Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
What's the point of putting down 20% and investing the rest to an investment account that is giving 5.5%?
Depends on the tax rate of the person doing the investment. If he's in the 33% tax bracket the effective after-tax rate of the mortgage goes to about 4%. If he's in tax-free munis at 5.5% (not likely given conditions now, but who knows about the future), those yield 5.5%.
Plus there's a lot to be said for having cash lying around instead of having to borrow against home equity (paying the bank for the privilege).
8% return is fairly conservative, is this something your denying?
Yeah, because if that was so easy to earn as you pretend, why are banks even bothering with mortgages?
They'd just instead put their money in this fairy tale easy 8% investment instead of the measly 30yr 5.75% they are getting from the American Homeowner.
Yeah, because if that was so easy to earn as you pretend, why are banks even bothering with mortgages?
They'd just instead put their money in this fairy tale easy 8% investment instead of the measly 30yr 5.75% they are getting from the American Homeowner.
Um.. first, banks dont bother with mortgages, they loan, and then flip them to the government under fani mae/mac.
In addition, the reason they bother with banks is because they are required to by law, to invest their funds in secured investments, not speculations. The stock market has consistantly outperformed 8% over the last 30 years..
Finally, banks do invest in these higher rate returns, the % that they are allowed to invest is governed by law.
The stock market has consistantly outperformed 8% over the last 30 years..
I just hope, you didn't invest your money in tech stocks in 2000 and hoped to make money (oh, I'm sure, if you did, you were LUCKY enough to invest in GOOG).
You can't just invest in the "stock market". Please give a concrete example that was obvious to invest in in 2000, which grew by 8% a year.
Now give an example that will guarantee 8% return from 2008 to 2038, please.
8% return is fairly conservative, is this something your denying?
I am looking to invest to about 20k a year into something safe.I do not want to play the markets.I will buy cds for a 4.5% rate,but if you can show me how to get 8% that will be better.My spouse have ps from her job ,she was getting returns of $1 to $3 on the $1 invested,so that why i will only invest my money conservative.
Last edited by Union Proud; 01-27-2008 at 07:03 AM..
Reason: add info
Um.. first, banks dont bother with mortgages, they loan, and then flip them to the government under fani mae/mac.
Uh, what are you talking about!?
Fannie Mae (not fani mae; BTW, this wasn't founded by a nice lady who decided that instead of baking cookies, she'll become a mortgage powerhouse - it stands for Federal National Mortgage Association) - "is a privately-owned corporation authorized to make loans and loan guarantees. It is not backed or funded by the U.S. government, nor do the securities it issues benefit from any explicit government guarantee or protection." (Federal National Mortgage Association - Wikipedia, the free encyclopedia).
It is private, not part of the government. It is merely government sponsored.
Are you saying that banks don't invest in the mortgage market? So the subprime fallout is a mirage? (At least this explains your optimism - are you fresh out of school and did you read somewhere about the magical never falling stock market, LOL?).
Where do you think FNME (& FHLMC - that would be the Freddie Mac; again an acronym and not a friendly uncle) get their money from? The government ???
No, they are the ones who issue mortgage backed security bonds, which in turn are bought by banks (which makes my original point stand).
I just hope, you didn't invest your money in tech stocks in 2000 and hoped to make money (oh, I'm sure, if you did, you were LUCKY enough to invest in GOOG).
Why do people keep bringing up the year 2000 as if everyone in the world suddenly invested all of their cash into the stock market on the day it peaked? I don't know anyone who did this, and I doubt you do either. It's just as bad an assumption as betting that everyone put their money in on Oct 2002, right at the bottom and quoting the 35%+ annual returns from there.
In real life, people put money in as it's available, smoothing out the highs and lows of the market. Since the stock market has trended up for the past few hundred years, in general this is a good way to make money.
You can't do this with a house. You buy the whole thing at a particular point in time and are stuck with whatever value you get. Hopefully you didn't buy a house in 2005-2006, the housing equivalent of March 2000.
Quote:
You can't just invest in the "stock market".
Sure you can. That's the whole purpose of index funds.
Quote:
Please give a concrete example that was obvious to invest in in 2000, which grew by 8% a year.
VWELX has a pretty decent history. You can find people advocating buying it for most of it's 80 year history.
What about putting 20% down at closing, and then pre-paying towards the principle later, either on a monthly or yearly basis? Any difference in doing it that way as opposed to putting down a larger chunk upfront?
The math analysis arguments are starting to make me dizzy, so let me return to your original questions, from a purely personal perspective. I tend to put down the smallest down payment that will get me qualifies AND the best rate. I usually put down 20% because it gets me out of Private Mortgage Insurance (PMI) required by most lenders AND that's where I usually find the interest rate plateaus. If I got a lower interest rate I would put down 25% or 30%.
Once I am in the house I put extra toward the principal. I usually make it something substantial ($500 to $1000/mo.). This is a personal thing because I don't like being in debt. To answer your question, I do the extra principal per month method vs the >20% down payment because I retain the option of changing it on a monthly basis. If I get hit by a truck or lose my job, I can fall back to doing the minimum of the mortgage payment. The extra cash I would have used to put down 25% or 30% is in reserve, not locked up in the house where I can't get it out quickly.
I have a number of diversified investments, and I have had financial advisors tell me to use the extra money for stock investments, rather than home equity. However, after a few years of diligently paying extra principal, I have to tell you, walking through my home knowing I own it free & clear puts a big smile on my face.
VWELX has a pretty decent history. You can find people advocating buying it for most of it's 80 year history.
So, then let's take VWELX over a 20 year period:
If you had a mortgage of $100k in Jan. 1988 and invested $100k in VWELX instead of paying off your mortgage, you'd have $194k today. Interest rates back then for a 30yr mortgage were 10% BTW.
Your monthly payment for that mortgage (PI) is $877. Let's be unrealistic and use today's 30yr mortgage rates, like 5.75% instead (of course, that was unobtainable 20 years ago, but still). This fictional payment would have been $583/month.
If you would have simply paid off that mortgage in 1988 with your $100k and put the equivalent of the house payment in a interest earning account of a very easily obtainable guaranteed 4.5%, you'd have $226k CASH in this account today. And a paid off house.
With VWELX, you'd be $32k short compared with the safe alternative. Sure, you can now argue that you have tax breaks. Well, then I argue that 5.75% for the first decade was unrealistic and that you'd have gotten many more percent for your savings for example. If we use 10% for the first 10 years (and keep a low 4.5% for the savings), you'd have $296k in hand today had you paid off the mortgage and put the monthly payments into savings. Vs. still only $194k (plus house debt) with VWELX. $100k ahead (plus a paid off house, which also comes with the peace of mind that no bank can foreclose, should the sh|t hit the fan). LOL!
You would also still owe money on your home and be obligated to pay $583/month for 10 more years. What if VWELX falls? Nothing is guaranteed.
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
