Advice #2 - "Our plan is to take the tax returns for the next 5 to 6 years and pay off the home equity." What???? You have a 58K loan. If you are getting 10k back at tax time, you need to see a CPA. I know it seems great to "get money back" at the end of the year, but what you are really doing is giving the government a 10k loan at 0% interest. Instead of doing that, you should adjust your withholdings so that you take home more money each month and get zero refund. Use that money each month to pay down your HELOC. Why lend the government money with no interest when you are borrowing money with interest?

Advice #3 - If you can get a lower fixed rate, great. If not, don't worry as long as you have a plan to pay off that loan quickly. Interest rates are currently low and probably will stay that way until we are well into an economic recovery. The real key is to start paying that balance down so that you don't have a 58k loan.

Well, billl actually beat me to the punch on items #2 and #3... I totally concur.

I think point #1 was mistaken in focus though. I see no evidence from your post that you couldn't afford to make the shortsale investment that you did... and the fact that you are capable of managing them together supports the idea that you are in good, responsible shape in that manner.

Rental real estate (properly acquired and managed) is the absolute SUPERIOR inflation-hedge investment going forward. Your fixed-rate mortgage payments will never go up... but your RENTS WILL! Further, the longer you can avoid giving back the levered funds to the mortgage bank, the more the economic burden of the borrowed amount will deflate (in direct balancing opposite to degree of inflation itself.)

Here's an extremely simple example (you can divide by 10 to get the idea.)

If you bought 10 rentals at $100,000 each with zero down at 6% fixed ($500/month)....
Starting of with *only* $600 monthly rents (zero cashflow after taxes, insurance & expenses,)
With a 3.6% average rate of inflation...
And a 3.6% average rate of real estate appreciation...
And a 3.6% average rate of rental rate appreciation...

After 20 years you would own 10 rentals worth $200,000 each... still costing $500/month mortgage payments.
Rents would be roughly $1,200/month...
Minus double inflated taxes, insur. & expenses ($200) you'd have $500 positive cashflow ($5,000 for the portfolio,)

Let's say you want to drop your management burden in half... take life more easy....

If you sold HALF of them, you would collect enough money (thanks to appreciation)...
to pay off all the mortgages on the OTHER half (thanks to inflation)...

Leaving you with 5 properties with a net casfhlow of $1,000 each ($5,000/month income,) and $1,000,000 unencumbered equity in your net worth.

You're on the right path.

Luck!
Dave Donhoff
Leverage Planner

What is your father suggesting you do? Sometimes you need to force yourself to be dispassionate about finances. Your husband's delight in a refund check costs you money. Your desire for the security of a fixed rate loan will likely do the same.

Dave, I'm with you on the rental purchases but - how does one buy investment property with no down, I've never bought without 25% down and am now told it is 30-40% down.

Well, realize that my prior post was an extremely simplified hypothetical... but it still applies to the real world.

The first thing we need to mutually understand is that *everything* is 100% financed... you either pay interest for somebody else's money, or you forfeit real earnings, opportunity & safety by financing from your own cash/money... so in the end, its all the same. The only question is net average cost of that asset-purchase money.

I didn't know it was possible, it may or may not be financially good, some can afford all the "ifs" billl mentions, so the leverage may work

Right. Owning/operating a rental property is a small business action... *not* a passive speculation... and it requires all the appropriate reserves & management skills that come with such an action. It also offers the relevant upside for those who treat it appropriately.

Cheers,
Dave Donhoff
Leverage Planner

If a property is a rental, then you need to understand how to do that and get a renter in there ASAP. You can mix and match the mortgage for IRS as long as you know how to do your taxes.

We often have a mix of ARM versus fixed rate mortgages. As long as you know how to manage the loans associated with the rental, either ARM or fixed rate should be fine at this time. For example, if you have a way to quickly lock a rate and refinance to a fixed rate as the rates start to rise, then ARM is not such a bad thing. I am paying about 3.5% on my HELOC right now. There is NO way I can get a fixed rate mortgage at that interest.

"Owning/operating a rental property is a small business action... *not* a passive speculation... and it requires all the appropriate reserves & management skills that come with such an action."

This is absolutely true. At times, our rental properties can cost us significant dollars without warning, ie leak in the bathroom, roof needs replacement, applinaces die, etc. You need reserves to deal with these...

Renters come and go at their schedule, not on my schedule!

check out penfed.org - Its a federal credit union. you can qualify by making a donation to a group that supports military and their families (its on the site) and they right now have a 4.99% 20 yr fixed rate equity loan.

My suggestion relates to more skillful use of your income tax refund.

That substantial cheque from the IRS after income tax returns go in every year may gladden your husband's heart ...

... but - it - drains - his - wallet!!

You know the amount of his tax refund last year. If he gets paid monthly, divide that amount by 12 (or the number of paycheques that he receives during the year).

If he gets paid monthly, as of Jan. 31, he made a loan to the IRS of that amount, on which he received no benefit, i.e. they paid him no interest on that amount ... and they held it until the date of the refund ... if it were June 1, that loan was for 16 months. I suggest that you calculate how much interest you're paying on your HELOC on that amount for 16 months.

As of the end of Feb., he made another interest-free loan of the same amount to the IRS ... for 15 months. Calculate how much interest you're paying on your HELOC on that amount for that period.

As of the end of Dec., he'd made 12 such loans. Calculate the interest on each of those amounts for the relevant periods, then add them all together.

For example, on $1,200. at 5%, the amount would be $60.00 if the full amount ran for a full year, but when we average, it's about half of that period, it'd be $30. for the year. Then we figure that the full amount was owing for 4 months, Jan. 31 '09 till May 31 '09, or 1/3 of $60., or $20., which means $50.00 in total.

Then I propose that you get 5 - $10.00 bills, fan them out in your hand and, if your husband smokes, ask him to get out his cigaret lighter and burn them.

If he shows a willingness to do so ... snatch the bills away in a hurry.

But - that's about what his lack of financial acumen is costing your family.

Every year.

Reduce the amount of withholding by that amount and use it to pay down your HELOC!

That'll produce a benefit for your family - interest-free loans to the IRS don't.

Good wishes for increasingly skillful use of your income and assets, year by year.

Good wishes also for having a great year in 2010.

ole joyful

I do agree with Kudzu and Ole Joyful - you need to put that extra tax amount into savings every month instead of "giving" it to the IRS to keep for you until spring. You are concerned about the interest on the HELOC, but have not addressed the issue of the money you are losing by overpaying your taxes. Sorry to be blunt, but if your DH doesn't trust himself to save money, and would rather pay the government to do it for him, I would hesitate to take on any extra debt.

Change your/his W-2 so that you are only paying what is necessary. Divide the expected refund by 12 (or 26 if he is paid every two weeks) and deposit that amount into savings with an automatic deposit. I'm sure your Dad is itching to help you make these changes.

Best wishes on your new venture.