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Old 05-11-2015, 06:33 PM
 
Location: ☀️ SWFL ⛱ 🌴
2,434 posts, read 1,669,408 times
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In 1984 the interest rate on our house was 14.75%, when rates went down we refinanced to a 15 year loan. We paid it off at age 45. At 58 we took out a mortgage on a second home (which is actually our primary now) at 3.6% for a thirty year mortgage, our payments for a much nicer house in a lower COL area are just slightly higher than the 1984 payments, 31 years later. Amazing.

We have the money to pay off the mortgage from the years of no mortgage payments, plus any money from the sale of our other house when we decide to finally sell. We decided not to have our money tied up in a house at this point but will pay it off before DH retires in five years.

I would opt for the 30 year mortgage for reasons others have listed: the ability to pay off earlier with larger payments but having a fallback to lower payments if the need arises. The high interest rate in 1984 played a big part in our decision to get a 15 year mortgage, we just wanted it paid off after seeing how little was going on the principal with the 30 year one. 1984 was not a good year to move.

Last edited by jean_ji; 05-11-2015 at 06:43 PM..
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Old 05-11-2015, 06:39 PM
 
231 posts, read 132,094 times
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Quote:
Originally Posted by honobob View Post
Most people should pay off their mortgages as soon as they can because they do not have the discipline or the investment sophistication to out earn a low fixed rate mortgage over 30 years. Of course they are stashing current 100% valued money into a highly illiquid asset that will appreciate exactly the same whether paid off or 100% leveraged.
!
That's so.

It seems to me that if you have some means, there are two reasonable answers.

. Pay cash for the house
. 0% down for the house, interest only payments (or as near to that as you can get)

In both cases, you are making a bet based on your circumstances and the value of other investments.

All of the other situations involve cases I'm not comfortable with, those where a house represents an outsized percentage of your net worth.
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Old 05-11-2015, 07:11 PM
 
Location: Forests of Maine
30,682 posts, read 49,455,573 times
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Whenever possible try to use other people's money to make the monthly P&I payments. Only use your earnings for principal-only payments.

People work hard for their money, and they are often willing to give you their money, to make your mortgage payments.
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Old 05-11-2015, 09:39 PM
 
2,374 posts, read 2,392,894 times
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Quote:
Originally Posted by Emigrations View Post
I just turned 29 and am looking at buying my first home over the next year. I work in Indianapolis but don't want to live in the inner city. I'm looking at reasonably priced condos and small SFHs in the better parts of the city and suburbs and am finding quite a bit I can afford, but I can go to small towns outside of Indy and probably save considerable amounts of money. I'm currently renting a 2BR and with rent, water/sewer, and electric, I'm up to $1,000/month. It's a decently kept but very dated apartment, and it's money down the drain. There are smokers/animals beside me and I want neither, and I want something on one level, with a basement possibly for optional use. There is a possibility of me getting married but can't foresee any kids.

I have been thinking of buying with a small mortgage ($50k-$110k or so) and trying to pay it off as fast as possible (hopefully by 40-45). This would give me the ability to be completely debt free for ten to twenty years prior to retirement, and to contribute a considerable amount.

Did you pay off a mortgage early and find it helpful or that the money was better allocated elsewhere? Even if it was better allocated elsewhere, did you find the peace of mind of being debt free worth it?
My prioritized recommendations:

  1. Figure out a way to make more money. In the process, you may need to move in which case renting is preferred.
  2. Are you in a relationship now? Do you want to be married? If so, and the other person doesn't, time to cut bait and move on instead of waiting for them to change their minds. Be sure to pick a spouse who shares the same fiscal mindset as yourself - will save many headaches down the line.
  3. There is something fulfilling about owning your own house, even with the additional chores/maintenance that go along with it. With Youtube, you can learn to repair just about anything, all you need is time.
  4. At your price range and mortgage total, your tax deduction will be minimal/non-existant compared to the standard deduction, even smaller if you marry. So don't buy a house for a phantom tax deduction.
  5. Don't buy too small a house, in case you get married/have kids. The frictional expenses of having to resell quickly far outweigh any mortgage questions.
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Old 05-12-2015, 05:50 AM
 
12,705 posts, read 9,975,776 times
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Quote:
Originally Posted by mathjak107 View Post
I am against anything that pigeon holes someone in to a shorter time frame as well as runs the risk of either being renegotiated at higer rates or possibly not at all if values fall.

The flexibility that you get with that 30 year fixed is as good as it gets.


Considering many move within 5 to 7 years arms would be the cheapest bang for the buck but the riskiest.
I would argue that if you don't expect to have extra money even in good times to throw at the loan, you're buying too much house.

If, on the other hand, you do expect to have extra money in good times and are concerned only with the issue of getting through a lean year or two, then you are worried about a problem that essentially does not exist. With a 15/15 ARM or with a 30/15 balloon note, you are not required to make the payment that would fully amortize the loan over 15 years. So what you do, then, is that during normal times, you make the 15-year payment, and during a "lean year" you are free to drop down to the minimum payment. You are simply worrying about an issue that you will not have, at least if you are prudent and do not buy too much house.

If you really can afford the house, then there is no significant risk associated with a small balance at the end of 15 years. Because you were making a payoff sufficient to amortize fully in 15 years except during your "lean year" or two, the remaining balance will be very small and proportional only to the "deficit" in payments during the "lean year", with a bit of accrued interest.

You can open a home equity line of credit without using it immediately and not pay interest until you draw money. So for example in year 10 of the loan, when you will have a lot of equity, you can get the credit line. If it will have a 10-year draw period, then you have effectively extended your time to pay off the loan by 5 more years, since a small residual balance at the end can be rolled to the line of credit to buy you time to pay off the "lean year(s)".

Because the residual balance will be very small (only from the lean year's deficits), interest rates do not matter. Interest is only charged on the amount owed, thus a miniscule debt has a miniscule interest charge, no matter if we have 10%+ fed funds rates! Plus, it will only take a short time (~2 years) to pay it off, so there is not much time to even incur HELOC interest charge in the first place.

As far as if the home value drops, this is irrelevant and a totally misplaced concern, because again you are only seeking to borrow the "lean year's deficits" and some interest on that, NOT the entire balance you would owe if you made minimum payments for 15 years!!! Even in year 10 you will have paid off more than 50% of the initial loan, so even a 35% drop in home value has no effect on getting the HELOC.

Even a very severe recession that might get you laid off is not a concern, because you have a 5-year cushion to even get the HELOC!

If a cushion this long is still making you lose sleep, maybe you shouldn't be buying a house at all.

This is why I firmly conclude that your concern is utterly ridiculous (no offense).

But you have the right to waste your money on a 30-year fixed mortgage you intend to pay off in 15 years, just like you have the right to flush $100 bills down the toilet. But it is completely irrational to do so, unless you bought a house you can't afford or don't really intend to pay off in 15 years, in which case the discussion does not apply in the first place.

To all others: Control your fears, never let them control you!

Last edited by ncole1; 05-12-2015 at 06:00 AM..
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Old 05-12-2015, 06:02 AM
 
12,705 posts, read 9,975,776 times
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Quote:
Originally Posted by Submariner View Post
Whenever possible try to use other people's money to make the monthly P&I payments. Only use your earnings for principal-only payments.
This makes zero sense as money is fungible (unless you're one of those GoFundMe crazies...)
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Old 05-12-2015, 07:08 AM
 
12,705 posts, read 9,975,776 times
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Quote:
Originally Posted by Luke Notaras View Post
That's so.

It seems to me that if you have some means, there are two reasonable answers.

. Pay cash for the house
. 0% down for the house, interest only payments (or as near to that as you can get)

In both cases, you are making a bet based on your circumstances and the value of other investments.

All of the other situations involve cases I'm not comfortable with, those where a house represents an outsized percentage of your net worth.
Why? With 0% down you will be paying sizable PMI premiums, so it's not as though you'd outearn the interest PLUS PMI on investments equal to 20% of the home value. Those top 20% of the loan debt have an effective interest rate that is far above the first 80%, once PMI is factored in. In some cases the equivalent rate is around 10% - thus a 20% down payment is a risk free 10% return.

Also, if you have the money that you could pay cash for the house but would rather invest it, one attractive option is to open (but not use) a margin account backed by an amount of securities equal to the house value, and get a 15-year fixed mortgage. If you run into some bumps in cash flow you can draw a small amount from the account. If you are adequately diversified and borrow less than 25% of portfolio value, margin call risk is next to nil. The 25% cushion will easily cover several years of the difference between 15yr and 30yr payments, so one should not worry too much.

It is true that margin rates are often higher than mortgage rates; however a higher rate on a smaller debt is often better mathematically than a (slightly) higher rate on a larger debt. For example, if you have a "lean" year and need to borrow $5k to cover the difference between 15yr and 30yr payments on margin at a rate of 8%, that interest cost is only $400/year. Even a 0.5% rate difference between 15yr and 30yr on a $200,000 loan is a savings of $1,000/year. So you still come out ahead even if you have a lean year and have to use margin to make up $5k in payments.

Last edited by ncole1; 05-12-2015 at 07:19 AM..
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Old 05-12-2015, 09:04 AM
 
Location: Forests of Maine
30,682 posts, read 49,455,573 times
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Quote:
Originally Posted by ncole1 View Post
This makes zero sense as money is fungible (unless you're one of those GoFundMe crazies...)
Each individual may spend their income however they please, and each individual needs a place to live.

1. You can spend your income on buying yourself a home,
2. or you can spend your income on renting [effectively paying the landlord for him to buy his home],
3. or you can have renters that pay you their income so you can buy your home.

I chose to allow others to give me their income, to make my mortgage payments.
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Old 05-12-2015, 09:18 AM
 
Location: SC
8,791 posts, read 5,659,431 times
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Quote:
Originally Posted by mathjak107 View Post
i agree with all except the don't take a 30 year mortgage part.

that can be a mistake . you can pay a 30 year off in 15 or 20 years years but if money gets tight you cannot pay a 15 or 20 year off in 30.

take a 30 and pay it off earlier , at least you have that choice .
To add to this concept...

I took this a step further; paying off my mortgage at 45 too, but using an adjustable rate mortgage.

What I liked about having the adjustable was that at the end of each year while I was plowing in over payments, when the adjustment came, not only was my overall balance down, but my minimum monthly payment also shrank. I started off with a $715 min due each month and by the last year my min payment due was something like $75 bucks.

I wanted it this way because if I encountered some financial catastrophe my min monthly payment due doe the remainder of the mortgage was insignificant.

Of course the risk was that each year the mortgage could adjust up (but the reality was that most years it actually went down)... but even with that risk, because I was overpaying by so much, even if the mortgage went up one percent it was not significant.

Having ten years of income with no debt is what allowed my to retire at 54. Everyone will tell you that you are missing out on investment opportunities by paying off the mortgage early, but I highly recommend it if you value freedom.
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Old 05-12-2015, 09:21 AM
 
12,705 posts, read 9,975,776 times
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Quote:
Originally Posted by Submariner View Post
Each individual may spend their income however they please, and each individual needs a place to live.

1. You can spend your income on buying yourself a home,
2. or you can spend your income on renting [effectively paying the landlord for him to buy his home],
3. or you can have renters that pay you their income so you can buy your home.

I chose to allow others to give me their income, to make my mortgage payments.
This was not a rent vs. buy discussion. Even if it were, your reasoning is flawed because all that matters is the size and timing of your cash flows, not who pays for what. If a friend of mine were to unexpectedly and randomly offer to either pay for $100 of my grocery bill this month or $100 of my rent this month, I would be 100% indifferent between the two because whatever is paid for frees up the money for the other thing. Money is fungible, and it does not matter which dollars come from whom.

If you buy two identical houses, one to live in and the other to rent out, you could either (A) use your tenants' rent checks to pay the mortgage on your primary and then pay the rental mortgage out of your paycheck, or you could do it the other way.

Ultimately it makes absolutely zero difference which way you do it, the end result will be exactly the same.
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