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Old 12-07-2009, 01:14 PM
 
Location: Alaska
5,356 posts, read 16,406,029 times
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Quote:
Originally Posted by MadManofBethesda View Post
Well, I guess I'll have to step up to the plate and be the lone contrarian voice here. I think that paying cash for a house in this low interest environment is beyond idiotic.

You can get a mortgage these days for about 4.25%, which is an effective rate of about 2.75% (depending on your tax bracket). Does anyone in their right mind think that interest rates and rates of return are going to stay at these historically low levels for any significant period of time? Do you seriously want to basically bury hundreds of thousands of dollars in your backyard for a return of 2.75% when bonds will be paying two, three or four times that rate in a few years?

I think that it is sublimely ironic that when firguring how much money one will need in retirement, people routinely plug in a "conservative" growth rate of 8% on their investments; but when it comes time for the rubber to hit the road, rather than actually invest in a well-diversified portfolio of investments that will return the 8%, they would rather stick with 2.75% because "psychologically" it "feels" better.

Ask yourself this: Have you ever heard of any real estate mogul paying cash for his latest acquisition even though he could easily afford to?

Now ask yourself this: If the richest men in the world get mortgages on their real estate purchases, why do you think that paying cash makes better financial sense?

EDIT: While I was composing my post, I see that SteathRabbit also weighed in on the merits on not owning a house free and clear, so I'm not the lone contrarian afterall. :-)
I see nothing wrong with investing for a better return instead of burying it in the backyard, but why should you do it if you don't need the funds? To me, it's kind of a Catch-22. If I mortgage the property, then I need a higher return to ensure that I can pay the mortgage. If I don't mortgage it, then I don't need the higher return.

In my planning, I look for the lowest return that will allow us to live for at least 35 years. I'm really hoping that a return in the 4-6% range will meet this goal. What I find is that we'll need a return in the 5-8% with a mortgage and that a return of near 0% is sufficient without a mortgage. So what I'm comparing is a near 0% chance of failure without a mortgage to guessing a 10-20% chance of failure with a mortgage. I believe the the lack of risk is worth a lower return since it's not needed.
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Old 12-07-2009, 01:17 PM
 
72,651 posts, read 72,508,687 times
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Quote:
Originally Posted by akck View Post
I see nothing wrong with investing for a better return instead of burying it in the backyard, but why should you do it if you don't need the funds? To me, it's kind of a Catch-22. If I mortgage the property, then I need a higher return to ensure that I can pay the mortgage. If I don't mortgage it, then I don't need the higher return.

In my planning, I look for the lowest return that will allow us to live for at least 35 years. I'm really hoping that a return in the 4-6% range will meet this goal. What I find is that we'll need a return in the 5-8% with a mortgage and that a return of near 0% is sufficient without a mortgage. So what I'm comparing is a near 0% chance of failure without a mortgage to guessing a 10-20% chance of failure with a mortgage. I believe the the lack of risk is worth a lower return since it's not needed.
i agree with ya, but with even an average of 3% inflation how can you take double to pay the same bills 20 years from now without your nest egg alone growing each year by the rate of inflation besides what your pulling out to live on. ?

3% inflation and a 3-4% withdrawl needs at least a long term average of 6-7%

Unless you dont need to withdraw the money, always a possibility.

Last edited by mathjak107; 12-07-2009 at 01:33 PM..
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Old 12-07-2009, 01:46 PM
 
Location: Alaska
5,356 posts, read 16,406,029 times
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Quote:
Originally Posted by mathjak107 View Post
i agree with ya, but with even an average of 3% inflation how can you take double to pay the same bills 20 years from now without your nest egg alone growing each year by the rate of inflation besides what your pulling out to live on. ?

3% inflation and a 3-4% withdrawl needs at least a long term average of 6-7%
In an earlier post, I mentioned three sources of income which are pensions, SS and retirement savings. What happens is that when the mortgage disappears, our retirement savings are no longer needed to cover expenses so it can sit there unspent. The pensions are partially inflation proofed and SS is fully inflation proofed and both will be able to cover expenses until about 8 years before reaching 95. The retirement savings are more than enough to cover those 8 years even if it doesn't make another dime during retirement. The plan also assumes we spend all income. In actuality, we'll likely save some of it which can go towards later year expenses.
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Old 12-07-2009, 01:46 PM
 
11,371 posts, read 11,362,717 times
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Quote:
when bonds will be paying two, three or four times that rate in a few years?
I think the Feds are working and will be working overtime for the next 5-10 years to keep rates right where they are----at 0-1% to keep the banks' profits up. Why should banks pay 5% when they can pay 1% knowing that people will continue to sock their money away in accounts at those ridiculous rates? If people insist on allowing themselves to be suckered, you think banks are going to rock the boat?
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Old 12-07-2009, 01:52 PM
 
72,651 posts, read 72,508,687 times
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Quote:
Originally Posted by akck View Post
In an earlier post, I mentioned three sources of income which are pensions, SS and retirement savings. What happens is that when the mortgage disappears, our retirement savings are no longer needed to cover expenses so it can sit there unspent. The pensions are partially inflation proofed and SS is fully inflation proofed and both will be able to cover expenses until about 8 years before reaching 95. The retirement savings are more than enough to cover those 8 years even if it doesn't make another dime during retirement. The plan also assumes we spend all income. In actuality, we'll likely save some of it which can go towards later year expenses.


aaaahhhhh okay
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Old 12-07-2009, 01:59 PM
 
11,256 posts, read 43,679,375 times
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LOL ... we're back to all the fancy calculations about potential greater earnings from investments than the certainty of owning a place free and clear.

It's interesting because all the basis for those calculations appear to assume buying a house now with the worst possible economic aspects while assuming that investment income will meet/beat inflation as well as be a sound investment. All the "good" upside to investments, and all the "bad" downside to home ownership. What if I need LTC? What if I need to move and the house is worth less than I paid for it? yada yada yada yada

How about seeing my investment capital shrink as certain index funds don't return what they expected to do? How about seeing certain markets and companies start to show lower returns and lower stock prices? How about the defaults on bonds from many places?

It's all a risk game. For my money, it was more certain to buy well in the real estate market and hang on to my properties. They give me a place to live, recreation, an income, food, local access to the amenities I need for the reasonably foreseeable future (30+ years) ... and are worth a lot more today than I paid for them. I could sell any of my income properties or residence for below market prices in a quick (distress?) sale and still have cash and a very handsome ROI.

When I wake up each day, I'm not worried about adequate cash flow to pay a (even low interest rate) mortgage. I'm more concerned with whether or not it's the day to go fishing, visit my plane in the hangar and fly to have lunch with friends in the region, see if my motorcycle remembers how to straighten out the roads, ride my horse, irrigate my hayfields, cut hay, or similar adventures. Maybe I need to go skiing from my Colorado house? Whatever, I've made the choices and I get to enjoy them. Today I'm sitting at home quoting a couple of projects, watching my flock of sheep eat the hay I tossed to them (of bales that I grew and harvested and baled and got off my own fields), seeing my horse play in the pastures, and stoking the woodstove to keep my little house warm and comfy. The other livestock is in the barns and has water and feed ... I've checked a couple of times, and everybody is doing well, including the pregnant ewes and does.

Being "rich" wasn't a prime concern for me in my prime working career. It's certainly not a prime concern now, and I've got enough income and resources to enjoy what I want to do when I want to do it. Freedom is what it's all about ... and maximizing the fun per dollar that I have for the rest of my life. I don't need to leave a big inheiritance to anybody, I don't need to build monuments to myself, I don't need the adoration of those who think they'll get a lot of money from me someday. I can't put a price on that ... but it's worth it to me to not have those considerations in my life. I paid for it and I'm going to enjoy it. Someone else might want to wake up each day and worry about managing investments and cash flow instead ... that's their choice to make.
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Old 12-07-2009, 02:00 PM
 
Location: southern california
55,901 posts, read 74,931,537 times
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dont buy a house car or take out a loan-- musical chairs-- when UIB stops-- we all fall down.
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Old 12-07-2009, 02:01 PM
 
8,272 posts, read 11,999,349 times
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Quote:
Originally Posted by thrillobyte View Post
I think the Feds are working and will be working overtime for the next 5-10 years to keep rates right where they are----at 0-1% to keep the banks' profits up. Why should banks pay 5% when they can pay 1% knowing that people will continue to sock their money away in accounts at those ridiculous rates? If people insist on allowing themselves to be suckered, you think banks are going to rock the boat?
But that's just it. people won't continue to do so. The reason that banks are paying less than 1/10 of 1% is that people got frightened out of their senses about any type of investment. In fact, during the darkest days last fall, Treasuries had a negative rate of return. People were paying the government to hold their money because they were too afraid to have it anywhere else!

As the stock and bond markets return to normalcy over the next few years, people will withdraw their money from bank accounts and money market funds and re-enter the markets. When they do, banks will have to pay higher rates in order to entice deposits and the government will have to pay higher rates at auction as well.
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Old 12-07-2009, 02:11 PM
 
72,651 posts, read 72,508,687 times
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i think as long as the fed will loan banks directly at close to zero the interest paid to depositers will have to be competitive with that.

most banks dont like borrowing from papa fed (discount rate) as its a sign of failure like asking your parents for money , they prefer to borrow from each other (fed funds rate) or depositors but they wont pay us anymore then they can go to papa fed for.

short term rates are all about the fed and their actions. ,,,, longer term rates are more about investor sentiment and where the worlds investors want longer term rates to be and where they bid them.

many times the investors of the world have dis-regarded what papa wanted.. they bid longer term rates totally opposite what feds policy on the shorter rates was trying to do.

right before the recession we had the fed raising rates and investors around the world bidding long term rates the opposite way creating the infamous inverted yield curve where short term rates were higher than long term rates.

its not normal where you get paid more loaning money for shorter periods then longer time frames but non the less thats what happened when investors bucked papa fed

Last edited by mathjak107; 12-07-2009 at 02:21 PM..
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Old 12-07-2009, 02:18 PM
 
11,371 posts, read 11,362,717 times
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Quote:
Originally Posted by mathjak107 View Post
i think as long as the fed will loan banks directly at close to zero the interest paid to depositers will have to be competitive with that.

most banks dont like borrowing from papa fed as its a sign of failure , they prefer to borrow from each other or depositors but they wont pay us anymore then they can go to papa fed for.
I'm inclined to agree with mathjak. Bottom line: banks want to keep rates low; the Fed will help them; older people don't want to risk uninsured investments even in good times; banks learned a valuable lesson in this downturn: that older folks (the only ones among the peons with appreciable amounts of liquidity) would keep their money in the banks at 1-2% out of fear; banks will continue to play on that fear via corporate-owned media feeding a continuous stream of bad economic news.
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