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you can only refinance large amounts?

Posted by behaviorkelton (My Page) on
Fri, Apr 4, 08 at 17:28

Let's say I owe 30grand on a $120,000 house...and with 13 years left on a 15 yr mortgage.

I called a broker, and this person said I would need to refinance a good portion of the entire value of the house in order to get a reasonably low interest rate.

Dave, I know, would probably suggest that I do this... basically re-mortgaging as much of the home's value as possible.

What I would *like* to do is refinance that 30grand out over 30 years at the going fixed rate.

So you can't refinance smaller amounts? I would think that the bank would LOVE loaning 30 grand on a house worth much more! It would be a no-risk loan for them, right?


Follow-Up Postings:

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RE: you can only refinance large amounts?

Low risk maybe...But the bank would not be making much money (ie. interest on 30 grand @xx% for 30 years) compared to loaning the same money to someone else with a much higher principal amount for the same 30 years.


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RE: you can only refinance large amounts?

Hi Kelton,
You can certainly refi your $30k if you want, but the simple minimum closing costs would likely be prohibitive if you are looking at it financially (not emotionally.)

Pretty much the "sliding scale" on closing costs gets stuck at about $125,000-ish, more or less... and any loan smaller than that costs the same closing costs.

If you want it that bad, knock your socks off ;~)

Dave Donhoff
Strategic Equity & Leverage Planner


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RE: you can only refinance large amounts?

When we refinanced our house, we did so by taking out a fixed-rate home equity loan for 15 years, in an amount sufficient to pay back the original mortgage. There is no problem with having a second mortgage (which is what the home equity loan is) without having a first mortgage.

The advantage of doing that way was that we were able to get the loan from out local credit union, which had no points, no escrow, and no closing costs.

Frankly, there's not much difference in the payment between a 15-year term and a 30-year term.


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RE: you can only refinance large amounts?

I called a broker, and this person said I would need to refinance a good portion of the entire value of the house in order to get a reasonably low interest rate.
I find that very odd/strange. I'm left wondering just what was in it for him if he convinced you that you had to go with a much larger amount.

I second what alphacat has said above. I was approved for an $40,000 Home Equity line Of Credit, with no closing costs whatsoever. I have not tapped it, but their interest rates have been some of the lowest.

Do you belong to a credit union yet? You might want to join one for possible future use, even if you don't use it now.

I belong to 2 of them...one is local, and one is out of state from when I was working...it was for the employees at the time, but now is open to everyone.

Sue


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RE: you can only refinance large amounts?

Well, I am paying $1010 a month for a 15 yr mortgage that I just started a couple years ago.

So, instead of just paying off the mortgage, I am thinking of just holding steady where I'm at on the mortgage. With that, I thought, why not refinance this last 30grand and stretch it out for 30 years AND have a lower interest rate!

This would result in, again, lower interest *and* lower payments.

I didn't realize that banks would not want to deal with such a small mortgage amount. I can't imagine why they would balk at it - Making a loan for a house that is clearly way more valuable than their loan.

The other option is to just get a new mortgage on the value of the house. Take that lump of money and invest it. Thirty year interest rates are very attractive, and this is really the thing that is drawing me to this "thought experiment"!... that, and Dave's advice.

Even if I refinanced most of the home's value, my payment would be lower than it is now.

Well, the next option is just to pay it off and stop fooling with all this number crunching BS!

Kelton


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RE: you can only refinance large amounts?

I would just pay if off, and because of the changing of rules for tax purposes, and then put the money into some sort of savings/CD's and pay yourself instead of the bank or mortgage com.


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RE: you can only refinance large amounts?

Hi Kelton,

The other option is to just get a new mortgage on the value of the house. Take that lump of money and invest it. Thirty year interest rates are very attractive, and this is really the thing that is drawing me to this "thought experiment"!... that, and Dave's advice. Even if I refinanced most of the home's value, my payment would be lower than it is now.

You are discovering a very very valuable lesson... good for you (and good for those who's understanding grows as they watch you go through the process yourself.)

Well, the next option is just to pay it off and stop fooling with all this number crunching BS!

As proud as I am to see the light bulb flash ON above your head... I will now bring forth a further critical consideration;

In order to SAFELY win at the financial growth management game, you must;
A) Have a calm, certain, non-ruffled temperament that allows you to take in a great deal of variable information, make critical financial decisions, execute them, and then not waiver from your plans,
OR,
B) Have the emotional ability to lock away as "untouchable" your capital in the able hands of money professionals, and keep full faith and trust in them (while also periodically keeping your eyes on the ball yourself via their status reports.) This can be done in the openly-traded securities world, or the principal-guaranteed insured account world.

You look yourself in the mirror, and you ask yourself "is my own retirement money safer under my own management and/or the controlled outside management I choose... or am I better of just leaving it at the non-growth safety and risk of my real estate equity?"

If you're sincere and straightforward self-response is NOT comfort in the self-management and control... then it is possible you could sabotage your own growth & security if you have access to it.

This is exactly the fear so many have expressed about themselves here... and it is something wise not to ignore.

I do wish you all the best in your determinations!
Dave Donhoff
Strategic Equity & Leverage Planner


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RE: you can only refinance large amounts?

Even at a lower interest rate, you're going to stretch the period to pay interest from 13 to 30 years ... and pay less of it?

What have you been smokin'?

ole joyful


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RE: you can only refinance large amounts?

I agree with "joyfulguy" why do you want to refinance with such a low mortgage amount. PAY IT OFF. i wish i had a $30k mortgage it would be gone within 2 years. take that mortgage payment and start saving/investing with it. why would you want to stretch out loan payments for 30 years paying interest to the bank.

if you need the equity i would take a HELOC or 2nd mortgage to avoid closing costs. most banks wont touch a mortgage unless it is over $50k and sometimes more. simply there is very little money to be made.


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RE: you can only refinance large amounts?

I'm a little confused.... you mention $30K loan, for 15 years, then you said a payment of $1010 and that refinancing would be cheaper........

Couple of things I think you're missing:
You have taxes and insurance are included in your payment that make up the majority of your payment, I would guess 2/3rds of it.

If you borrowed $30K over 15 years and had a 10% interest rate(high) your payment would be $322 a month. Extending that to 30 years would make your payment $260 a month.

If the extra $60 bucks are killing you, I'm sorry to hear that.... thats a cable bill, cell phone bill, etc.

Your entire principal and interest is a low car payment. Your taxes and insurance seem disproporionately high at approx $7800 per year on a $120K house.

Maybe I'm completely missing something...


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RE: you can only refinance large amounts?

chrisk327, I believe kelton has been aggressively making extra principal payments to a loan with a much larger intial value (around the value of his house at $120K perhaps?)

A 15-year mortgage for $120K @ 6% results in a $1012 monthly P&I payment... and the required payment doesn't go down as the principal is payed off... you still have to pay the same $1012 per month when you only have $30K left as you did when you started at $120K.


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RE: you can only refinance large amounts?

And in the early years of the mortgage, the interest payments on the yet-unpaid balance owing on the loan are high, so only a small part of the payment goes to retire the principal.

Meaning that if one can make an extra payment of the regular amount, once per year, one may well pay off as much of the principal with that one payment as through all of the rest of the year's monthly payments.

It surely pays well to make extra payments, the full amount of them to reduce the principal still owing, especially in the early years of a mortgage. Cuts many years off of the term.

Good wishes for increasingly wise use of money: the one who benefits is ... you (and family)! It amounts to the equivalent of a raise in pay (that you didn't have to ask for)!

ole joyful


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RE: you can only refinance large amounts?

That's right... I started paying down the loan right out of the gate. I could pay it off now, but...
1. Dave has thrown a wrench in my well-oiled "pay off debt" philosophy.
2. If I pay it off, my bank account looks smaller: the unavoidable consequence of paying off debt.

The action of inflation, and unbalanced portfolio (50% of my money would be in real estate!) leave me doubting a mortgage payoff.

However, my job is secure, my girl's job is secure, we have family that can bail us out if we get too silly, and we can quickly build up our savings within one year.

The risk isn't huge, and let's face it, this cheap house isn't going to kill us no matter what happens to the housing market. It is a lot of money, but not the kind of issue that people with $500,000+ mortgages might be sweating.

In other forums, I see people fretting over $30 in the price of a camera or other quibbles... I sometimes wonder if I am doing the same with this situation!

P.S. I'm not depending on my parents, but they are part of an honest assessment of one's financial condition.


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RE: you can only refinance large amounts?

the view of keeping a mortgage payment doesnt reduce your debt load. you still have DEBT.

once the house is paid off use the mortgage payment and invest it in mutual funds or use it for savings.


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RE: you can only refinance large amounts?

mnk,

That is my original plan, and I will probably do that.

The idea of refinancing is that I would be able to reduce my monthly mortgage "rent" payment such that it would be less noticeable *and* get a really nice interest rate that would also be less noticeable.

Carrying a full mortgage at low interest could, frankly, be the best financial decision.

If I do pay this thing off, I will be honest enough (with myself) to admit that it was purely emotional. I don't think it is a financially devastating decision, but it is probably better to carry a low interest loan.

I know this much, I am not going to invest my current savings in a place that will compete with my mortgage interest... I'm just not. So if I don't pay the mortgage off, that savings is going to remain somewhat idle and barely keeping up with inflation.

Kelton


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RE: you can only refinance large amounts?

one thing you may not be considering is RISK. you get a guaranteed rate of return when you pay down your mortgage; whatever amount. if you dont pay it down, you are taking on other risks such as:

Inflation: savings account interest lower than current
inflation rate

Volitality: risks of up/down swings in stocks, bonds
and real estate

Interest: savings rates will be less than your
mortgage rate

You have to calculate risk of whatever you do because it will reduce the real return of your investments/savings. A financial planner can help calculate it for you or you can look it up. Investopedia is a good start.

Your mortgage payment is safe. Again based upon your original post you only have $30k remaining. that is too low to consider refinance or take out a HELOC. Debt is debt no matter what. When you pay off your house your risk of ever losing is practically gone (unless you dont pay your property taxes).

I will grant that the only way in not paying off mortgage and invest the difference will pay off is just that invest the difference for the next 15-30 years and you will stay in the house. Very few people have that kind of discipline and i would always counsel to pay off the house.

good luck


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RE: you can only refinance large amounts?

mnk,

Of course, Dave would strongly disagree with you!

Being cynical, I am hoping that Dave's argument is partly motivated by wanting to sell us some sort of investment opportunity. If he is, then I wouldn't second guess myself on a mortgage payoff. But for now, I actually believe that he is making legitimate and useful points to consider.

My savings interest rate has now dropped to 3% monthly. I pay income tax on that measly 3% to boot! With each savings interest drop, the payoff option looks ever more sweet.

My mortgage is 6.1%. The 6.1% is tax free and without the kinds of risk we associated with stocks and bonds.

There are some risks to consider, though, and Dave has elaborated on those in other mortgage threads.


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RE: you can only refinance large amounts?

you have answered your own question. current savings rate less than your mortgage rate, plus you have to pay income tax on that with the mortgage payoff the government is giving you a deduction. There is no benefit to use the difference to increase savings (other than your emergency savings) instead of mortgage payoff.

the flipslide is you should have your emergency savings and pay off CC debt before you start to pay off your mortgage. a good financial planner should always advise you of risk. there are very few investments that will beat out a fixed mortgage rate.

nothing against Dave, but he never mentioned risk which you need to consider before considering not paying off the mortgage. again i would only agree with Dave if you are staying in your office for the term of the mortgage and ALWAYS invest the difference.

another way to look at it is would you borrow $30k for savings or investment. i doubt it.


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RE: you can only refinance large amounts?

Always be prepared for the unexpected, unfortunate things that 'could' happen.

I was talking with a neighbor this week. He has cancer and has been off work since Nov...first on short term disability, and now going to be on long term disability. In 2006 he built a house and now he has a mortgage. He had moved from a much smaller home (paid for) when he built the new one. He told me that had he ever thought that something like this might have happened to him, he would have stayed put and not built...Thus no mortgage, lower taxes, utilities, insurance....and more security cash. He would have not built unless he had 'cash', thus no concerns other than keeping up with medical bills not covered by his insurance.

Just food for thought...be as money smart as you can be, but be careful of unexpected happenings. They unfortunately sometimes do happen to some of us.

Sue...a cancer survivor


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RE: you can only refinance large amounts?

Yep, given that I am certain that I will not be investing my current savings in anything more than super-safe (aka: low interest) accounts, I am guessing that the reasons for not paying it off become far fewer.

Sue, thanks for the reminder about the unexpected and I'm with you on that!

Kelton


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RE: you can only refinance large amounts?

Hi Folks,

Allow me to step in and sort out a few things that have been pondered;

Hi mnk,
the view of keeping a mortgage payment doesnt reduce your debt load. you still have DEBT.

This is a meaningless statement... it implies that all debt is equal (and theoretically somehow bad.) Nothing could be further from responsible reality. Debt that is incurred for vapid, wasteful consumption is certainly bad debt (for your net worth,) however debt that is tied to the controlling of growth assets, or the protection of assets overall, can be very good (and even "conservative" as it saves against loss) debt. The latter is known as "Leverage."

once the house is paid off use the mortgage payment and invest it in mutual funds or use it for savings.

If you actually run the mathematical numbers, all variables considered (tax treatment, compounding growth, relative rates, etc.) you will find that waiting to invest until mortgage free, and eliminating your safety leverage, virtually never wins in simple retirement growth, and often puts the individual at very significant risks (like the previous poster's friend who had the personal disaster of cancer.)

Keeping a mortgage (with a non-compounding interest rate) and instead maximizing alternative growth accounts (with compounding growth rates, and especially preferring tax-sheltered vehicles) is not only safer and more conservative, but reaches a secure retirement sooner as well.

you get a guaranteed rate of return when you pay down your mortgage; whatever amount.

Actually, no... you get no "return" whatsoever. You get a single, one-time, non-recurring savings.

Returns can be accumulated as saved future income, or spent as realtime income. Savings are good, but they are not as good as returns.

one thing you may not be considering is RISK.

OK... lets roll up our sleeves and look at each of your fears... as they are quite important!

if you dont pay it down, you are taking on other risks such as:
Inflation: savings account interest lower than current inflation rate

Inflation INCREASES the value of your real estate, dollar for dollar.
Inflation DECREASES the value of your outstanding borrowed money, dollar for dollar.

The most perfectly correlated inflation hedge in the world, period, is a piece of real estate that is 100% financed.

Every dollar you entrap INTO your real estate equity (by surrendering your mortgage leverage) is a dollar you have double-exposed to the deteriorations of inflation.

Volitality: risks of up/down swings in stocks, bonds and real estate

All the more critical reason to SEPERATE your "security funds" from ANY free-market openly traded asset, including real estate.

Interest: savings rates will be less than your mortgage rate

There are longterm savings vehicles that equal, and even outperform mortgage leverage rates...

HOWEVER, realize that your personal financial security DOES have a very real living value.
If you "expended" a small interest rate spread (earning interest at 4%, and paying mortgage at 6%, for example,) that difference can be seen as your "conservative financial security insurance policy premiums."

In most cases, however, a good financial planner can structure it so you have a "zero premium" or even gain a net longterm profit.

Debt is debt no matter what.

Again, something to awake to. All debt is not the same.

When you pay off your house your risk of ever losing is practically gone (unless you dont pay your property taxes).

This is an EXTREMELY DANGEROUS fallacy. I've documented on these boards (and elsewhere) the dire risks against unleveraged real estate equity. Search "S.L.A.P. risks" here.

I will grant that the only way in not paying off mortgage and invest the difference will pay off is just that invest the difference for the next 15-30 years and you will stay in the house.

This is very wrong and is tantamount to telling smokers that the only way smoking can kill you is if you swallow a lit cigartette. Using defensive leverage to protect your personal assets is very effective, and the proper structuring of safe growth alternatives will achieve financial goals far more steadily and securely than trying to "go it naked."

Very few people have that kind of discipline and i would always counsel to pay off the house.

This is very dangerous counsel, and I sincerely hope that type of advice isn't your career. If you are on record of such advice as a licensed financial or legal professional you could be at severe liability risk for that, in itself.

=============================================

Hi Kelton,

Being cynical, I am hoping that Dave's argument is partly motivated by wanting to sell us some sort of investment opportunity.

I have no investment opportunities to sell. Professionally, I provide customized financial planning services from a safe-growth equity-protection perspective, which I (in essence) give away for free here at the boards... on a generalized basis to anonymous requesters.

If my explanations and advice do not make sense to someone, they will neither gain benefit in general, nor have any interest in seeking my direct support... so (applying appropriate cynicism) you'd have to figure my posted perspectives are as "prettied up" as I can in good conscious and ethics deliver.

My savings interest rate has now dropped to 3% monthly. I pay income tax on that measly 3% to boot! With each savings interest drop, the payoff option looks ever more sweet.
My mortgage is 6.1%. The 6.1% is tax free and without the kinds of risk we associated with stocks and bonds.

You are comparing apples to orangutans.

Cash in a savings account is 100% instantly liquid at no charge, and the tradeoff is full taxation and minimal interest credits.

Cash in real estate is 100% frozen (NON-liquid,) expensive to re-access, questionnable to qualify for when you actually most need it.

Cash in principal-guaranteed accounts is semi-liquid (usually up to 10% instant access at no cost per year, if needed,) however in trade-off it grows either tax-deferred or tax-free, and pays same-to-above mortgage interest.

Balancing among the three 'buckets' to fit your actual cash needs, relative to your desire to conserve and protect your net worth, with other structural features, is the responsible approach.

=============================================

another way to look at it is would you borrow $30k for savings or investment. i doubt it.

When we drop preconceptions and open our eyes to the full financial picture, borrowing in order to seperate an over-accumulation of your precious net worth that may be currently entrapped in illiquid real estate can sometimes be a very wise thing to do, indeed.

The key is "BALANCE." Having too much of your eggs in a risky nest is poor balancing.

=============================================

Hi Sue,

Just food for thought...be as money smart as you can be, but be careful of unexpected happenings. They unfortunately sometimes do happen to some of us.
Sue...a cancer survivor

So very very insightful, and true.

When weighing out the burdons of maintaining protections, versus the burdons of incurring disaster... nobody has ever complained about having the protections in place when needed.

MANY, however, have painfully regretted their losses when they had their life's financial security literally swept away without warning, uninsured, and illiquid.

Be well!
Dave Donhoff
Strategic Equity & Leverage Planner


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RE: you can only refinance large amounts?

Kelton,
If you took out 120K at 6% 2 years ago, and now only owe 30K, this means you have paid about $100K or more into your mortgage over this period of time. You will get far more benefit of this agressive style of savings than attempting to swizzle between mortgage debt and mutual funds. My recommendation is to take the 50K per year and invest in a portfolio. Then in a few yrs when mortgage is paid off invest the other 12K. Do this every year and you will not have to worry about your financial future.

Yes, in the perfect world stock market returns are > than mortgage rates so any calculator that assumes even yearly returns will convince you to borrow money and invest it. Hoewever, the assumption about flat returns is completely false. But the bigger consideration is this. Will a simple strategy of paying your mortgage and investing provide your financial future? If so, why mess around with prepaying a 15 year mortgage, then reborrwing against the house on a 30 yr mortgage.... You can pay off your house in 2-3 yrs at this point, simultaneousely put large amt of money into the market so why mess around.


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RE: you can only refinance large amounts?

Hi Dave,

"This is a meaningless statement... it implies that all debt is equal (and theoretically somehow bad.) Nothing could be further from responsible reality. Debt that is incurred for vapid, wasteful consumption is certainly bad debt (for your net worth,) however debt that is tied to the controlling of growth assets, or the protection of assets overall, can be very good (and even "conservative" as it saves against loss) debt. The latter is known as "Leverage.""

Leverage is utilized by people who have the means to pay off the debt at any time. It may make sense for someone with $300k in cash to finance 80-100% for real estate in order to possibly generate a return greater than the mortgage. You advocate leveraging a monthly payment which is not the same. Microsofts acquisition of Yahoo is a good example. They can pay cash for Yahoo but believe they can generate better returns by using leverage. Most people on this forum do not have such means. Still you are taking RISKS.

"If you actually run the mathematical numbers, all variables considered (tax treatment, compounding growth, relative rates, etc.) you will find that waiting to invest until mortgage free, and eliminating your safety leverage, virtually never wins in simple retirement growth, and often puts the individual at very significant risks (like the previous poster's friend who had the personal disaster of cancer.)"

I dont advocate prepaying mortgages until one has an emergency savings or access to other liquid assets. Once someone has savings and invests in their retirement plans I believe paying off the mortgage should be the next priority.

"Keeping a mortgage (with a non-compounding interest rate) and instead maximizing alternative growth accounts (with compounding growth rates, and especially preferring tax-sheltered vehicles) is not only safer and more conservative, but reaches a secure retirement sooner as well."

Again no consideration for RISK and VOLITALITY.

"Actually, no... you get no "return" whatsoever. You get a single, one-time, non-recurring savings. Returns can be accumulated as saved future income, or spent as real-time income. Savings are good, but they are not as good as returns."

You are getting the benefit of not having to pay a mortgage payment, reduced interest on the loan and no RISK in not being able to pay the mortgage.

"OK... lets roll up our sleeves and look at each of your fears... as they are quite important! Inflation INCREASES the value of your real estate, dollar for dollar.
Inflation DECREASES the value of your outstanding borrowed money, dollar for dollar.
The most perfectly correlated inflation hedge in the world, period, is a piece of real estate that is 100% financed."

I am sorry that is ridiculous. To suggest that 100% financed real estate is the way to go is wrong. Look at those speculators and homeowners who used 100% financing and are now looking at foreclosure. They did not put any savings anyway and what is the benefit of leverage if you cannot pay it off. Ask them if they have the cash reserves to pay off $500, 600, 700 mortgages or even those with small $100-150k mortgages. Again RISK comes into play which has to be calculated if you are going that route.

"Every dollar you entrap INTO your real estate equity (by surrendering your mortgage leverage) is a dollar you have double-exposed to the deteriorations of inflation."

Yet you state that inflation benefits your real estate holding. The RISK of losing your home to inability to pay a mortgage is gone. I grant you that with inflation your fixed payment is decreased but so what, it is still a debt payment. What are you getting out if? Even if you are investing in the stock market your real rate of return is decreased by taxes, commissions, mutual funds fees, etc.

"Volatility: risks of up/down swings in stocks, bonds and real estate All the more critical reason to SEPERATE your "security funds" from ANY free-market openly traded asset, including real estate. "

I completely agree.

"Interest: savings rates will be less than your mortgage rate There are long term savings vehicles that equal, and even outperform mortgage leverage rates... "

Risk and Volatility must be taken into consideration and the discipline to utilize available funds to invest in. Again I question most people dont have the discipline to constantly invest the difference. I would argue if you calculate risk your rate of return will may be ahead of your mortgage but that is years down the road and the difference may not be enough (for me at least) for the risk of a mortgage payment.

"HOWEVER, realize that your personal financial security DOES have a very real living value. If you "expended" a small interest rate spread (earning interest at 4%, and paying mortgage at 6%, for example,) that difference can be seen as your "conservative financial security insurance policy premiums."

I completely agree.

"In most cases, however, a good financial planner can structure it so you have a "zero premium" or even gain a net long term profit."
Again a good financial planner will calculate risk and volatility for their clients. Time horizons have to be taken into consideration. There is also the consideration most people sell their homes within 5-7 years then you have costs to consider which is equivalent to a back end load. Debt is debt no matter what.

"Again, something to awake to. All debt is not the same. "

Sorry dont agree. Leverage is only worth while if one has the means to pay off the debt. Debt implies risk that you wont be able to pay it off. That risk is calculated into the interest payment other than profit for the lender. You cannot have a risk free life but can be reduced by not having debt. I question anyone who feels better off with debt than without.

"When you pay off your house your risk of ever losing is practically gone (unless you dont pay your property taxes). This is an EXTREMELY DANGEROUS fallacy. I've documented on these boards (and elsewhere) the dire risks against in leveraged real estate equity. Search "S.L.A.P. risks" here. "

It is not a fallacy but a fact. You are not going to lose your home if your mortgage is gone. There may be other factors involved (death, unpaid taxes, lack of homeowners insurance), but the mortgage risk of losing your home is gone. The risk is significantly reduced without a mortgage. I do agree before this is done you need liquid assets and not have it all in your home. I could not find anything re: "SLAP"

"I will grant that the only way in not paying off mortgage and invest the difference will pay off is just that invest the difference for the next 15-30 years and you will stay in the house. This is very wrong and is tantamount to telling smokers that the only way smoking can kill you is if you swallow a lit cigarette. Using defensive leverage to protect your personal assets is very effective, and the proper structuring of safe growth alternatives will achieve financial goals far more steadily and securely than trying to "go it naked."

Again only start to prepay once you have an emergency fund. "Defense Leverage" brings on risk of the inability to pay back the loan. You dont have that with a paid off mortgage. At worse the homeowner can utilize a HELOC.

"Very few people have that kind of discipline and I would always counsel to pay off the house. This is very dangerous counsel, and I sincerely hope that type of advice isn't your career. If you are on record of such advice as a licensed financial or legal professional you could be at severe liability risk for that, in itself. "

Everyone situation is unique, as I said above I would not advise to begin the process of prepayment unless a client has liquid assets, retirement accounts and not on the reliability of home equity. The goal is to try and secure a reasonable rate of return with unnecessary risks. I am not a financial planner but I do have the education and training if I want to. Any financial planner will do what is best for the client based on their risk tolerance, time horizon and goals. All options are provided and the planner makes their recommendations. The client decides what is best for them.
These are my personal views.


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RE: you can only refinance large amounts?

Hmmm, but maybe this is another thread, but I don't quite understand this aspect of "home ownership as investment".

I lived in Orlando for the past 15 years. During the last bit of my time there, home prices soared.

Every home owner felt like a financial genius. However, how does one ever realize the gains?

I mean, it's not like you can sell your house to buy a more expensive house... because those homes have appreciated equally! You can, but you won't realize any profits having to pay that much more for the new house.

It seems to me that you'd have to move quite far away to see the profits.

Alright... sorry to interrupt. I know you and Dave are in the middle of a battle of the titans!

Kelton


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RE: you can only refinance large amounts?

Hi Kelton,

Alright... sorry to interrupt. I know you and Dave are in the middle of a battle of the titans!

BAHH!!!
A) This is YOUR thread to begin with... so make no apology for re-directing it back to YOUR interests,
B) mnk716 argues like an old friend of mine from another community... but even if (s)he is not the same person, I thoroughly enjoy the engagement ;~)

I don't quite understand this aspect of "home ownership as investment".

You are 1,000% accurate in your doubts about considering your residence as an "investment."

Properly selected and managed, "investments" need to be weighed out and evaluated on a cold-hearted, financial, dispassionate basis regularly. You've heard the old saying "don't fall in love with your stocks"... there's a very valid reason for that old saw.

HOMES that you live in *ARE* to be expected to be fallen in love with... they are the dwelling of your life... they are where you experience your family's ups & downs, where you "store" your emotions, where you retreat for emotional solace, where you celebrate love, growth and victory, and where you heal from the suffering of loss.

Putting the burden of dispassionate, cold-hearted management of an "investment" into the same place you rely on as you personal and family retreat is a conflict that virtually never wins.

ON THE OTHER HAND; Your home *CAN* act as your "personal balance sheet banking repository" which can be the basis for the structural financial management of the rest of your family net worth. Taking this approach requires emotional development around money, certainly, as it requires a healthy understanding of the good AND bad of assets and liabilities, and a holistic view of your financial management.

Cheers,
Dave Donhoff
Strategic Equity & Leverage Planner


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RE: you can only refinance large amounts?

Hi MNK,

Let's start from the ending, where we both completely and thoroughly harmonize!

Any financial planner will do what is best for the client based on their risk tolerance, time horizon and goals. All options are provided and the planner makes their recommendations. The client decides what is best for them. These are my personal views.

AND I along with you!

NOW let's break down the game film... most specifically addressing fallacies that are again repeated as "facts." (I'll leave the acknowledged "personal opinions" alone... as everyone has a right to their own opinion.)

Leverage is utilized by people who have the means to pay off the debt at any time.

While this is absolutely true... leverage is ALSO responsibly used, every day, by people prior to accumulating funds to replace the leverage entirely.

Buying a home is a responsible use of leverage.
Financing education can be a responsible use of leverage.
Insuring income during family raising years can be a responsible use of leverage.
... and many other examples are easy to arrive at.

"ALL" debt is not equal, nor is all debt bad nor evil.

It may make sense for someone with $300k in cash to finance 80-100% for real estate in order to possibly generate a return greater than the mortgage. You advocate leveraging a monthly payment which is not the same. Microsofts acquisition of Yahoo is a good example. They can pay cash for Yahoo but believe they can generate better returns by using leverage. Most people on this forum do not have such means. Still you are taking RISKS.

This paragraph makes no sense to me. If you can re-state it I can try to address it.

"Keeping a mortgage (with a non-compounding interest rate) and instead maximizing alternative growth accounts (with compounding growth rates, and especially preferring tax-sheltered vehicles) is not only safer and more conservative, but reaches a secure retirement sooner as well."
Again no consideration for RISK and VOLITALITY.

Au contraire! Risk and volatility would absolutely be primary considerations in the selections and balancing of growth accounts.

I am sorry that is ridiculous. To suggest that 100% financed real estate is the way to go is wrong.

You may be sorry (and apology accepted,) yet you are spinning off on a tangent. I made no generic recommendation about 100% financing. I merely defined "a perfect hedge" against inflation.

Look at those speculators and homeowners who used 100% financing and are now looking at foreclosure. They did not put any savings anyway and what is the benefit of leverage if you cannot pay it off.

You're spinning off into anecdotal hinterlands again. While anyone can pull out references to failures (either specific or implied,) anyone can equally point to responsible successes.

Further, falling back to an argument that "most people are too irresponsible/dumb/uneducated (add your own insult here) and therefore do not deserve to be made aware of more responsible choices" is a silly position to take at any community message board where people come PRECISELY to learn and grow.

"Every dollar you entrap INTO your real estate equity (by surrendering your mortgage leverage) is a dollar you have double-exposed to the deteriorations of inflation."
Yet you state that inflation benefits your real estate holding.

Exactly! When you've entrapped your cash into your real estate, your cash neither grows nor provides protection. The underlying real estate itself responds to the inflationary pressures regardless of whether it houses your cash or not, so entrapping the cash is merely added risk of illiquidity and wasted growth opportunity.

The RISK of losing your home to inability to pay a mortgage is gone.

The RISK of losing your home is *ONLY* gone when you maintain enough liquid cash to replace it. There is no other way to completely cover that risk, period.

I grant you that with inflation your fixed payment is decreased but so what, it is still a debt payment.

Indeed, so what? It is a payment on defensive, conservative leverage that is a reducing burden at the rate of inflation.

Even if you are investing in the stock market your real rate of return is decreased by taxes, commissions, mutual funds fees, etc.

Obviously the stock market is a generally high-risk/high-opportunity selection for funds, and should be used only to the degree appropriate to a client's financial life stage (and not a dollar less, either.)

You are not going to lose your home if your mortgage is gone.

HAH... yeah, right. Tell it to Trent Lott (an easily Google-able example) and the thousands like him who lost their paid-in-full homes overnight in Katrina... had to live in miserable subsistence conditions with life completely interrupted and no liquid cash to fall back on... and had to endure long periods of protracted legal battles among the insurance companies (if they were fortunate enough to be sufficiently covered) to finally receive their claim funds.

Ask them if they are happy they paid their mortgages off in full... or whether they'd left them fully leveraged for the insurance companies and the mortgage banks to fight over, instead of the individual's getting stuck int he middle.

And lest ye accuse *ME* of anecdotal support... that list goes on & on & on... year after year after year... state by state by state... family after family after family.

The risk is significantly reduced without a mortgage.

Having no mortgage, all else equal, is riskier than having a full mortgage with an equivalent cash position.

I could not find anything re: "SLAP"

Me neither... darn the search funciton!

The risks to equity are S.L.A.P.
S.oftening or dropping market resale values,
L.itigation exposures,
A.cts of God (natural disasters beyond insurability of liquidity,)
P.ersonal Disaster (family and health issues that create burdens beyond home management.)

BACK TO AGREEMENT:
Every family has their own profile, yet the principals of responsibly balanced finance will always apply. A professional advisor will recommend structural plans to fit the family's profile (hopefully setting aside the professional's own biases in favor of the client's best interests,) and ultimately the client must decide which path they choose to take... as it is ultimately their own life and future they will be creating.

Cheers,
Dave Donhoff
Leverage Planner


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RE: you can only refinance large amounts?

Dave,

So if I owe 90% on a house, and it gets blown away in some way that is *not* covered by my insurance... how does having a mortgage help?

Don't I still have to pay the mortgage on the non-existent house?

As far as I can tell, the home owner suffers the same plight one way or the other... paying for a house that no longer exists.

Kelton


 o
RE: you can only refinance large amounts?

Hi Kelton,

So if I owe 90% on a house, and it gets blown away in some way that is *not* covered by my insurance... how does having a mortgage help?

You still have the cash you WOULD have given to the the mortgage bankers, thus you have staying-power to survive whatever life throw at you while you are sorting out what to do next.

YOU are the one left in control,
YOU are the one empowered to decide your fate,
YOU have the discretion of management of resources.

If you stuffed-away all your cash into your real estate trying to "save the interest" you would have won the small battle (maybe,) and lost everything.

Don't I still have to pay the mortgage on the non-existent house? As far as I can tell, the home owner suffers the same plight one way or the other... paying for a house that no longer exists.

Not at all. Most of the mortgage banks (as an example) made dramatically reduced settlement concessions to the Katrina victims, often for equal or less than the full insurance claims (and almost universally MUCH less than the full mortgage amount.)

Even in the WORST case were the bank to make NO concessions... you are still in possession of your CASH, and have the capacity to pay for decent interrim housing & support while the administrative processes between the bankers & insurers play out (without having you trapped in the crossfire, broke & vulnerable.)

There's a reason for the old saying "Cash is King." When the option is between having cash from leverage, versus having frozen (but free & clear) assets... all else in total net worth being equal... cash is oxygen... liquidity rules the day.

Cheers,
Dave Donhoff
Strategic Equity & Leverage Planner


 o
RE: you can only refinance large amounts?

this is a good debate but it appears we have different views Dave.

Re: SLAP
S.oftening or dropping market resale values, Litigation exposures: Nothing to do with mortgage risk.
A.cts of God (natural disasters beyond insurability of liquidity,): Nothing to do with mortgage risk. Make sure your HO is up to date and have proper coverage (flood, earthquake, etc.)

P.ersonal Disaster (family and health issues that create burdens beyond home management.): ONE LESS THING TO WORRY ABOUT W/O MORTGAGE

"So if I owe 90% on a house, and it gets blown away in some way that is *not* covered by my insurance... how does having a mortgage help?"

It doesnt you are more likely to let the house go then pay for no house. w/o the mortgage you can focus on rebuilding or sell.

"Don't I still have to pay the mortgage on the non-existent house? As far as I can tell, the home owner suffers the same plight one way or the other... paying for a house that no longer exists."

Having a natural disaster is not the banks fault. you still signed a contract to pay a debt regardless of what happens to you. w/o a mortgage one less issue to deal with. this is all part of risk of maintaining any debt especially mortgage.

"You are not going to lose your home if your mortgage is gone. HAH... yeah, right. Tell it to Trent Lott (an easily Google-able example) and the thousands like him who lost their paid-in-full homes overnight in Katrina... had to live in miserable subsistence conditions with life completely interrupted and no liquid cash to fall back on... and had to endure long periods of protracted legal battles among the insurance companies (if they were fortunate enough to be sufficiently covered) to finally receive their claim funds."

Which a mortgage has nothing to do with and one should have sufficient cash reserves to deal with emergencies.

My recommendation to Kelton is regarding a remaining $30k on a 120k loan. that tells me in 3 years he will be paid off. then the $1000 monthly payment can go to savings/investment. To refinance and take out more for 30 years or just to lower the monthly payment is short sighted. I dont believe Kelton would take out a HELOC or mortgage just to invest. If you have cash savings dont prepay the mortgage.


I do agree there is no benefit to be house rich and cash poor. dont prepay a mortgage unless you have cash in the bank for emergencies and contributing to a retirement plan.


 o
RE: you can only refinance large amounts?

At this point, I suspect I have already done the damage that Dave suggests we avoid. The house have been paid down significantly.

Out of my $1010 mortgage payment, around $380 covers property tax, interest on the loan, and insurance... so every month, I'm paying $630 down on the principal.
That $380 is essentially "rent".

I do enjoy knowing that this is the cheapest rent I have ever paid.. to include my college days. [Well, I did go through a stint where I paid $75 monthly for me and my parrot to live in a 5'x 9' room in college... circa 1988]

So, having the mortgage paid so far down, my minimal monthly payment has forced me into an ever quickening mortgage paydown. It's a 15yr mortgage.

One thing I liked about my old adjustable rate mortgage is that my payment would be reset every so often such that the minimum required monthly payment would go lower as I put extra money into it. It was nice just knowing that, if I wanted to, I could just pay that tiny little minimum payment.

Now, in THAT situation, I would have been MUCH better off if I would have invested that same money. That period covered 1993-1999. Insult to injury, I sold the darn house just before the housing boom!

MNK, I understand that I am obligated to pay for any debt obligation. I was just making the point to Dave that holding a mortgage or not holding a mortgage seems irrelevant given that, either way, I am screwed for the amount that I owe.

I think Dave is saying that if I still owed a lot on the house, that my bank would fight the insurance company to get a new house built. They have the deep pockets for such pursuits. I think that is what Dave is saying with respect to that point. The bank will be very concerned if they have made a loan on a house that doesn't exist! They know they are on shaky ground if I default on the loan and there isn't a house for them to foreclose.

Kelton


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RE: you can only refinance large amounts?

Kelton,

you seem to have a grasp as to what you want to do. by utilizing ARMS you are taking the interest rate risk instead of the bank. with a fixed the bank is on the hook if rates go up.

i used to be a claims adjuster believe me the insurance co will just pay off the mortgage to the bank. the bank doesnt care if you rebuild they want their money. that is not what is happening in the Katrina areas. the banks are going to the HO for the money.

again cash flow and savings are very important before prepaying. at such small mortgage payment there is no benefit to not pay it down. all you will have left is property taxes and insurance which you cant avoid anyway.


 o
RE: you can only refinance large amounts?

Hi Kelton,

I was just making the point to Dave that holding a mortgage or not holding a mortgage seems irrelevant given that, either way, I am screwed for the amount that I owe.

The relevance is in your control and access to your own money. If you give it away in paydown of the mortgage you lose the safety of control (that is assuming you are responsible enough to actually be safer in control.)

I think Dave is saying that if I still owed a lot on the house, that my bank would fight the insurance company to get a new house built. They have the deep pockets for such pursuits.

No, as MNK points out the banks simply want their money back, and they'll spend their own lawyer's time & money pursuing the deep pockets (the insurance companies) for their funds.

What is important in Katrina is that even those fully insured have had to go without their claims being paid while different insurance companies argued over which one was actually on the hook for paying what percentages of claims (depending on whether damage happened from wind-driven rains or surging floods.)

If you had held onto your money and left your mortgage alone, you'd be safe & comfortable during the process, and able to engage in whatever regular employment you may have access to.

If you gave away your cash to try to 'sliver-away' your mortgage, you get to wait and suffer on subsistence trailers & rations.

I think that is what Dave is saying with respect to that point. The bank will be very concerned if they have made a loan on a house that doesn't exist! They know they are on shaky ground if I default on the loan and there isn't a house for them to foreclose.

The mortgage banks HAVE been renegotiating, waiving & forgiving amounts outstanding beyond the insurance coverage, and the fully-mortgage owners have been getting a very favorable break.

Those (like Trent Lott, and many like him) have received no similar benefits.

Cheers,
Dave Donhoff
Strategic Equity & Leverage Planner


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RE: you can only refinance large amounts?

Ah, I see.

Whatever the case, I guess the mortgage company will have no concern for a home with which they have no business (mortgage)!

These are fascinating points... it is surprising that this subject isn't chewed over a bit more on the 'net and media in general.

I have read blips about the questionable practice of paying off a mortgage, but never the additional points that Dave mentions.

I suppose most Americans are so up-to-their-necks in debt, the discussion of paying off a mortgage is far removed from their reality.

I won't pay off the house until I, at least, have a full year's living expenses saved up... I'm not far from it.

If I do, I will have *some* idea of the pros and cons of the decision.


 o
RE: you can only refinance large amounts?

"I won't pay off the house until I, at least, have a full year's living expenses saved up... I'm not far from it."

Excellent plan which is what I was saying. pay off other debts first and build cash and retirement savings then hit the house. you are in a unique situation because your mortgage is so small that if you can take the risk of 2-4 years to try and pay it off it may be worth it. just the pay the normal monthly payment while you build up cash.

The issue with paying off the mortgage is not only possibly a better investment but your monthly cash flow to pay other bills. if you throw everything into a house without savings then yes you are tying your cash in a non-liquid asset which you can only take out by either selling or loans.

good luck


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