Mortgage Questions

[Thomas Rogers]

Gavin also said:

You still haven't convinced me that taking on debt makes people more wealthy.

That's good, because I NEVER tried to do that.



I said it several times, and if typing slower or typing in all caps would allow you to hear and understand I would try that...but I will say it again.



The debt, in this case a mortgage or a bike loan is without question. It is given. It is assumed.



I never said taking on debt is a good recipe for gaining wealth. However, we could discuss that. It seems that many companies have a pretty prosporous business model of taking on debt in order to make money. That's essentially what any lender does.



My initial comments were simply to encourage people that it is often the case that investing elsewhere instead of paying down already held, low interest rate debt often has one money ahead. And you have done NOTHING to counter that claim, and very little it seems to even understand it.



Sorry if I am being harsh, but you seem to not be listening.



TJR

 

[Thomas Rogers]

Caymen said:

While I understand where TJR is coming from, he insuates we have a bunch of money to invest. For most of the working class, that simply inst true.

I insinuated no such things. Others did. Others, and there were more than one, said to pay down extra on the mortgage periodically (each month, once a year).



If there are emotional reasons to do that, say like you want to have the satisfaction and sense of security that paying for your home earlier brings, than that is good advice.



However, if the reason for paying extra is to save/make money, then folks should consider that proposition carefully.



Most people can come up with an extra $50, $100 or so a month, or a windfall of $1K a year, and when they do, they shouldn't simply figure that paying down their mortgage a little extra is their best investment.



With a 5% mortgage rate putting that same money into a drip-based index mutual fund would typically yield much more cabbage after 10, 15 years.



So, I didn't insinuate that you or others have that extra cash. I was just counseling on the advice given of paying extra principle.



TJR

 

[Tom Schindler]

With a 5% mortgage rate putting that same money into a drip-based index mutual fund would typically yield much more cabbage after 10, 15 years.

The issue is getting enough intrest to get into that 10 to 15 years.



Without a good chunk of cash in there, the return you get could be better spent putting it on a principle and paying off the burdon of a loan.



It is interesting that as our society, as a whole, gets better educated in investing for the future, the over allo society has more financial issues than before.



Is this a situation where it works out on paper, but not in real life?



My family member became a millionaire by paying cash for everything and hardy ever taking a loan. Would he be richer if he took a loan for everything?



I doubt it myself.





Tom

 

[Thomas Rogers]

Caymen,



If I understood the story about your friend, he has a lot of cash and can easily and safely make 8% annual return on his cash. He is going to pay cash for a motorhome rather than hold a 5% fixed rate loan on the motorhome. Do I have it right? If so, would you agree that by paying cash, for this person, he is forgoing quite a bit of earnings?



By my calculations, assuming a 15 year term, holding the $75k and enjoying an 8% annualized return grows that money to $248k which is a return of $173k.



Likewise, the total interest paid over 15 years on the same $75k at 5% is just over $31k.



So, it seems to me that by his actions friend will forego making $173k in order to save $31k; or put simply, paying for the motorhome in cash will cost your friend over $140k vs holding the note and keeping the cash invested.



That's real money to me.



Now, if there are other reasons he wants to pay cash, then so be it.



TJR

 

[Thomas Rogers]

Caymen said:

Without a good chunk of cash in there, the return you get could be better spent putting it on a principle and paying off the burdon of a loan.

That's not necessarily true. Even without big funds to start with, modest, small monthly contributions to a drip fund more often than not will outperform those same contributions used to pay down additonal on a mortgage. And, with such small investments to a drip fund, one enjoys "dollar cost averaging", which isn't the case when contributing extra to your mortgage principle.



Beating 5% fixed isn't hard, for anyone, with almost any amount.



Again, the general discussion is whether or not to pay extra down on your mortgage if able.



One thing to consider with that question is how liquid is the investment you make? If I pay into a drip and a few years down the road I run into bad luck, then I can sell some funds and pay bills. All the time between my money has been growing. If I have instead been paying down principle, that money isn't really liquid, unless I take a home equity loan, which then costs me. And, contributions to extra principle don't grow; they simply deduct in simple fashion from the principle owed; mortgage payments don't adjust monthly. Even if I make a balloon payment of principle, my next month's interest amout is only a few pennies less than the previous.



TJR

 

[Tom Schindler]

TJR,



No, he is making payments over the duration of the loan.



What I was saying is that with minimal money to invest, you would be hard pressed to find any account or investment that will give you a guarenteed 8% minimum return on your money. Sure, it you had $250,000 to $1,000,000 to invest somewhere, you can get almost anything in return for your money.



For the average worker, investing $5.00 here and there just does not get the intrest rate high enough to really make it a wise investment.



If he had $75,000 in a savings account, CD, or Money Market ceritifcate, he would lose money by paying intrest on that money on a loan.



Because he has so much to invest, he gets a higher intrest rate on his money.





Tom

 

[Thomas Rogers]

Caymen asks:

My family member became a millionaire by paying cash for everything and hardy ever taking a loan. Would he be richer if he took a loan for everything?

That's a moot argument; how he got where he is doesn't change where he is now and the opportunities and choices he has. The math doesn't lie. One choice costs more than the other.



TJR

 

[Thomas Rogers]

Caymen said:

For the average worker, investing $5.00 here and there just does not get the intrest rate high enough to really make it a wise investment.

Again, that's not necessarily true.



Look into drip funds, which can be funded monthly for as low as $25/mo (some even lower).



The challenge is to beat an annualized rate of return, over the term of the mortgage, that beats the mortgage rate, say 5%. That simply isn't hard.



TJR

 

[Thomas Rogers]

Caymen said:

It is interesting that as our society, as a whole, gets better educated in investing for the future, the over allo society has more financial issues than before.

That is what we call an attribution error.



You make an assertion which questionable and probably not true (the assertion being that "as a society we are getting better educated in investing"), present it as fact, and then show how there is a logical contradiction to the fact; the contradiction being that we have growing financial problems.



The reality is probably more likely that we, as a society, are NOT getting more educated in investing, and that as our investment choices increase and or knowledge doesn't keep up, people get in more trouble.



TJR

 

[Tom Schindler]

Most people can come up with an extra $50, $100 or so a month, or a windfall of $1K a year, and when they do, they shouldn't simply figure that paying down their mortgage a little extra is their best investment.

Actually, that isn't true.



Check this. Aerage family. Two kids, wife, husband. Husband makes $50,000/year. Wife makes $35,000/year. Kids make nothing (they just cost money)



Together they make $85,000/year.



They love in a $200,000 home in the suburbs with $25,000 down on it. Nothing fancy, just enough room for everyone in an area with a good school system.



Mortgage is $1,021/month with another $250/month in property tax's and $75.00 in insurance for a total payment of $1,346/month for 30 years.



Add two decent car loans. Mom drives a minivan and dad drives a small 4 door car car.



Dad's monthly payments are about $398/month and moms van is about $537/month (dad's car is $20,000 at 3.9% for 5 years and mom's van is $27,000 at 3.9% for 5 years)



Car payments are around $935.00. Add another $200 a month for car insurance for a total of $1,135.00/month for transportation.



I know what our utilities run. Lets say we triple that since we got double the family members and quadruple the home value. Utilities would run this family over $1,000/month.



So far, this families living tab is as follows.



Mortgage $1,346/month

Cars $1,135/month

Utilities $1,000/month

------------------------------

Total so far is over $3,481.00/month



Out of the $85,000 they make, they see about $46,000 of that in thier paychecks after health insurance, tax's, etc.



45,000/52 weeks in a year=$865/week.



This family gets to make $3,833 a month.



We havent even broken the ice on fuel prices, food, or any type of recreation.





Tom

 

[Jacob Dryer]

Caymen do you do any forced savings/retirement? My wife and I have been investing for our retirement since we got married. We each put $50 into Roth IRA's for several years while we were living in what would be considered poverty (gross income of less than 30k combined) You make adjustments for your future. $50 is 1 night out for dinner, or not eating fast food for lunch for 2 weeks. Once you are in the habit of saving it isn't hard to continue that. We are forced into the savings because it is partially out of our control. At any given time we can call our financial planner and have them put the withdrawls on hold (which has only happened once around Christmas time) that keeps some extra money in our pockets.



The point of all that was if you/ANYONE truely wants to have a few extra dollars to invest/save they can, but it might mean giving up a little.



Now I'm not saying I know everything about investing or owning a home. But I will say that I'm pretty sure I'm now in a better situation than most of America and I'm <30 and own a home.



Both Caymen and TJR are correct. The answer is you are both right. It depends on the situtation. I doubt either one of you went to the link that I put above. It does the math for you and calcuates which is the better option.



Paying more on your mortgage doesn't do anything for you until you are out of your other higher interest debts. Take care of that first. In Caymen's example above there is as much spent on cars as there is in mortgage. That needs to go away first, once that is gone you can focus on the house and split the difference with savings/investments.

 

[Thomas Rogers]

JDBoxes said:

The point of all that was if you/ANYONE truely wants to have a few extra dollars to invest/save they can, but it might mean giving up a little.

Right. That was what I was implying. That through choices, most American families could fund some type of savings/investment each month, even if only a very small amount.



Caymen, that last example is the typical "Overspent Americans" (its the title of a book, BTW).



You can't (shouldn't) spend more than you make. 10% should be saved right off the bat towards long term savings. Then, live on the rest. Few people follow that rule, not because they can't (everyone can), but because they choose not to. No matter who you are you can always spend less and/or earn more.



TJR

 

[Tom Schindler]

Caymen do you do any forced savings/retirement?

Actually I do. That is not the point.



I do invest in a 401(k). It does not make much money and I have been taking a beating on it.



The point is, $200,000 for a house is not much. We are looking at $130,000 houses and have a hard time finding something worth buying. As for car payments, I hate them and avoid them at all costs.

In Caymen's example above there is as much spent on cars as there is in mortgage. That needs to go away first, once that is gone you can focus on the house and split the difference with savings/investments.

The number I gave for cars is really not to far out of line either. How much does the average small family car cost? Is $20,000 that outrageous? How about a mini-van for mom? Is $27,000 too much?



If it were me, I would have each made a $10,000 down payment on each car. My monthly payments would be greatly less and I would have more money to invest in other things.



Making the blanket statement that you are better off paying 5% and investing is better, that simply is not true.



Even if I were to invest my $40,000 I have saved for a down payment, I could still not make ends meet. I am not asking for much in life. A home in the suburbs on a small piece of property. $130,000 does not get you much. I am unable to continue to live where I live.



I drive vehicles with over 100,000 miles (one is 155,000 and another has 354,000). My Trac is the lowest mileage vehicle in my stable with 91,000 miles.



There is no one answer that is the best for everyone. For me, paying off any debt as fast as possible is the best way to go. That gives me the opportunity to invest my money on other things.





Tom

 

[Bill V]

Caymen, if you're so opposed to taking on debt, why are you considering buying now, anyway? If "the blanket statement that you are better off paying 5% and investing is better, is simply not true", then it would also be true that you're always better paying 100%. In which case, you really shouldn't even be considering buying until you've saved up enough to just pay cash for this house, and, for that matter, for your vehicles.



I'm not understanding why you're asking for mortgage advice, when you seem convinced that the only acceptable route is to not take out a mortgage or any other debt. Rightly or wrongly, you seem to already have in your head all the answers to any of your questions. What am I missing?

 

[Thomas Rogers]

Caymen said:

Making the blanket statement that you are better off paying 5% and investing is better, that simply is not true.

By the term "blanket" I assume you mean "always" or "covering all cases"? If so, I have to agree with you. But I am glad I never said that.



I countered the conventional wisdom of saving money by paying extra on your principle each month by saying:

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.

And I still claim it is sound advice. Note the italics. Clearly not a "blanket" statement, and clearly stated to define all the assumptions implied (must be a higher return, etc).



TJR

 

[Tom Schindler]

Caymen, if you're so opposed to taking on debt, why are you considering buying now, anyway?

Because I am 35 years old and we plan on starting a family. We need the room.

In which case, you really shouldn't even be considering buying until you've saved up enough to just pay cash for this house, and, for that matter, for your vehicles.

I will borrow money, but will pay it off as soon as i can. It is a best of both worlds kind of deal. Again, this works for me. I buy a house at $140,000. I borrow $100,000. I pay 1 1/2 value of payments a month. So, if my mortgage is $500/month, I pay $750/month. The loan gets paid off much sooner. If we encounter hardships, the $500.00 would be easier to pay than a higher loan with a higher monthly payment.

I'm not understanding why you're asking for mortgage advice, when you seem convinced that the only acceptable route is to not take out a mortgage or any other debt. Rightly or wrongly, you seem to already have in your head all the answers to any of your questions. What am I missing?

you are reading too much into it. You are missing the point on your end, not mine. I simply said that I do not like loans. Sometimes a loan is a requirement but to look for loans and only barely pay it off just to invest in other things is not always the best idea for all people.





Tom

 

[Thomas Rogers]

Caymen, if you want the room, lower payments, and less risk, and more money to invest, then I say rent.



If you want the room, want to own, want to lower your risk and keep money on the side for a rainy day, then by all means I recommend you NOT pay down extra on the mortgage. Take that same money, work with a reputable agent and find a good, low risk investment.



You will be money ahead, big time, and have a nest-egg that is much more liquid should a rainy day come.



TJR

 

[Thomas Rogers]

Caymen also said:

Sometimes a loan is a requirement but to look for loans and only barely pay it off just to invest in other things is not always the best idea for all people.

Can you share some of those reasons with me that apply to you.



As I have said and can show, investing the money will likely give a much greater return with little risk, and provide you with a much more liquid set of funds should times get rough.



I submit paying it down takes money out of your pocket and ends up giving you less options and flexibility when a rainy day comes.



So what are your reasons for paying it down?



The only one I keep hearing from people is this idealic sense of being "out of debt quicker". If that's the reason then all others will be moot.



TJR

 

[Tom Schindler]

Caymen, if you want the room, lower payments, and less risk, and more money to invest, then I say rent.

Wrong. Rent is hardly ever lower payments.

If you want the room, want to own, want to lower your risk and keep money on the side for a rainy day, then by all means I recommend you NOT pay down extra on the mortgage. Take that same money, work with a reputable agent and find a good, low risk investment.

So then I spend every penny I have to make my mortgage payment. Sorry, homie don't play that. If I lose my job, fall under hard times, or something else, I can keep my house.

You will be money ahead, big time, and have a nest-egg that is much more liquid should a rainy day come.

Tom, if you only knew what I had. Lets just leave it that way. To give you an idea without bragging, but my unborn children already have college paid for. They could be a doctor, lawyer, etc. and never have to pay a penny.





Tom

 

[Thomas Rogers]

Caymen also said:

I will borrow money, but will pay it off as soon as i can. It is a best of both worlds kind of deal. Again, this works for me. I buy a house at $140,000. I borrow $100,000. I pay 1 1/2 value of payments a month. So, if my mortgage is $500/month, I pay $750/month. The loan gets paid off much sooner. If we encounter hardships, the $500.00 would be easier to pay than a higher loan with a higher monthly payment.

Help me understand how that "higher loan with a higher monthly payment" factors innto things. You explain it as a "than", as if that's the alternative when hardships mount. But the fact is you already have a mortgage in either case, and you are paying $500/month. If that is what you are comfortable paying, and that's your threshold of payment, then so be it.



No one is saying to deliberately take on MORE debt from the get-go. No, we are saying that once you have a mortage and a monthly payment that you are comfortable with, and if you have the option of paying extra, consider wisely if you should because, frankly, there are many other better investments.



Buying a house at $140k and borrowing $100k sounds about right. That way you avoid PMI, and you start with nice round numbers of what is owed...we like that as humans.



It's the paying an additional $250 each month that I think is ill advised. If bad times come you can fall back on the lower, original payment of $500, but you can't tap any of that y months times $250 a month nestegg that you have created without a home equity loan, which has lots of strings attached and requires you to pay interest. Also, that extra $250 a month isn't growing at all. It just reduces principle with no growth.



There are lots of reasons to do what you are describing, but saving money and putting money away for bad times aren't it.



TJR