Mortgage Questions

[Thomas Rogers]

Caymen said:

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.

Again, I never said that. Read my last post above.



I simply said that if you are planning a mortage payment of $500/month because that's your comfort level, but have budgeted that you can pay an additional $250 a month now, while times are good, then that's not a financially sound strategy IF the reasons for doing it are to save money in the long run and to make yourself more financially fit for a rainy day.



Simply put, that $250 invested elsewhere will be more liquid and perform better.



TJR

 

[Thomas Rogers]

P.S., Caymen....



There is an easy resolution to this meta-debate. You have hinted to it. You have said "best for me".



I must admit that paying down your mortgage so that you own your home sooner may actually be best for you, for reasons related to your own personal comfort. These reasons and attitudes go back to ideals about ownership and debt, and the perceived security that ownership brings. They are essentially emotional and emotion-based ideals and reasons.



If such are your reasons, then I don't intend to sway you. It would be insulting for me to try.



If, however, your reasons have to do with wanting to maximize your money and towards making you better prepared for a future financial hardship then those are specific goals and can be discussed rather unemotionally. If those are your goals, then I've said all I can on the subject and I fear we may be confusing emotional desire with financial goals.



TJR

 

[Tom Schindler]

I simply said that if you are planning a mortage payment of $500/month because that's your comfort level

My comfort level of a car loan is no more than $350/month for 36 months. I round that number to $500/month If one week, I get sick and miss out on a weeks wages, I will not be scrambling for enough money to make that $500 payment. Since my payment is only $350/month I can make the payment without having to worry.



The same goes with a mortgage. We make our payment plus extra. Why? Because when we sell this place, we will have some money left over from the sale.



We will not see eye to eye on this. You live your life as you see fit. I have my reasons why I am like this.



I have my pension, and my 401(k). I am very well off.





Tom

 

[Bill V]

Fair enough on all points, Caymen. Good luck on your purchase!



One question I do have for you, just out of my own curiosity. This question is not meant to be smart-a$$ed or sarcastic, I mean it with all sincerity.



You said:

The same goes with a mortgage. We make our payment plus extra. Why? Because when we sell this place, we will have some money left over from the sale.

Based on this, do you also intentionally put fewer deductions on your W-2, so that more taxes are withheld each week? I've known people who do/did this, just because "when they get their refund, they'll get more money back". That's very much the same way of thinking--pay more to the government so you'll get more back, and pay more to the house so that you'll get more back. In the long run, from a purely financial standpoint, neither makes sound sense; but both can make emotional sense from a peace of mind standpoint, and in those terms I can't fault either.



Like I said, just curious...



Thanks! Good luck with your purchase!

 

[Tom Schindler]

Based on this, do you also intentionally put fewer deductions on your W-2, so that more taxes are withheld each week?

I have always claimed no deductions. The difference between 0 and 2 is only 30 bucks a week, or so. That $30.00 is not enough to make or break me. I do like the option of a $4 grand refund I just got that I can use for new furnature, a car (or downpayment of one), vacation, etc. If I were to invest that money into a savings account, my return would be next to nothing. If I had the money invest in some type of IRA, I would get hit with a 10% penalty.



That would eat up much of the intrest I would have made.





Tom

 

[Thomas Rogers]

Caymen,



I've got it now.



You pay the govt extra each paycheck, you pay extra on your car and home loans so that you have these "forget about them" nest eggs that have money in them, either at the end of the year, or when you go to sell the house or trade in the car. In the case of loans you are increasing your equity, quicker.



Just remember, equity of this type has no true return (it doesn't grow by any other means that what you put it in) and equity of this kind can't easily be tapped without a significant event (sale of the item, refinance, etc). The equity seems to have a return in that you avoid paying some interest by shortening your loan duration. But that's it. It's not a return, its an expense avoidance. A true return has your money making money for you; the output is greater than the input. Each dollar you get out of the type of equity you are talking about comes from a dollar you put in.



Just so we are clear on those things.



Good luck.



TJR

 

[Tom Schindler]

TJR,



For what it is worth, I have over $250,000 dollars in incestments and another $250,000 coming. I am sure when you were at my age, you did not have that.



You are the last person that should give me financial advice.





Tom

 

[Thomas Rogers]

And for the answers to this question:

Let’s say there is this little boy named Tommy. He wants to buy a bike from a department store, but it is expensive, costing $10. He doesn’t have that kind of money, but the department store will sell it on credit to him; 20% simple interest each week for 40 weeks.



Tommy decides to buy the bike, no money down. When he is about to pay his first payment he recognizes that he has 5 cents burning a hole in his pocket. He seems to always have 5 cents lying around. He figures he could pay extra each week on the bike. At the same time his friend Stevie offers him a deal. It seems Stevie gets his allowance on Monday and it is always gone by Friday. Tommy gets his allowance on Friday. Stevie offers to pay Tommy 6 cents each Monday when Tommy gives him 5 cents the Friday before, all so that Stevie has spending money during the weekend.



Which is the better deal; with the better deal being the one that gives Tommy more money in his pocket after paying for the bike? Should he pay down on the bike, or should he loan Stevie the money each week.



Remember, both loans are 20%, simple interest.



The answer will surprise many of you.

If Tommy pays down the bike debt he saves 30¢ versus what it would cost him if he simply paid no additional down each week. He reduces his payments by 6 weeks, with the new last payment (in week #34) being 10¢ in principle and 5¢ in interest; for a total paid of $11.70.



However, if Tommy took that same 5¢ each week and loaned it to his friend, at the end of that 34 weeks he would have 34¢ additional. And, to compare apples to apples, at the end of 40 weeks he would have 40¢.



So, regardless how you look at with respect to which duration he lends (the shorter, the longer, indefinately), Tommy makes 13% to 33% more by lending the money then he does by paying down the loan...and remember, the interest rates are the same.



TJR

 

[Thomas Rogers]

Caymen said:

For what it is worth, I have over $250,000 dollars in incestments and another $250,000 coming. I am sure when you were at my age, you did not have that.



You are the last person that should give me financial advice.

Wow. I knew it was only a matter of time before the insults came out, the pee-pee get placed on the table for a size comparison, and you made some gross assumptions about me.



Jeez. Why do you feel the need to do that?



I have no need to judge myself against you, or be judged by you. I didn't judge you. I gave sound advice that mirrors the advice of the best financial consultants and if followed could net you 100s of thousands of dollars and place you in a position to weather financial hardships better. Because you don't agree with it due to what appear to be emotional reasons you can't even articulate from a financial standpoint you get hostile.



You asked for advice. I gave it to you. In the future, if you aren't willing to listen to advice from everyone, don't ask for it.



TJR

 

[Tom Schindler]

TJR,



The fact is that you are preaching to the choir. I know how to invest. I also know how to save money. I was not trying to insult you, but you have done nothing but insulted me during this whole discussion. You treat me like I am a child and I don't understand how things go.



I know more than you give me credit for.





Tom

 

[Thomas Rogers]

Caymen,



Please show me the insults. I would welcome understanding where I was insulting so that in the future I can choose my words more carefully.



As for "knowing more than I give you credit for", frankly, in this discussion, you haven't shown that you grasp what I am saying at all.



I still don't understand why you would pay extra on a mortgage, other than the emotional aspect of having more equity and a nearer sense of true ownership. If those are your reasons, and I have postulated that they are, then say so. But don't say its for a rainy day or to save/make money because I have clearly shown how those reasons don't wash...and you haven't shown how they do.



TJR

 

[Tom Schindler]

Please show me the insults. I would welcome understanding where I was insulting so that in the future I can choose my words more carefully.



As for "knowing more than I give you credit for", frankly, in this discussion, you haven't shown that you grasp what I am saying at all.

You speak to me like I know nothing. That is insulting.



I klnow what you are saying. It that aspect I don't. I do things the way I do them and I am financially sound. More so than most people are.



I lost more in my 401(k) that most people contributed to thier own 401(k).

I still don't understand why you would pay extra on a mortgage, other than the emotional aspect of having more equity and a nearer sense of true ownership. If those are your reasons, and I have postulated that they are, then say so. But don't say its for a rainy day or to save/make money because I have clearly shown how those reasons don't wash...and you haven't shown how they do.

I do not like a monthly payment. I hate writing checks. When my insurance bill comes due, I pay it the minute I get it. I pay it in full so I never have to see that payment for the rest of the year.



I like the fact that if times get hard, any monthly payments I get are small enough I never have to touch my savings. I do not have to worry about early withdrawl penalties or any of the garbage.



You see it different than I do.



The difference is that you try to counsel me on what I am doing wrong, though I do not recall telling you what you are doing is wrong.





Tom

 

[Thomas Rogers]

Caymen said:

I do things the way I do them and I am financially sound. More so than most people are.

I didn't mean to imply or even state that what you are proposing isn't financially sound. It's clearly not reckless. It's very common for that matter. It's just not maximizing your ROI or creating the most liquid nest egg (in most people's opinion) and that was what some of the common reasons for paying extra have been stated as.



And Caymen said:

I do not like a monthly payment. I hate writing checks. When my insurance bill comes due, I pay it the minute I get it. I pay it in full so I never have to see that payment for the rest of the year.

I can appreciate that. You don't like payments, you don't like debt. Could that bias possibly be clouding what COULD be a strictly financial decision? It's okay if they are. You are human.



And Caymen said:

I like the fact that if times get hard, any monthly payments I get are small enough I never have to touch my savings. I do not have to worry about early withdrawl penalties or any of the garbage.

Note that I never said anything to counter that desire. As a matter of fact, I embraced it. I agreed that you should start with an initial mortgage balance that has you paying the amount monthly that you are comfortable with, so that as times get tough you don't have to dip into savings. I never said anything to the contrary.



Caymen said:

The difference is that you try to counsel me on what I am doing wrong, though I do not recall telling you what you are doing is wrong.

Again, not true. I don't think what you are doing is wrong. I think it is right for you. I think you may be kidding yourself as to why are you doing it. What you are doing, to be specific, is paying that extra $200 each month towards principle (just to make sure we aren't talking about taking on an initial mortgage that is smaller or larger). All I have been saying is that IF your reasons for doing that are to save money and have a flexibile nest egg to fall back on, it's not the way I would go...it's not the way most financial consultants would recommend you go.



I am sure that you are going to do what you propose for a number of reasons, which are all valid for you. I don't think I can change your mind on that.



TJR

 

[Jacob Dryer]

Caymen:



Please goto the link (if you haven't) but you have not addressed it at all.

I inputed your numbers listed above.

100,000 mortgage balance

500 payment

250 surplus

5% interest

figure you are in the 30% tax bracket

Investment is a 6% CD



In 16 years your investment would be worth more than your morgage balance, and then at that time you could pay it off in full (should you see fit)



If you pay that extra $250 every month into your mortgage it would be paid off in 16 years.



The difference is your investment would be $5000 more in that 16 year period. Along with that it would be a liquid asset that at any time you are able to spend. If you pay it into your mortgage you can't touch it. (Refinance but thats not that point)



It is almost a wash, but $5000 is still $5000 and having that money available at any time without tax penalties.. think cd's, mutual funds whatever..



Not poking, not proding, just showing the math breakdown from your example. It is definiatly close, but in my eyes, investing it you are more prepared for lifes oh sh*ts.

 

[Thomas Rogers]

JDBoxes,



Good links, good information.

 

[Thomas Rogers]

More info on the subject that I just happened to find without even looking for it:



See the link below as it has an article that says the following about mortgage prepayment:

it seems clear that mathematically it makes more sense to invest the money.

But then goes on to say:

However, it’s also clear that eliminating a mortgage offers a tremendous psychological boost. I’ve never heard anyone say they regret owning their home outright.

The article then talks about several different strategies for paying down a mortgage. But ultimately it cautions with the following:

To be fair, Givens doesn’t recommend this method for low-interest mortgages like ours. He clearly states, “Never pay off low interest mortgages — those under 9%. Instead, use the extra money in a better investment.” He wouldn’t advocate using this method on a 6.25% mortgage.

The clearly unemotional, mathmatical aspect of investing instead of prepayment for lower interest mortgages; the emotions involved with debt and early ownership; etc; is pretty much what I have been saying above.



TJR

 

[Josh Langel]

Only thing I can offer is a GOOD mortgage attorney on your side, Stay away from real estate agents, they are only working for the SELLER...

Wrong.



I believe it is better to have a real estate agent. An aggressive agent will get YOU a better deal and know what to ask when looking at a new home... they understand contracts, know the laws, can find problems [if there are any] and know what a house should sell for.



Not getting an agent, IMO, will end up costing you more in the end.

 

[Gavin Allan]

Mortgages help folks buy houses who otherwise couldn't afford them.

 

[Tom Schindler]

Mud,



I agree. A real estate agent you hire to find you the best deal is working for you.



A few years back, when Theresa was looking to buy her house, we called an agent for one house we drove by.



She agreed to show us the house. When we met her there, she advised us that if we are interested in that exact house, we should hire someone else to work on the deal. Since this house is her listing, my job is to get the sellers the best price possible. If this house is not for us, she would be more than willing to work with us.



We liked her. We worked with her for about 3 weeks. She worked non-stop to help us find a nice house. She even went to the house before us to make sure it was something we were looking for.



Finally, we found the house that was perfect for her. Theresa and her parents decided on a fair price to offer. When she told the agent, the agent said "I got a better idea. Lets go $3,000 less than your offer and ask for them to pay closing costs. Also, they will pay for the inspection before the sale to make sure there is nothing wrong with it."



In the offer, the sellers had 24 hours to respond or the offer was void and we would submit another formal offer.



They took it.



She never once tried to get us to pay more. She was all about the buyers, us.



Still to this day, if she is in the area, she will stop by to say hello. That was 7 years ago.



Our new agent is actually my cousin. She is very good at her job and knows exactly what we want. She sends us a list of homes she found that meets our exact criteria.



Best of all, when the sale is done, we owe her nothing. She gets paid from the listing agent.





Tom

 

[Thomas Rogers]

The buyer agent we had for our current home sucked. She kept showing us homes either not in our price range, or not the amount of land we wanted. She kept saying "that's all we have to choose from". One weekend, by accident, we got off a PA tpk exit we normally don't (we were living in corporate apartments at the time) saw bigger homes, larger lot sizes, and costs we could afford. She simply had a bias against the area...too rural for her. Yet we told her we wanted land.



Anyway, we found our own new home, on our own that weekend. Made a deposit that next week, all withour her help.



But she made sure she was at the close to get her fee. If I could have gotten out of the contract, somehow, she would have gotten nothing. As it was, the builder selling the home negotiated a lower fee with her and her company. I looked across the table...about $8K...around 3%. Not bad for no real work.



To be nice we invited her to our open house. She didn't come. But she did invite us to her house a month latter for swim and luncheon. She lives on the "main line" (if you know Philly, that means something to you). She was a nice enough lady, but I felt screwed over a bit. I expected I would have more leverage with the builder on price if they were not being shaken down by the buyer agent for no services provided.



Sure, I know, it goes with the territory. But from my perspective, she provided no value. None, nada, zip.



Read the fine print. If you do your own house hunting and find your own home, make sure you know whether or not the buyer agent will muscle in on that.



TJR