $200k on your mortgage on which you pay 5%, you're out of pocket two grand a year less taxes. It's the equivalent of lighting the stove with a Ben Franklin every month.

Why would you do this?

retire@40 11-09-2004 01:48 PM

Re: C'mon, guys.
 
Quote:


Under what circumstances do you expect the bond position to disappear?

This really isn't that hard. *If you own $200k worth of bonds (individual or in a fund) that pays you 4% and you owe $200k on your mortgage on which you pay 5%, you're out of pocket two grand a year less taxes. *It's the equivalent of lighting the stove with a Ben Franklin every month.

Why would you do this?
If you are in the 35% tax bracket and the bonds happen to be state municipals.

nfs 11-09-2004 02:14 PM

Re: C'mon, guys.
 
Quote:

If you are in the 35% tax bracket and the bonds happen to be state municipals.
You're in the 35% bracket, which means your taxable income is >$300k. Your AGI is probably >$325k. Last I looked, people with $325k AGIs had their Schedule A deductions whacked.

So you're collecting 4% tax-exempt interest and paying 5% non-deductible interest. Tell me why this is supposed to be a good deal.

haha 11-09-2004 03:09 PM

Re: 6 Mortgage Myths
 
Quote:

What difference does that make? *At the point you think the margin interest rate becomes unacceptable, you simply give them their money back either with the money you borrowed, or god-forbid, with another loan. *You make it sound like after the point you margin, you can't undue it for whatever reason you deem necessary (such as the interest rate going up).*
Azanon, this is probably beyond my ability to clarify. But there is power when one can control the timing of a financial decision. Say I get a $100,000 mortgage loan at 5.5% today (I don't know if this is realistic or not) vs a $100,000 margin loan. Say interest rates increase 2% over one year, and stock prices go down, as they well might under this scenario. Well, unless I am a momentum player, which I definitely am not, the securities that I bought at a higher price should still be attractive, likely more attractive. Under the mortgage scenario I can continue to fund it with a 5.5% loan. If interest rates increase 4 more points, I can still fund my these securities at 5.5%. I think it is fairly clear that the PV of my loan responsibility is going down as interest rates go up, as long as I have the fixed loan.

One factor that cuts slightly in the opposite direction is that the mortgage will ordinarily require amortization of the loan principle, whereas the margin loan is interest only.

If interest rates go down meaningfully, the margin loan would be better, at least with respect to rates. But I think this is low probability scenario, given the already rock bottom state of today's rates.


One more comment- you indicate that what counts on a balance sheet is the net equity, not the specific characteristics of the assets and liabilities involved. I think that net worth is important, but far from the whole story. There are liquidity and control issues to be considered also.

Lastly, none of this is meant to address whether or not one should use leverage. If one decides to do so, I think it is pretty clear that it is a good deal to fund it at historically low fixed rates, as is possible with a home mortgage in today's market.


Mikey


haha 11-09-2004 03:12 PM

Re: 6 Mortgage Myths
 
Quote:

Most home lenders use what is called the Fannie Mae *mortgage form. *This form is used for loans that are sold on the secondary market. *Each state has its own variant of the form so that the mortgage complies with state law requirements.

Under this form, the mortgage is in default if the borrower fails to comply with a terms of the mortgage. *For example, the borrower doesn't make payments, doesn't pay property taxes, doesn't maintain insurance, sells the property, doesn't use the property as his residence for at least a year (yeah, that's what the form says), allows the property to deteriorate, *lies on the loan application, etc. *There must be a breach by the borrower of a term in the mortgage for a default to occur. *Most states also require a time period where the borrower can cure the default.

On commercial property, many mortgage forms provide that the lender can call the loan in default if the lender "deems itself insecure". *These "insecurity" clauses needless to say are disliked by commercial borrowers and sometimes they are able to negotiate out of them. *I never have seen an insecurity clause in a home mortgage. *Even in commercial loan, a lender is unlikely to start foreclosure just because it deems itself insecure.
Martha, thanks for very concise expert's opinion on this issue.

Mikey

retire@40 11-09-2004 04:34 PM

Re: C'mon, guys.
 
Quote:


You're in the 35% bracket, which means your taxable income is >$300k. *Your AGI is probably >$325k. *Last I looked, people with $325k AGIs had their Schedule A deductions whacked.

So you're collecting 4% tax-exempt interest and paying 5% non-deductible interest. *Tell me why this is supposed to be a good deal.
I agree that someone in the 35% bracket must phase out his itemized deductions, but not all the interest is necessarily non-deductible as you say. Even someone in the 35% bracket could deduct most of the mortgage interest.

I was too lazy to do the math the 1st time, but let's look at the actual numbers now using someone in the 28% bracket that still proves my point.
AGI = $150,000
Mortgage Interest Paid= $30,000
Mortgage Interest Deductible = $29,685 (98.95%)
Lost Mortgage Interest Deduction = $315 (1.05%)

Mortgage Rate = 5%
Tax Free Bond Interest Rate = 4%

28% * 98.95% *= 27.706% effective tax savings

5% * 27.706% = 1.3853%

5% - 1.3853% = 3.6147% after-tax mortgage rate

Therefore, a 4% tax-free bond is better than paying a 5% mortgage.

daystar 11-09-2004 06:05 PM

Re: 6 Mortgage Myths
 
I plan on doing a 15-year mortgage when I buy a house. I'll probably get a roommate to help with the expenses. Then I'll have plenty of cash flow to pay the house off early. I'll do this for peace of mind and my own mental sanity. I can then buy a second house and rent it out, if the market seems good for rentals. Ideally, I would like to own two or three houses and have them fully paid off so I can start collecting some cash flow on those rentals in retirement.

Did you know that "The Donald" prefers investing in properties? You can see him on The Apprentice on Thursday's:
https://www.nbc.com/The_Apprentice/

sgeeeee 11-09-2004 09:56 PM

Re: C'mon, guys.
 
Quote:


Under what circumstances do you expect the bond position to disappear?
If it matures before your mortgage is over or if you sell it to take advantage of better investments in the future?

Quote:

This really isn't that hard. *. .
One would think. . .

Mortgage rates hit record low levels a few years ago. It would be great if low mortgage rates occured at the same time as high returns on stocks and bonds, but that doesn't happen. On the other hand, periods of low stock and bond returns have historically been followed by periods of higher returns. If you wait for those periods of high returns to happen, you will not find low mortgage rates to take advantage of. So . . . you can buy into the unprecedented low mortgage rates today and hope to make your money back when future returns increase to more typical levels. Historical simulators illustrate that this strategy has provided superior performance results in the past. If you chose to pay off a sub-5.25% loan in the past, you lost money compared to investing that payoff money in a balanced portfolio. Those are the facts.

If you choose to compare only current mortgage rates and current stock/bond returns, you will not be able to predict the results illustrated by the more thorough, time valued historical simulator. When you do this, you are using today's numbers and extrapolating them through the life of the loan as if they do not change.

Another interesting point to consider is that real return is what you really care about for your portfolio investments. The mortgage payoff choice guarantees your absolute return on your money for the life of the loan, but does nothing to protect your real return if we go through a period of high inflation again. If you have considered owning TIPS or I-bonds for their inflation protection characteristics, you might want to consider that mortgage in much the same way. :)

John Galt 11-10-2004 03:34 AM

Re: 6 Mortgage Myths
 
Hi salaryguru! Excellent post!

While I recognize the value of using history to predict
interest rate fluctuations vis-a-vis returns on various
investments, I seldom do it. I tend to look at
survivability (financial and otherwise) under
a bunch of "worst case scenarios". Partly an age
thing I know.

John Galt

azanon 11-10-2004 05:46 AM

Re: 6 Mortgage Myths
 
Quote:

Lastly, none of this is meant to address whether or not one should use leverage. If one decides to do so, I think it is pretty clear that it is a good deal to fund it at historically low fixed rates, as is possible with a home mortgage in today's market.
That captures the majority of my original point, though it falls somewhat in-between our discussion. *

My only goal was for someone to understand if they're investing taxable monies not earmarked for necessary expenses we all have, AND they still have loans of any kind, then they are leveraging (i used margining) and generally speaking, that's higher risk than using monies that arn't, in effect, borrowed.

You gave a scenarion of a margin loan going sour (interest rates go up, stocks go down). *How bout the housing market collapsing (equity on your borrowed investment going down), still paying interest on it, AND stocks going down (the invested money you're not using to pay the house back with at the higher price you paid) at the same time. *Same thing; triple ouch there. *And again, i don't believe in paper loses, though one might say who cares if the house you live in goes down, cause you're not moving. *To those I say, never say never. *The status quo today is not living one place for long.

Also, if that's a "safe" way to go, what's keeping people who've paid their house off from borrowing against it and investing it?

Quote:

Martha, thanks for very concise expert's opinion on this issue.
Yeah, I appreciated her pointing out all the various risks involved in mortgages as well, and the several ways one can be found in default.

John Galt 11-10-2004 06:10 AM

Re: 6 Mortgage Myths
 
Regarding the uncertainty over whether you might be moving..........after I semiretired in 1993, I moved back to my home town in Illinois, mainly because I did not
have any better ideas at the time. Someone said to me
"Are you back to stay?" My reply? "I'll be here until they plant me!" Since then I have moved 7 times,
including 2 interstate moves. So much for staying put :)

John Galt

nfs 11-10-2004 02:20 PM

Re: C'mon, guys.
 
Quote:

So . . . you can buy into the unprecedented low mortgage rates today and hope to make your money back when future returns increase to more typical levels. Historical simulators illustrate that this strategy has provided superior performance results in the past. If you chose to pay off a sub-5.25% loan in the past, you lost money compared to investing that payoff money in a balanced portfolio. Those are the facts.
So you're a market timer too. :) You would rather borrow at 5% today because you're very likely to make more than 5% in the future.

You know what? I agree with you because I think the long run return of a balanced portfolio is almost certain to be >5% myself.

Do I do it myself? No, because the extra volatility I generate by levering up far outweighs the incremental return. If I wanted that volatility, I could still pay off the mortgage and go with a portfolio that was 80-100% equities.

Different strokes for different folks.

azanon, up above, went through a long calculation to demonstrate that it was worth borrowing at 5% (3.7?% after tax) to buy 4% tax exempt munis. If you look at the calculations, he wants to do it with a $600k mortgage. The net effect is an incremental $1800 per year.

It doesn't work for me. As an ER with a mean life expectancy of another 50 years or so, I wouldn't be in hock to a bank for $600k, with my house on the line, for an extra $1800 a year. To me, that's a bad tradeoff.

For azanon and you, it could be jim-dandy.

Ain't markets (and civil arguments like this) grand? ::)

sgeeeee 11-10-2004 08:41 PM

Re: C'mon, guys.
 
Quote:


So you're a market timer too. * :) *You would rather borrow at 5% today because you're very likely to make more than 5% in the future.
Okay. If that's how you want to define market timer. But why wouldn't you call the person who chooses to payoff the mortgage a market timer? They choose to place investment funds into a house today rather than keep it in their long term portfolio? I would argue that neither of these investment decisions are really what most people refer to as market timing. . . But I think you know that.

Quote:

You know what? *I agree with you because I think the long run return of a balanced portfolio is almost certain to be >5% myself.

Do I do it myself? *No, because the extra volatility I generate by levering up far outweighs the incremental return.
And that's a very reasonable decision. Everyone would be advised to understand their own level of comfort with various risk and they will be happier if they choose to invest in ways that are consistent with that. Of course, in this case, when you are increasing your SWR and improving your odds of surviving poor economic conditions . . . when you are keeping your equity/bond allocation (and therefore your portfolio beta) constant, what do you really mean by "extra volatility"?

Quote:

If I wanted that volatility, I could still pay off the mortgage and go with a portfolio that was 80-100% equities.
Well . . . not really. If you run the FIRECALC simulations you will discover that increasing your equity/bond ratio does increase volatility, SWR and terminal value. But keeping the mortgage does not increase volatility and it will increase SWR more than a simple readjustment in allocation.

Quote:

azanon, up above, went through a long calculation to demonstrate that it was worth borrowing at 5% (3.7?% after tax) to buy 4% tax exempt munis. *If you look at the calculations, he wants to do it with a $600k mortgage. *The net effect is an incremental $1800 per year.

It doesn't work for me. *As an ER with a mean life expectancy of another 50 years or so, I wouldn't be in hock to a bank for $600k, with my house on the line, for an extra $1800 a year. *To me, that's a bad tradeoff.
Again, this is not quite acurate. The analysis azanon did looked at what kind of minimum return a single bond would have to provide in order to break even. He looked for the point where the differences between the bond and the 5% mortgage were insignificant. That's a useful number to set minimum expectations. He did not calculate what a balanced portfolio investment might return over the 30 year life of the mortgage. Again, FIRECALC can provide a range for the gains that your balanced portfolio will provide. It will vary based on your nest egg, your mortgage value and your stock/bond allocation. But the number can be quite significant -- even dramatic.

nfs, I don't want to talk you out of your strategy. It really does make no difference to me what you or anyone else on this board decides to do for themselves. I think, above all, you should be comfortable with your decision. But I am interested in making it clear to people who are facing this decision that it is more complex than a simple rule-of-thumb directive might make it. And I do want to provide some indication of how one might take a look at the numerical part of the decision.

Having read the posts of many others on this board who have been retired longer than I have, I have to believe that I might decide to payoff my mortgage early too -- one of these days. It seems like several ERs simply paid off their mortgage to be "done with it". I have no reason to believe that I won't reach the same point some day. When that day arrives, I will pay it off and know that I made the right decision. :)

nfs 11-12-2004 08:44 AM

Re: C'mon, guys.
 
Quote:


Okay. If that's how you want to define market timer. But why wouldn't you call the person who chooses to payoff the mortgage a market timer? They choose to place investment funds into a house today rather than keep it in their long term portfolio?
I would argue that this is different. Whether you own the house free and clear or own the house with a mortgage on it, you own the house. Paying off the mortgage is not "placing investment funds into a house".

Quote:

If you run the FIRECALC simulations you will discover that increasing your equity/bond ratio does increase volatility, SWR and terminal value. But keeping the mortgage does not increase volatility and it will increase SWR more than a simple readjustment in allocation.
WADR to firecalc, that flies in the face of common sense. A mortgage is a bond, so owing on a mortgage is in essence a big negative bond position. It changes one's portfolio allocation. Firecalc is underestimating overall portfolio volatility for the person with a mortgage.

Take me as an example. I own a house free and clear. I own an investment portfolio free and clear. The investment portfolio is 60/40 equity/bonds. Suppose I take a mortgage on the house, plunk the proceeds into bonds (hell, if you want exact, say I plunk the proceeds into GNMAs) and my investment portfolio asset mix goes to 50/50.

I think most people would look at that and say nothing has changed very much. But Firecalc would make all sorts of adjustments, showing decreased volatility, SWR and terminal value. Why? Because Firecalc only estimates the volatility of the asset side of the balance sheet (and, to be absolutely correct, only some assets at that - where are the volatility estimates for assets like houses or SS payments or private pensions from rickety employers) and presumes that the liabilities, including the mortgage, have no volatility.

Quote:

nfs, I don't want to talk you out of your strategy. It really does make no difference to me what you or anyone else on this board decides to do for themselves. I think, above all, you should be comfortable with your decision. But I am interested in making it clear to people who are facing this decision that it is more complex than a simple rule-of-thumb directive might make it. And I do want to provide some indication of how one might take a look at the numerical part of the decision.
Fair enough. But you can't point people to Firecalc as an indication of the wisdom of an investing strategy when, as we all know, Firecalc - and any other calculator - makes all sorts of assumptions, some explicit and some quite hidden, and can provide only approximate answers in the best of cases. This is not to say that nonsense like that of he who cannot be named is worth endless rehashing but people need to be wary of GIGO too.

sgeeeee 11-12-2004 09:35 AM

Re: C'mon, guys.
 
Quote:

. . .
Fair enough. *But you can't point people to Firecalc as an indication of the wisdom of an investing strategy when, as we all know, Firecalc - and any other calculator - makes all sorts of assumptions, some explicit and some quite hidden, and can provide only approximate answers in the best of cases. *. .
nfs,

Of course none of us can predict the future and that is the primary failure of any financial calculator -- FIRECALC included. But we do no how FIRECALC works and what the underlying assumptions are. The calculation techniques and methods have been around for a long time and have been discussed by many of us for several years. I'm not sure what assumptions you think FIRECALC is making. It is a historical simulator and it simply tells you what the performance of specified portfolios would have done over specified intervals throughout the period from 1872 to today. You can use it to test how things would have behaved over past periods of time.

So when you run 30 year FIRECALC simulations to look at the performance of a 5% mortgage vs a payoff of the same, you simply determine how they would have performed for every 30 year period from 1872 to today. There are of course other assumptions related to expense ratio, etc. that the simulator asks for. It is true that even if a particular mortgage may have provided superior performance in every 30 year period throughout history, it may not provide superior performane in the next 30 year period. No simulator can provide you with that kind of information.

In the example you make (taking a mortgage, reducing stock allocation, investing in GNMA) . . . FIRECALC is not capable of performing that analysis since it cannot look at the GNMA investment using it's historical data base. But I do believe that the analysis it is capable of doing is more useful than you seem inclined to believe.

You seem to believe that an investor increases volatility significantly by keeping a mortgage. In an absolute sense, this is true -- since the investor with $2M invested in a 50/50 allocation portfolio will see greater absolute variations than the investor with only $1.5M invested in the same way. But, of course, on a percentage basis the volatility is identical.

Further, the percentage volatility of a fixed mortgage on investment performance is zero (ie. no fluctuation). In fact, when viewed in terms of real return, a mortgage improves investor volatility significantly in the presence of any inflation since it reduces the effect of all other inflating prices. That is precisely the reason that people who chose to keep low interest mortgage have historically performed better than those who chose to pay them off.

:)

nfs 11-12-2004 01:07 PM

Re: C'mon, guys.
 
Quote:

Of course none of us can predict the future and that is the primary failure of any financial calculator -- FIRECALC included. But we do no how FIRECALC works and what the underlying assumptions are. The calculation techniques and methods have been around for a long time and have been discussed by many of us for several years. I'm not sure what assumptions you think FIRECALC is making. It is a historical simulator and it simply tells you what the performance of specified portfolios would have done over specified intervals throughout the period from 1872 to today. You can use it to test how things would have behaved over past periods of time.
Okay, tell me how one uses Firecalc to model the twelve years starting from just before the crash in 1929 until just prior to Pearl Harbor in 1941. It was a horrendous time for stocks, a horrendous time for corporate bonds, and a horrendous time for residential real estate. Firecalc takes the first one into account, ignores the second one - making a presumption that spreads for corporates over Treasuries are some fixed amount - and presumes that the user can guess what buying or selling a house in godnose how many years hence might bring or cost.

Assume that you were running Firecalc in July 1929. Assume that historical stock market returns and volatility were similar to what Firecalc uses today. You can even assume that you would be smart enough to avoid corporate bonds and buy only Treasuries if you like.

If you have a house in 1929 with no mortgage, Firecalc's answer would be, "You can take $X a year and you have a Y% probability of the portfolio surviving Z years." I can live with that estimate.

Now put a mortgage on the house and plunk the money into your portfolio in 1929. Firecalc knows that the portfolio returns go to hell in short order and adjusts the SWR. Firecalc does know that you have committed yourself to a fixed expenditure during which time the CPI falls by a 1/3, but it is not clear from the description that it knows that the portfolio's income (not total return, income) could fall below the expenditure level, which makes liquidations of securities at low prices necessary. Worst of all, Firecalc does not know that there's an anxious mortgage lender who can see that you're having trouble making mortgage payments and that the asset he thought was good collateral is worth 1/4 of what it was a few short years before.

I'm not indicting Firecalc. But even if you presume that markets will never be unkinder than what is already in the historical record, and presume that every number you input is biased to the conservative side, there ain't no toggle for "antsy mortgagee" or "I'll be blowed - my million dollar house is worth $60k on the open market." You may laugh but both of those happened in the 30s and Firecalc has never been told to imagine that they could.

(Just to give another example of a hidden presumption, note that SS payments in constant dollars are presumed a given. If your time horizon is ten years, that might be justified. If it's 25 years or more, it ain't gonna happen. The unfunded liability is going to have to be covered somehow and there aren't enough workers. Where's the toggle for "Congress screws me over in 2017"? :))

Quote:

Further, the percentage volatility of a fixed mortgage on investment performance is zero (ie. no fluctuation).
I'm sorry, but I believe that to be wrong. Do you also believe that there is no volatility to a bond with a fixed coupon? Or, to use the simplest possible example, a CD?

Quote:

In fact, when viewed in terms of real return, a mortgage improves investor volatility significantly in the presence of any inflation since it reduces the effect of all other inflating prices.
Of course. But what does the mortgage do in the presence of deflation?


sgeeeee 11-12-2004 10:11 PM

Re: 6 Mortgage Myths
 
. . . Fearing an ensuing discussion of folding kyaks and the removal of my dryer sheet status, I will choose to move on. Good luck. ;D

ESRBob 11-13-2004 12:03 PM

SG and NFS --Re: 6 Mortgage Myths
 
SG and NFS --

oops, deleting my original post -- everything I was saying was covered by TH a week ago; serves me right for ignoring the post until the 5th page and then thinking I could add something useful!

ESRBob

retire@40 11-13-2004 12:36 PM

Re: 6 Mortgage Myths
 
Quote:

Finally, there was one initial assumption, I believe, that got this started: *that your true cost of the mortgage (Cost of Capital) was reduced from the mortgage rate by a tax savings. *What most ERs find is that their federal and state taxes drop dramatically once they get themselves organized, earning little or no salary, less taxable income, etc. *So while the math might work for someone in salary/accumulation mode still in a high tax bracket, it doesn't really work for the ER.
True. And even though one of my prior calculations proves that investing in a 4% tax-free bond is better then paying off a 5% mortgage for somebody in the 28% bracket, I would not even listen to my own conclusions and still pay off the mortgage before investing in such a scenario because I just don't want debt of any kind.

I kinda had a similar situation when I purchased my car. The dealer wanted to offer me something like 2.9% financing at a time when I could have got something like 4% at a bank. The dealer was trying to convince me that I would be earning a net difference of 1.1% by going with the financing. I told him he was forgeting that I had to pay taxes on my earned interest but the interest expense was non-deductible. It would have practically been a break-even. So I told him I would only take zero financing or pay cash for the car.

cute fuzzy bunny 11-15-2004 02:42 PM

Re: 6 Mortgage Myths
 
Oh my, I take a few days off and the place just fills up with unread stuff. You guys need jobs...

In case anyones missed me, the wife's well into the 3rd trimester and has denounced performance of any further tasks around the home, and she's needing a lot of bedrest. On top of that, i'm getting her old house ready for sale...yes...the painting has begun! As a result of all that, plus feeding six animals and becoming a full fledged house-husband, I hardly have time to turn on the PC anymore, let alone spend the hour or so a day of collective time posting here that I've enjoyed in the past. I'll try to stop by from time to time, but wouldnt expect to hear much from me for the near future. I've certainly learned a lot and hope I imparted some of my learnings.

As far as this topic goes and to close it off for good, as far as I'm concerned...

Mikey dearest...your last post to me implied that my position on this topic was "blanket assertions" rather than "demonstrable facts". Rather angry and inaccurate, since I've not only provided explanations and data based examples of most, if not all, of my perspectives on this. In fact, I've used realistic examples of the time people spend in homes, risk factors and so forth. I havent simply ignored all the apples and orange differences in order to force a point. You later make another hostile comment about people being able to make up their own minds 'without being told what to do by TH'...well, I dont think I told anyone anything anywhere in here 'what to do', nor is that my interest or intention. My response to you that your points were well made but wasnt directly applicable to this discussion, I think, was reasonable. I didnt insult you. I didnt question your motives or intentions. Your response however, was in fact hostile and insulting. Its entirely possible you cant see that, and you wouldnt be the first person to be unable to recognize their own hostility. As far as the pampers go, I just bought a truckload of them, so they were on my mind, and the correlation between those and what I felt was an immature and unreasonable post ("you're a poopy head and you aint the boss of me") was easily made. In your analysis, no analogy would ever be acceptable because one could always draw up differences. You did note some differences, they had no material effect on the analogy used, you got angry and snippy, and for that you received an appropriate response.

Moving on...

Nords...you're 100% correct. "Salaryguru" is a troll. He claims this topic was for the benefit of the group. In truth, there really isnt anything in this article he references that should be new or even very interesting, other than another opportunity to bring up the mortgage debate. He knows I'll take the bait when someone claiming a "factual" approach to a subject uses erroneous math, factors that arent met with reality, and mismatched calculations. Unfortunately, I meet his expectations every time. You'll see that he posted and got the ball rolling, then sat back while we all picked at each other. Then when I was busy for a few days, in that absence he waxed on about his own agenda, then ran away when someone else challenged his funny math and approach. Trolls introduce topic materials they know will be inflamatory, delight and participate in the mayhem that ensues, and hope to create an undesirable effect for one or more discussion participants. Salaryguru feels I dislike him and that my presence and participation in discussion groups is a negative influence, and laments that many other posters enjoy my participation. His reasons to troll are therefore not hard to understand. Because I've disagreed with him, he's perceived me as a threat to his person and his ideas, and he is unable to separate disagreement with an idea from personal hate. I've offered him an olive branch on several occasions, and he's neglected to take it. I've been left just to feel sorry for him.

As a final recap...I'll point out up front that we've talked about this so often that many of the better parts have been left behind as we've all been cultured to 'cut to the chase'. I think if you read my very first posts on this topic, about a year back, I said that I think most people already have their minds made up about it and are simply looking for validation of that decision. Like many other topics, I dont think a lot of our mindsets are changed by reading something on an internet bulletin board.

As long as every reader understands that they've got a risk free, guaranteed return, along with an opportunity to reduce their market exposure and withdrawal rates on one hand, and a risky, potentially higher return with more market exposure and a higher withdrawal on the other, then you know the score. Suspect anyone that says either approach is a 'no brainer' and/or offers funny math with incorrect numbers, unreasonable investment periods, or that claims history is a sure judge of the near term future. This issue of where you put a few hundred thousand dollars is pretty important to any retirees short to intermediate term financial health. Make that decision well informed with all the facts in hand. Not on the platitudes of some asshat.

Since I wont be here much, if anyone wants to yap, I can be reached at t_h at comcast dot net.

Prosp long and liver...:)

Cut-Throat 11-15-2004 04:03 PM

Re: 6 Mortgage Myths
 
Quote:

Since I wont be here much, if anyone wants to yap, I can be reached at t_h at comcast dot net.

Prosp long and liver...
Say it ain't so TH ! :'( - You're are my lifeline to the high-tech world! - I'm about to go DSL, Wireless etc.

Man - come to your senses! :(

John Galt 11-15-2004 08:34 PM

Re: 6 Mortgage Myths
 
Boys, boys! Let's try to keep a certain level of civility and decorum. You would never catch me deliberately
gigging one of my fellow posters :)

John Galt

Nords 11-15-2004 10:37 PM

"Welcome back", TH!
 
But I'm distancing myself from that "troll" accusation. I'm just pointing out that the behavior could be mistaken for trolling, but not the person. I'll continue to value SG's ability to make us question our decisions and to reaffirm their validity. Or, if the facts change, then I'll change my mind... but without that constant prodding then I'd never reconsider.

Let me point out that if SG is indeed trolling, then you must find his bait irresistible. Every time.

David Snowball, a communications professor who posts at Brills & FundAlarm, calls this type of hand-grenade exchange a "reciprocated diatribe". As TH has pointed out, each side made up our minds long ago and our "prolonged discourse" has degenerated to "a bitter and abusive speech or writing with ironical or satirical criticism". Once we reach that reciprocated-diatribe stage then we should probably break it off an move on to another topic.

BTW, TH, I figured you were off the board to bank as much sleep as possible. In a few months you'll look back on this as the "good ol' days." In fact, next time you sit down at your keyboard you should hold a baby bottle in one hand and a 20-lb bag of rice on your arm to practice that midnight-feeding one-handed typing.

Hopefully you'll accompany your return with a birth announcement. See you next year.

While you're temporarily out of post, UncleMick & Cut-Throat have been reinspired to leapfrog your 2300+ level...

Bridget 11-19-2004 11:22 AM

Re: 6 Mortgage Myths
 
Wow,

This topic sure did fire some people up!

For me, the key is to lower the monthly lifestyle costs. A roof over my head is important and providing that (either through rent or mortgage) is usually the highest expense on that side of the ledger. Any way in which I can minimize that cost means less money that I need to have monthly for my lifestyle. Therefore, I will pay-off the mortgage as soon as possible. My goal is to have no mortgage once I retire--plus, when I look at how much interest I save by pre-paying my mortgage, I see how much less money I have to earn over the long-term as well. I'm paying someone else for the honor of using their money - I should be in their position and not the other way around. In addition, as said by many here, crystal balls are cheap, good ones are priceless.....very few have the good ones and can tell me my money would be better off elsewhere.

I'm more risk averse when it comes to my roof----so for the poster who wanted advice on what to do with the mortgage...mine advice would be, pay it off and then go have fun doing what you want to do---thereby lessening your 'worry' list.

Bridget aka Deserat

consejo 11-22-2004 07:28 AM

Re: 6 Mortgage Myths
 
Bridget, I'm with you but, man oh man, these things can get nasty FAST!

I just think there are some people who flame for the sport of it, better they take up dodgeball.

And, actually, the point for those in dream of ER is not to be found on the margin of shaving interest costs or earnings, one way or the other.

If you want to achieve ER ASAP the issue would be total costs of homeownership. Small houses on small lots costs a whole lot less to support and that is where you can save big money to bring down your botton line and achieve ER.

I know, even though I have no problem affording it, I have a 4K sqft home with 1/3 acre of lawn and citrus trees to maintain. It has 3 4T AC units and a pool. And there are only 3 of us living in it!

Smarter would be 1400 sq ft house on a 6000 sq ft lot. And that would bring down your cost of ER much more dramatically than whether or not the small home had a mortgage on it.

On the other hand, my home appreciated $100K last year, for all the good it does me :-/

Tulsaboyw 04-24-2008 02:34 PM

mortgage payoff ..
 
no way..

short of winning a big lottery ... I wouldnt hurry to pay off.

1. get a 30yr normal mortgage 80/20 or better.
2. payoff maybe the smaller of the 80/10/10 or 80/20.. maybe even then.
3. customize if u want to pay quicker without changing the 30yr.
(I pay my mortgage 4 times a month at 25% each week).

4. I am a partial millionair and have no intention of losing the deductions I get now.

REWahoo 04-24-2008 02:38 PM

Quote:

Originally Posted by Tulsaboyw (Post 648358)
I am a partial millionair...

I believe this is a true statement for anyone with a positive net worth, even if it is only $0.01. ;)

maddythebeagle 04-24-2008 02:55 PM

Here we go again;D

Tulsaboyw 04-24-2008 03:21 PM

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 04-24-2008 05:59 PM

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 04-24-2008 07:16 PM

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

Notmuchlonger 04-24-2008 07:18 PM

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

Softball 04-27-2008 01:17 AM

Just payed off my mortgage? was is smart?
 
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 04-27-2008 07:46 AM

Quote:

Originally Posted by Tulsaboyw (Post 648383)
.. since all of us can invest that same $$ at much greater rate.

Really? Where?

Johnphx 04-27-2008 10:36 AM

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 04-27-2008 01:26 PM

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

DD

maddythebeagle 04-27-2008 04:19 PM

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 04-27-2008 04:28 PM

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

Johnphx 04-27-2008 04:41 PM

Quote:

Originally Posted by maddythebeagle (Post 649832)
If you are saying that you are substantially underwater, I would consider NOT paying down at this point...

Why not?

Ronnieboy 04-27-2008 04:46 PM

Quote:

Originally Posted by cute fuzzy bunny (Post 649840)
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 04-27-2008 04:49 PM

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 04-27-2008 05:03 PM

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 04-27-2008 05:04 PM

Quote:

Originally Posted by Johnphx (Post 649845)
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 04-27-2008 05:05 PM

Quote:

Originally Posted by cute fuzzy bunny (Post 649850)
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 04-27-2008 05:14 PM

Quote:

Originally Posted by brewer12345 (Post 649856)
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? :o

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 04-27-2008 05:16 PM

Quote:

Originally Posted by Ronnieboy (Post 649857)
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 04-27-2008 05:17 PM

Quote:

Originally Posted by Johnphx (Post 649855)
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


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