Do svgs int rates, stock market change house financing?

marys1000March 8, 2009

In the past there have been different takes on how much money to put down on a house and debate on whether to pay ahead and pay off a house early.

In my simple understanding - when rates of return were doing well (stocks, 401K, CD's) it was deemed better to do a standard downpayment or stick with whatever your mort payment was (rather than pay off a house).

Now that rates of return are down, CD's are down - if you were buying a house and had the cash - would you increase your downpayment above the standard 20%? I think rates now are about 5.25 for a 30 yr fixed. For taxes assume single, don't reach the minimum for deductions.

Would how long you planned on keeping the house affect your decision? (assume 5-10 yrs).

how would any assumptions on the rate of inflation affect your decision? (would need a crystal ball but I thought it should be considered?)

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If you can qualify for a 20% downpayment mortgage, take it to give yourself maximum flexibility. With the prevailing stock market conditions, it may pay to prepay a mortgage, because prepaying guarantees you an "earning" of the mortgage interest rate. I think these days, a CD that pays 5.25% is rare, or maybe offered only by banks that are at high risk of failing. If that happens, you'll get your principle back (eventually) but no interest. Just make sure there is no fine print in the mortgage contract that requires a prepayment penalty.

But I would keep a keen eye on the macroeconomic situation, because you want to be able to get back into stocks when things turn around. I know what they say about market timing, that you can't get it right, and I agree. But in the present rare situation, I think it's a no-brainer to stay away, but be ready to go back in quickly when the time is right. Studies have shown that, IF YOU PAY ATTENTION, and get in shortly after stocks start bouncing back up, you won't lose out on the next bull market. IMO, stocks can still lose another 20-40% of their value right now, because all the bad news,especially about the bank insolvencies and how to fix them, is not out and therefore not priced in the market.

    Bookmark   March 8, 2009 at 5:48PM
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There's usually major volatility around the market as it works through the bottom, so it would often be well to be making ongoing commitments periodically as one felt that the bottom was being developed. Not getting bent out of shape as the values went down again, figuring that, after while, there'd be recovery in quality companies, and the more commitments that one had made on a regular basis through a prolonged bottom, the larger would be the amount eligible for increased value as the market moved ahead again.

But I'm not expecting a major move ahead soon, as I think that our difficulties are much deeper than in earlier recessions. If I'd suggested to you, five years ago, that there might be a possibility, in a few years, of GM being at risk of going bankrupt ... you'd have laughed me out of town!

And it seems to me that a number of our problems aren't just cyclical ... they're structural: many of these disappearing jobs aren't going to reappear later ... at least, not in our portion of the global economy.

Although several here disagree with me, my feeling is that I'd like to get the debt on the house paid off - to be out of debt.

But I'd want to have a substantial cushion available in case of emergency, especially in these times of major economic uncertainty, with so many layoffs taking place. Having lived in 22 locations during my 80 years, I've never owned a home, so never had a mortgage.

That said - I frequently lack that emergency fund, myself, of 3 - 6 - 9 months' or a year's income in case of major immediate emergency. But I have a credit card, which I almost always pay off in full prior to due date, and a Line of Credit at the bank, fully secured by stocks and mutual funds, which I can draw on to pay off that emergency loan that I'd put on the card. The Line of Credit bore no initiation fee, and there's none for inactivity, either.

Would your lender be willing to offer you a Line of Credit, using stock or mutual funds' certificates (could be part of your emergency fund, if you know for sure that your lender will give you an LoC) along with using the equity in your house, while you still had a substantial amount owing on your mortgage?

I don't like to borrow for consumption purposes, but I may borrow to invest in quality assets (whatever they may be!), as I have something of ongoing value to show to offset the loan that I owe.

If I do borrow for consumption, I want that on a different LoC, as interest on investment loans is deductible ... that for consumption purposes usually is not.

Good wishes for making a decision which will please you on an ongoing basis as you choose which path to follow.

ole joyful

    Bookmark   March 10, 2009 at 11:18AM
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Hi Mary,

In the credit world there is an old saw... an ancient standard saying;
Rates Are Relative!

This is to say, as borrowing rates rise & fall, depository rate rise & fall.

The strategic wisdom remains the same, really, at all times. Its not a question of math, but simply personality, discipline, and willingness to responsibly manage details and financial complexity.

For folks who prefer extreme simplicity and don't mind delaying their financial independence in exchange for that simplicity, then "investing" all moneys toward the elimination of leverage prior to beginning the compounding investment process in earnest may be the most emotionally comfortable thing to do.

For folks who put a higher priority on security and financial independence to the point they embrace the management of their financial details, the carefully balanced useage of leverage and growth is the way to go.

There is no "right" nor "wrong" but for your own personal "wannas."

Dave Donhoff
Leverage Planner

    Bookmark   March 10, 2009 at 12:42PM
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