Mortgage Questions

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When I bought my house I was required to take a first time home owners class which was paid for by the state. I was expecting it to be a big waste of time but it really wasn't. I would suggest you look into that, it was 2 nights and about 3 hours each night. They covered all the basics from start to finish.



I had to take it because I truely was a first time buyer, and they gave me all kinds of incentives if I took this class. Free money in terms of thousands of dollars was worth 6 hours of my time.
 
Gavin said:
Get longer term mortgage than you need, then pay additional amounts each month to shorten the term to give you payment flexibility in case of layoff or emergency.
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Are you trying to imply that the extra paid down gives you some type of surplus cushion in case you get laid off? Or are you saying that by getting a longer term loan and making lower monthly payments than you can afford you have some cushion should you lose a job in the future?



I could see how the latter can work, but not the former. My understanding is even if you pay extra and are ahead in principle, the mortgage company expects your regular payment each and every month and will start foreclosure a few months after that is not the case.



Few financial planners that I know of recommend making extra payments on principle. Most recommend taking very long term loans at low interest, paying as little as possible, getting the most tax savings as possible, and taking any additional cashflow left over and investing in something that provides higher returns; something somewhat liquid so if times get tough in the future you use those funds with earnings to pay your mortgage.



TJR
 
TJR, and while you are taking very long term loans at low interest, paying as little as possible, and getting the most tax savings as possible, you are paying interest which is money out of your pocket. The more interest you pay, the more the house will cost you. Tax benefits are a joke. The sooner you pay off a house, or any investment when time and interest are involved, the less the investment cost you.
 
Les says:
The sooner you pay off a house, or any investment when time and interest are involved, the less the investment cost you.
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Yes, that is true. But note what I said. I said that most all investment advisors will say that same thing, and that is if you have a choice between paying down your mortgage, say a fixed rate mortgage of 5 or 6%, or investing elsewhere, investing elsewhere is typically more advisable.



Put another way, would you borrow money at 5% to make 10%? I know I would.



Most mortgages today are around 5%. Most investments today can easily earn 10%.



TJR
 
I wouldn't buy in an area or neighborhood where the price of real estate is likely to drop. It is better to hold on to what you already own, or rent in some cases. Michigan and Ohio are bearing the brunt of this economic downturn. What you pay $100K for today, could be worth $80K in five years. It doesn't matter how smart you are in the mortgage, if you lose you butt on the actual value of the home.
 
TJR, of course if you can borrow money at 5% to make 10% you would be a fool not too. With this I agree with you, however to "most" people their house is their only investment. If this theory could easily be put into practice, there wouldn't be the foreclosure crisis that exists today. All of these people would just refinance and invest the "extra" savings. By the way, name me 5 investments that can easily earn 10% with minimal risk, I would be interested...
 
Les,



Buying into an index fund the past several decades would have had minimal risk and if invested over the same period of a mortgage (15+ years) would have yielded on average +10%.



Sure, the last 5 and 10 years aren't that great, but still beat 5% pretty darn well (see link). Of course, nothing is without risk.



My point was that if people are giving the advice that paying extra down on your mortgage is a sound way to save money then I agree; it will save money. However if the thought is that paying extra is a good investment then that probably isn't true as there are better investments, IMHO.



TJR
 
Paying interest is never a good way to build wealth. Pay off your debts as quickly as you can and try to stay out of debt by saving instead of borrowing.



Going into debt is not a good way to save money.
 
Gavin,



The example you gave in your link isn't apples to apples.



We were discussing paying down "extra" on one's mortgage. The article you gave a link to described advice about taking out a mortgage when it isn't even necessary (the person didn't even have to carry any debt). Even then, the advice that was given, IMHO, was probably not the best. If one is going to do the math and consider all things from an investment standpoint, in the scenario given in the link the people in question would probably be better off "renting" and investing the difference....better off than buying and hold a mortgage; better off than buying with no mortgage.



I still stand by what I said. If you find that you have a couple of hundred dollars each and every month burning a hole in your pocket, it's better to invest it into something liquid then to pay down a low fixed rate mortgage. That was the situation we were talking about. Few people actually are in that situation, though, as Les said.



Of course, "going into debt is not a good way to save money!" Duh. But taking on debt is typically required for "making money!" Most all business people will tell you that risk, and debt are both key ingredients to making money.



Again, if you want to SAVE money, pay down your mortgage. If you want to MAKE then take that same money and INVEST it.



TJR
 
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Congratulations and good luck- see if you can find some (pre)foreclosures- call local banks w/big mortgage departments. My lawyer specializes in real estate and says most banks in our area are trying to avoid foreclosing on people so they don't worsen the current situation and end up holding tons of properties, but the banks and homeowners are looking for a way out and a qualified buyer can call the shots. My optician is buying his first home from Bank of America. Home has been vacant for a year, bank was owed $520,000, he is buying for $380,000 with ZERO down, minimal closing costs- after he was approved they have tried to coax more $$$ down, but he has been steadfast. My best advice is take your time- the recent fed rate cuts haven't shown up in mortgage rates- yet...Also- make the lender follow the good faith estimate of closing costs to the letter. When we closed on our house, a mysterious $10k "origination fee" showed up that morning! We pulled out the estimate showing No origination fee and it disappeared just as fast...:cool:
 
Again, if you want to SAVE money, pay down your mortgage. If you want to MAKE then take that same money and INVEST it.



TJR
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Better yet: PAY off your debt and then invest ALL the money you were paying in interest and principle AND MAKE EVEN MORE!



A penny saved is a penny earned. Why pay interest to make someone else rich when you can be earning the interest for yourself?
 
Gavin,



Sure paying all debts and investing is better than just investing, all things being equal.



But rarely are all things equal.



For example, said:
A penny saved is a penny earned.
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and you asked:
Why pay interest to make someone else rich when you can be earning the interest for yourself.
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Clearly people should save. But the fundamental question comes down to one of RETURN. We have blurred the discussion on this tangent with terms like "saving", "investing" and "earning", etc. But the fundamental issue at hand is one of ROI (return on investment).



If someone has a couple of hundred extra dollars each month during the life of their mortgage then they need to determine if using that money each month to pay down their mortgage gives them the best ROI (that is the scenario) Most financial people when given that scenario believe there are better investments with higher ROI than paying down the mortgage.



TJR
 
Interesting fact is that some of the richest people on earth pay cash for everything, never borrow money at all, and never buy anything new.



Some points to ponder.





Tom
 
TJR, well said throughout. Especially when you consider that if you invest the money and get 10%, rather than paying off the 5% mortgage, not only are you getting a better return, but you also can deduct the mortgage interest on your taxes. If you pay off the debt, you lose out on both the 10% return and the mortgage deduction, and just get 5% return.
 
Quote:



A penny saved is a penny earned.

and you asked: Quote:



Why pay interest to make someone else rich when you can be earning the interest for yourself.





Clearly people should save. But the fundamental question comes down to one of RETURN. We have blurred the discussion on this tangent with terms like "saving", "investing" and "earning", etc. But the fundamental issue at hand is one of ROI (return on investment).



If someone has a couple of hundred extra dollars each month during the life of their mortgage then they need to determine if using that money each month to pay down their mortgage gives them the best ROI (that is the scenario) Most financial people when given that scenario believe there are better investments with higher ROI than paying down the mortgage.



TJR
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You had made the distuinction between SAVING and MAKING money in your previous post. I was just pointing out that even Ben Franklin knew that there was no difference between the two!



I understand RIO, but my point is that if you are not using a bunch of your income paying debt, you can then use that money to invest. By investing a lot more money, you are going to both save and earn a whole lot more than if you are paying a mortgage.



Let me break it down for you: If you are are paying $1000 a month for your mortgage, and another $500 a month for your Sport Trac loan, and all you can afford is $100 a month to save/invest, you will be saving/investing a hell of a lot less money than you could if you paid off your mortgage and your Sport Trac. If you paid off your debts, you could save $1600 a month-- which is going to give you a hell of a lot more money (net return) than you will get with your saving $100 a month - high RIO scenario you keep talking about.



Why people think they can get richer by going into debt is nutty to me. If you want to get rich, pay off your debt as soon as you can, and save and invest as much as you can.
 
TJR, well said throughout. Especially when you consider that if you invest the money and get 10%, rather than paying off the 5% mortgage, not only are you getting a better return, but you also can deduct the mortgage interest on your taxes. If you pay off the debt, you lose out on both the 10% return and the mortgage deduction, and just get 5% return.
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You got this all backwards.



Why would you only invest your money at 5% after you pay off your debt? That makes no sense that you would invest your money in riskier investments if you were heavily in debt, but that if you had no debt you would invest it in a lower-returning investment.



Also, if you have no debt and have much more money to invest (see E-mail to TJR above for an explanation), then your larger investment amount would probably give you MORE OPTIONS for investing in higher-returning investments than you would have available if you only had a small investment.
 
Gavin,



What is interesting about this new type of thinking is that there are higher numbers of repo's, forclusures, and CC debt than ever before.





Tom
 
Maybe we should all get a bunch of credit cards and play the stock market or casinos. You know, if the RIO is better, it all makes sense to go into more debt.
 
Why would you only invest your money at 5% after you pay off your debt? That makes no sense that you would invest your money in riskier investments if you were heavily in debt, but that if you had no debt you would invest it in a lower-returning investment.



Also, if you have no debt and have much more money to invest (see E-mail to TJR above for an explanation), then your larger investment amount would probably give you MORE OPTIONS for investing in higher-returning investments than you would have available if you only had a small investment.
Click to expand...



No one's saying you would invest your money at 5% after you pay off your debt. But WHILE you're in the process of paying off your debt, that is effectively what you are doing--the only benefit your getting from your money is the 5% interest you're avoiding paying.



Your comment of "if you have no debt and have much more money to invest" contradicts itself. If you have debt, you have much more money to invest. If you pay off debt, that action depletes the money you have available to invest. And as long as you invest it wisely, such that the return on the investment (monetary or otherwise) is greater than the cost of having the debt (interest or otherwise), you're better off having the debt.
 

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