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Location: Formerly Pleasanton Ca, now in Marietta Ga
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Quote:
Originally Posted by Submariner
Good thing this is not 1929.
Not sure what that means. You live in a really cheap area. You live very cheaply too.
Not everyone does.
My friend in California pays about 27K a year in property taxes alone. In California that is not unheard of.
So let me ask you. If your property taxes were that much and you lost your income, how long before you lost your paid off house?
The math is already proven that paying off a home often make less financial sense than investing the money. Of course you are free to show the math otherwise.
Now that you paid off your little farm, you are saying you have no expenses that occur?
People are so adamant about one or the other but I have to agree with the people who prefer more of a middle ground. I make it a goal of mine to pay off my mortgage shortly, even with a 2.95% rate, because it’s a 10/1 ARM and I just don’t like owing anyone any money frankly. It’s a personality thing. I already have more than 30 times the mortgage amount invested, I don’t care about investing a little bit more, that won’t help me at all or change my situation. But psychologically I’d like to pay less per month for living expenses. Maybe it’s because I’ve tried to live frugally in the past and just enjoy low overhead. But I wouldn’t ever put myself in a situation of being low on cash just to have a paid off place (I’ve had that before, too, it was a nightmare as I needed the cash).
So this is a question, not a statement of fact. I’d be interested if this makes sense regarding the risk of of carrying a mortgage and investing vs. paying off a mortgage.
Scenario 1: Buy a house for $250,000 cash in year 1. Home prices fall 10% in 2 years, and the owner is forced to unexpectedly have to sell in year 2. Excluding real estate commissions, etc, the buyer walks away $225,000. Loss of $25,000.
Scenario 2: Buy a house for $250,000 in year 1, get 100% financing (assume this for simplicity...I don’t think it really has a material effect on the point I was pondering), and make normal payments on a 30 year mortgage. Home prices fall 10% in 2 years. Owner invested the $250,000 in an S&P 500 index fund, and say over that relatively short period of time equities fell 10%, which I assume is reasonably possible given the relatively short period of time. Owner needs to unexpectedly sell house. Given the payments are limited to the first 2 years of the mortgage, little principal has been paid down, and when he goes to sell the house, he only gets $225,000, but he still owes $250,000 (in reality a bit less), but he only has $225,000 in his equity investment to meet his obligation. So basically he is down $50,000 vs. the $25,000 in scenario 1.
I’m not suggesting that the second scenario is likely but home prices and equity markets don’t always go up (atleast in the short term), and seems to me that if you aren’t able to ride out down markets (e.g. forced to sell a property prematurely) having a paid off house could insulate you from some investment risk.
Thanks for any insight re my (possibly incorrect) analysis.
there are quite a few ways to view this but most people view it from an obstructed view
keeping a mortgage or not and investing our money is not as simple as just investing our money like we typically do . ....
In effect you are buying equities leveraged with borrowed money . We tend to miss this factor ...
So you need to ask yourself if you were buying stocks on margin what would you want as a risk premium to make it worth doing .... you have 3-4% interest ...you have a risk free treasury bond paying 2% to 3% so how much of a risk premium over a risk free treasury bond would you want to not only buy equities but buy equities on leverage .. maybe 2-3% ?
If you were going to put that borrowed money in a balanced fund with a 6-8% return would you borrow money and do it knowing you have 3-4% interest and an investment with zero risk is paying 2-3% ?
That is a very different question now compared to just get more than the interest you pay.
In effect you are leveraged and your downside is now greater .....
Think this point through very carefully ....we don’t realize we can consider either one the investment bought on leverage when we borrow money and use our cash too.
We like to think it is our money in the stocks and the mortgage in the house but that is only mental masturbation when we do this ....it can be considered either way in effect in reality-because the situation has been altered from either just buying a house or just investing.
The risk premium as it is called becomes very important when using leverage because the downside is greater with leverage and that makes this a very different decision then we usually make.
We just have been fooling ourselves by taking our own money and the borrowed money and applying its use in a way that makes comfortable sense to us but the truth is all that money both your own and borrowed is coming from the same pocket and used interchangeably
So this is a question, not a statement of fact. I’d be interested if this makes sense regarding the risk of of carrying a mortgage and investing vs. paying off a mortgage.
Scenario 1: Buy a house for $250,000 cash in year 1. Home prices fall 10% in 2 years, and the owner is forced to unexpectedly have to sell in year 2. Excluding real estate commissions, etc, the buyer walks away $225,000. Loss of $25,000.
Scenario 2: Buy a house for $250,000 in year 1, get 100% financing (assume this for simplicity...I don’t think it really has a material effect on the point I was pondering), and make normal payments on a 30 year mortgage. Home prices fall 10% in 2 years. Owner invested the $250,000 in an S&P 500 index fund, and say over that relatively short period of time equities fell 10%, which I assume is reasonably possible given the relatively short period of time. Owner needs to unexpectedly sell house. Given the payments are limited to the first 2 years of the mortgage, little principal has been paid down, and when he goes to sell the house, he only gets $225,000, but he still owes $250,000 (in reality a bit less), but he only has $225,000 in his equity investment to meet his obligation. So basically he is down $50,000 vs. the $25,000 in scenario 1.
I’m not suggesting that the second scenario is likely but home prices and equity markets don’t always go up (atleast in the short term), and seems to me that if you aren’t able to ride out down markets (e.g. forced to sell a property prematurely) having a paid off house could insulate you from some investment risk.
Thanks for any insight re my (possibly incorrect) analysis.
People in California walked away from their house during the housing bubble.
Location: Formerly Pleasanton Ca, now in Marietta Ga
10,441 posts, read 8,678,932 times
Reputation: 16857
Quote:
Originally Posted by WVNomad
So this is a question, not a statement of fact. I’d be interested if this makes sense regarding the risk of of carrying a mortgage and investing vs. paying off a mortgage.
Scenario 1: Buy a house for $250,000 cash in year 1. Home prices fall 10% in 2 years, and the owner is forced to unexpectedly have to sell in year 2. Excluding real estate commissions, etc, the buyer walks away $225,000. Loss of $25,000.
Scenario 2: Buy a house for $250,000 in year 1, get 100% financing (assume this for simplicity...I don’t think it really has a material effect on the point I was pondering), and make normal payments on a 30 year mortgage. Home prices fall 10% in 2 years. Owner invested the $250,000 in an S&P 500 index fund, and say over that relatively short period of time equities fell 10%, which I assume is reasonably possible given the relatively short period of time. Owner needs to unexpectedly sell house. Given the payments are limited to the first 2 years of the mortgage, little principal has been paid down, and when he goes to sell the house, he only gets $225,000, but he still owes $250,000 (in reality a bit less), but he only has $225,000 in his equity investment to meet his obligation. So basically he is down $50,000 vs. the $25,000 in scenario 1.
I’m not suggesting that the second scenario is likely but home prices and equity markets don’t always go up (atleast in the short term), and seems to me that if you aren’t able to ride out down markets (e.g. forced to sell a property prematurely) having a paid off house could insulate you from some investment risk.
Thanks for any insight re my (possibly incorrect) analysis.
Not enough info. Why does the owner need to sell the house in both cases?
Has he completely lost income? Based on the scenario it sounds like the economy is on a downturn.
In 1930 after the banks locked their doors they called in outstanding mortgages.
Both sets of my grandparents lost their farms, because they had mortgages.
Having a mortgage when the banks fail is very hazardous.
Quote:
... You live in a really cheap area. You live very cheaply too.
Not everyone does.
I am aware of that.
I moved from California to get away from their constant droughts and the high COL.
Quote:
... My friend in California pays about 27K a year in property taxes alone. In California that is not unheard of.
Most of my relatives are still in California. I used to own a home there as well.
Quote:
... So let me ask you. If your property taxes were that much and you lost your income, how long before you lost your paid off house?
From cash on hand, I could last a few years.
If I am selling turnips and whiskey from a wagon on the side of the road, it is easier to make a hundred bucks than it would be to make a thousand bucks.
Quote:
... The math is already proven that paying off a home often make less financial sense than investing the money. Of course you are free to show the math otherwise.
Again, when the banks lock their doors, the next time, and try to call in all mortgages, ...
Those with mortgages are ruined.
Quote:
... Now that you paid off your little farm, you are saying you have no expenses that occur?
I have a few expenses. I do far more with bartering though.
You have to live in Maine. I stayed at a nice hotel in Kennebunk port and the owner was looking for someone to manage the property in the winter, he said it’s free to live there to one potential employee. It’s cold there.
there are quite a few ways to view this but most people view it from an obstructed view....
If my brokerage offered me a 30 year fixed margin loan at 3.5%, I would take it real quick. Otherwise you do have a good point though and it applies to just about everything. I'm paying 3.5% interest on the lunch I'm about to eat.
there are quite a few ways to view this but most people view it from an obstructed view
keeping a mortgage or not and investing our money is not as simple as just investing our money like we typically do . ....
In effect you are buying equities leveraged with borrowed money . We tend to miss this factor ...
In effect you are leveraged and your downside is now greater .....
Think this point through very carefully ....we don’t realize we can consider either one the investment bought on leverage when we borrow money and use our cash too.
The risk premium as it is called becomes very important when using leverage because the downside is greater with leverage and that makes this a very different decision then we usually make.
We just have been fooling ourselves by taking our own money and the borrowed money and applying its use in a way that makes comfortable sense to us but the truth is all that money both your own and borrowed is coming from the same pocket and used interchangeably
Post #2 in this thread has stated a different position
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