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Advice regarding mortgage, improvements, etc.

Posted by stinky-gardener (My Page) on
Mon, Aug 11, 08 at 13:39

Guess like so many folks who purchased a home 2yrs. ago, I feel a little sick to my stomach when I think of what I paid for it. The good thing is, I live in an area that is doing so much better than so much of the country as far as market values, but certainly, prices have gone down here as well. The military presence is our economic salvation here. Question...let's say I overpayed $25,000. for my house 2 yrs. ago. I put 50% down & have a 15 yr. mortgage at 5.625% interest. No one has a crystal ball to gauge what will happen in another 7-18 yrs. when we might sell, but in the mean time, what is my best course of action to protect my value? Should I attempt to pay off the mort. in 10 yrs, instead of 15? Should I instead spend that money on home improvements (today carpenter is doing a home maintenance project--repairing rotting wood around windows). Know that this house will need new windows in about 5 yrs., & new heating/cooling system at any time (system original to house--20yrs. old). Those are the two biggies that I know of. Would like to upgrade the kitchen applicances, counters, etc. Have spent a fair amount on having wallpaper removed, painting, light fixtures, small handyman things. Would you stop doing home improvements until it's closer to resale time? Any observations, suggestions, thoughts, would be appreciated. Thanks!


Follow-Up Postings:

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RE: Advice regarding mortgage, improvements, etc.

Hi Stinky-Gardener,

I put 50% down & have a 15 yr. mortgage at 5.625% interest. No one has a crystal ball to gauge what will happen in another 7-18 yrs. when we might sell, but in the mean time, what is my best course of action to protect my value?

YIKES... you certainly took the riskier road, without being aware of it...and are now paying the consequences.

"Value" is determined by the market, and as an asset owner you (we all) are along for the ride... you can't do anything about the property value as far as market fluctuations are concerned.

EQUITY (on the other hand) is something you CAN protect, at least whatever is remaining of it.

If you re-adjust your leverage to remove the equity from the real estate, and keep it in alternative savings vehicles where your interest will compound on a principal-protected basis, you'll be in a far less risky situation and face less (or no) potential further loss of net worth due to market shiftings.

As you shift your equity out of the real estate exposire, you'd have a larger outstanding leverage balance, so it would make sense to adjust your amortization (forced payment into the real estate balance itself) to a lighter burden... the 30 year term would most likely be most advisable.

Should I attempt to pay off the mort. in 10 yrs, instead of 15?

That would be throwing good money after bad. Depositing MORE of your nest-egg into the asset that is dropping in value will only accelerate your losses.

Should I instead spend that money on home improvements (today carpenter is doing a home maintenance project--repairing rotting wood around windows). Know that this house will need new windows in about 5 yrs., & new heating/cooling system at any time (system original to house--20yrs. old). Those are the two biggies that I know of.

MAINTAINING your home asset quality is critical regardless of market fluctuations. Do the right things as your budget allows... but doing more won't help.

Would like to upgrade the kitchen applicances, counters, etc. Have spent a fair amount on having wallpaper removed, painting, light fixtures, small handyman things. Would you stop doing home improvements until it's closer to resale time? Any observations, suggestions, thoughts, would be appreciated. Thanks!

This depends on;
A) Are you improving it for YOUR OWN experience?
B) Are you improving it for re-sale increase?

If #A, then worrying about resale value is simply additional non-productive worry. Do what you can afford, and realize its a consumptive expense (like going out to dinner... or lots of them, etc.)

If #B, hold off on cosmetic renovations until just prior to putting the home on the market. Spending money on home cosmetics early will just lose its luster (and thus your curb-appeal "bang" effect) month-by-month as you live in it.

Hope that helps,
Dave Donhoff
Leverage Planner


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EDITED; Advice regarding mortgage, improvements, etc.

SG,

I have to give an edit. I said;

If you re-adjust your leverage to remove the equity from the real estate, and keep it in alternative savings vehicles where your interest will compound on a principal-protected basis, you'll be in a far less risky situation and face less (or no) potential further loss of net worth due to market shiftings.

It SHOULD have read;
If you re-adjust your leverage to remove the equity from the real estate, and keep it in alternative savings vehicles where your interest will compound on a principal-protected basis, you'll be in a far less risky situation and face less (or no) potential further loss of YOUR SAFETY CASH due to market shiftings.

Your net worth will inescapably shift with your home market... but you CAN escape the loss of your safety reserves.

Cheers,
Dave Donhoff
Leverage Planner


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RE: Advice regarding mortgage, improvements, etc.

Thanks for the prompt & thoughtful reply, Dave. I am so confused, though! I really thought that no matter what, getting a house paid for ASAP was a financially savvy thing to do. The market should cycle back, worst case scenario, in 5 more yrs., wouldn't you say? I should probably have added, my DH will be retiring in 15 yrs. Don't want to have a mortgage then! If you have a chance, could you say more? Thanks! Stinky


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RE: Advice regarding mortgage, improvements, etc.

Hi SG,

Thanks for the prompt & thoughtful reply, Dave. I am so confused, though! I really thought that no matter what, getting a house paid for ASAP was a financially savvy thing to do.

Yes, and no. Gathering up enough money (seperately from your real estate holdings) in order to BE ABLE to completely pay of the mortgage *IS* a financially savvy thing to do.

Trying to do it by "tiptoeing across the minefield" by putting your cash at the risks of the fluctuating markets, not to mention other risks of real estate equity, is not the best way to go about it.

You didn't know this, I am sure. The prevalent "back-porch wisdom" is indeed to take the risky way, and that's the overwhelming voice you'll hear from anyone who doesn't make a study of it (including many so-called "financial experts" who really ought to know better... but clearly do not.)

The market should cycle back, worst case scenario, in 5 more yrs., wouldn't you say?

Yes, highly likely that most of the real estate markets will recover in 5 years or less, and the real estate markets have zero choice BUT TO APPRECIATE to match the longterm rate of inflation, which we are only now beginning to observe on an explosive path growing into the future.

If you have the cash & wherewithall to simply "wait it out" you'll ultimately be OK.

I should probably have added, my DH will be retiring in 15 yrs. Don't want to have a mortgage then! If you have a chance, could you say more? Thanks! Stinky

The BEST plan (for responsible people) to eliminate your mortgage is NOT to attack it in nickles, dimes & dollars at a time, but rather to "sneak up on it" by building up a side-account you'll ultimately be able to use in one stroke of a check to pay off the full mortgage balance all at once.

As you've discovered, having more mortgage keeps the dropping markets from taking your control of equity away from you, and paying more cash into the real estate asset exposes you to vulnerability.

Moving your equity from your real estate will cost you the after-tax costs of mortgage interest... however, the value of the reserves safety should not be understated, PLUS there are longterm savings vehicles that can be usually used to offset most OR EVEN 100% of the interest costs of the mortgage.

"Simplicity" ignores the reality of the issues... most people slice it all apart and try to attack the mortgage by itself incrementally... and seperately (or even worse, theoretically AFTER they've sliced away the mortgage) they concern themselves with seperate account growth and safety reserves.

If you adjust now, you'll immediately get aligned with safety and avoid any further liquidity & reserve risks.

They say the first thing to do when you find yourself deep in a hole is... put down the shovel ;~)

Cheers,
Dave Donhoff
Leverage Planner


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RE: Advice regarding mortgage, improvements, etc.

Thanks again for the info, Dave. You've given me a lot to wrap my brain around. Appreciate your time & effort!

Stinky-G


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RE: Advice regarding mortgage, improvements, etc.

You have a pretty long timeline in staying in your home. If you really stay 18 years i wouldnt worry about the value of your home. You cant always tell what the price will be but the long term averages of home appreciation is about 3-5% @ year (this is always based on location).

i wouldnt stress about whether you overpaid for your home. you paid for the home what you believed it was worth at the time. that is called a sunk cost. at this point its irrevelant. the value of the home changes day by day week by week.

i would try and pay off the mortgage sooner with the caveat that you have a good cash savings of 3-6 months of expenses and out of other debt (cc, auto, school, etc.) also that you are putting money away for retirement. if you have done that then bang out the mortgage and have one less stress in your life.

the work you want to do on the house sounds like normal maintenance especially over that time.


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RE: Advice regarding mortgage, improvements, etc.

Thanks, mnk! I HAVE stressed about this a lot. Nice to hear that maybe I didn't completely blow it!


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