Do we need a financial planner? (payments, balance, medical, refinance)

[bxlefty23]

most financial planners dont know ****
they will however try and push you into investing in bonds and funds that have high commissions for them

[bxlefty23]

if the op is asking whether or not to get a fin adv he doesnt know enough enough about investing where it would make sense not to pay off his mortgage if he can

[blkhrn3775]

The mortgage discussion is one of numbers over emotion. The behavioral finance involved comes down to the individual investor and risk tolerance. The numerical calculations would lead to only refinancing given there timeline (40's) and goals (not long term house).

I have spent four years of undergrad, two years of masters, and two years of PhD work in personal finance to know that there is no sound bite answer on a message board for her situation.

She needs to interview 4-5 financial planners and pick one that she can connect with. Search the FINRA Brokercheck site or SEC repository and consult the CFP website.

Having taught in two registered four year CFP programs and having practiced privately over the last 12 years, I know this: there are many shades of grey on the planning spectrum. Not every planner plans and not every advisor gives advice. The experience should be a process, not a product driven engagement.

I am happy to answer any questions that you all may have.

Thx.

[Billy_J]

Originally Posted by golfgal

So what if they pay off the $100,000 now and in 4 years go to sell and can only get $50,000 for the house? Either way they lost $50,000 but only paid maybe $8000 in interest over those 4 years and by not paying off the house come out $42,000 ahead of the game PLUS whatever they made in interest having that money invested, which would probably equal or surpass that $8000 in interest. That is the part you are missing in this.

If you get a loan for a car for $10,000, then turn around and sell it for $5,000 and that is applied to the loan, you still owe $5,000!

You are obligated to pay the full amount of the loan - $10,000.

[Lacerta]

Originally Posted by Billy_J

If you get a loan for a car for $10,000, then turn around and sell it for $5,000 and that is applied to the loan, you still owe $5,000!

You are obligated to pay the full amount of the loan - $10,000.

^^^ This

Unless you are willing to do a short sale and mess up your credit. And if you have assets in the bank or in other investments, the bank may not approve the short sale anyway.

If you don't pay off the house, and go to close and are down $50k, and you don't want to ruin your credit, you have to bring $50k to the table. So in the interim, if your interest earned on the $50k is less than your interest paid on that part of the mortgage, you lost potential money.

[michgc]

Paying off the house isn't necessarily the best thing to do. Look at interest rates, they are an historic all-time low. Getting a 15-year 3.5% loan is the smart thing to do if one thinks that interest rates will go up in the future. In 5 years, CDs and treasuries may be paying 5%. If someone paid off their loan this year, they wouldn't be able to take advantage of that spread. However, if one thinks interest rates are going to go lower, then paying it off now could make more sense.

However, one still has to consider liquidity and opportunity cost for the money. Perhaps, this person wants to start up a business. He anticipates needing $350K to start the business. He can pay off his mortgage of $150K, leaving $200K left. Then he would need to borrow the remaining $150K at a higher rate than his mortgage since business loans are usually higher rates than mortgages (and not tax deductible). On the other hand, if he doesn't pay off the mortgage, he has the $350K readily available to him (and is essentially borrowing the money he needs for the business at a 3.5% tax deductible loan).

While I understand that some people do not want debt at all. By blankly stating, "Pay off the mortgage" you are ignoring some possibilities to invest with the money.

I'll give a real life example. My parents bought a house in 1972. Their loan rate was about 7%. By 1980, CDs were paying 13%, 15%, etc. (Thanks, Jimmy!) If my parents had paid off their mortgage before that, they would not have been able to take advantage of those high CD rates because they would not have had any extra money. But by having money liquid, they were able to. In 1982 my brother went away to college. My dad had all of these CDs he could have cashed in to pay for college, which was his original plan. Did he do it? No, way. He took out a student loan at 8% or so. Not all debt is dumb debt. Some debt is very smart indeed. So, he borrowed at 8% and lent at 15%, and made money just like the banks do.

[Billy_J]

Originally Posted by michgc

...By blankly stating, "Pay off the mortgage" you are ignoring some possibilities to invest with the money.

And what are these investments?

[stan4]

Lol...explains why this country is full of financial losers...rather play funny games than pay off all their debt when the opportunity arises.

I am all for strategy and proper fiscal planning and investing, but gimme a break...pay off the house.

[michgc]

Originally Posted by Billy_J

And what are these investments?

I thought I gave some examples.

--If one is in need of money in the near future for a business for example, they may be left with not enough for their needs, and they may need to borrow at a higher rate for busienss loans than what they were paying on their mortgage, even if rates are steady. (this is hypothetical, her 6.5% rate is pretty poor, but if she can refinance at 3.5% it may be worth it).

--If one expects interest rates to go up in the near future, she can invest in low/no-risk CDs at a rate higher than what she is paying on her mortgage. Suppose she has a 15-year 3.5% rate on her mortgage. For the first 5 years, the CD rate is 2%, so she is losing money. But if in year 6-10, CD rates go up to 5% she is making money. If from year 11-15, rates go even higher to 7%, she is making even more money. So her last 10 years of making money makes up for her first 5 years of losing money. Is there a risk that rates won't go up? Sure. But if she pays off the mortgage, she's also take a risk that the rates do go up, and she cannot take advantage of it because she's illiquid.

--Maximize her 401(k)/Roth IRA each year. She may be able to invest $17K per year in her 401(k), along with her spouse for a total of $34K. Add in $10K of Roth IRA money they can invest, and that's $44K of money they need each year to maximize their retirement savings. If they pay off their house, they may not be able to afford to maximize their retirement savings and take advantage of the tax benefits. By having the money available, they can maximize their retirement benefits for 8 years. One cannot go back in years and contribute to their 401(k) or IRA if they did not get to do so. By keeping money liquid, they can take advantage of it for 8 years.

Now, I am not necessarily saying she shouldn't pay off her mortgage. I don't know enough about her situation to know one way or the other. It might be right to do so, depending on her circumstances. What I do know is that saying point blank, "Pay off the mortgage" is not correct without knowing more details about her financial situation.

[michgc]

Originally Posted by stan4

Lol...explains why this country is full of financial losers...rather play funny games than pay off all their debt when the opportunity arises.

I am all for strategy and proper fiscal planning and investing, but gimme a break...pay off the house.

I don't know if you are calling me a financial loser, but if you are, you are quite mistaken. I don't suggest that anyone should play financial games with debt. But advising her to pay off the house completely without knowing more about her financial situation is not necessarily good advice either. We simply don't know enough about her situation to tell her for sure what to do one way or the other. Refinancing her loan to 15 years at 3.5% might very well be better advice for her along with keeping the money liquid for other uses. I'm not telling her to keep the mortgage and buy lottery tickets with the rest. It seems as if she does not have much in retirement savings, and putting $44K this year and over the next few years into a Roth and 401(k) might be quite prudent. Not sure if she has an emergency fund, but putting one year's expenses in a money market would also be prudent, if she doesn't already have one. But, of course, we don't know exactly what she should do because we don't have all the details of her finances.