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Pay down mortgage and refinance?

Posted by linda_ut (My Page) on
Tue, Oct 20, 09 at 14:05

Would you take most of your money (liquid assets), no other debt, adequate 401's, IRA'S etc. to pay down your mortgage and refinance? Current mortgage balance 128,000 home value 425,000 loan at 5.87% with 24 year balance. Approx new mortgage would be 60,000 @ 4.50% for fifteen years.closing cost from credit union approx.2000.00


Follow-Up Postings:

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RE: Pay down mortgage and refinance?

I think you have 2 questions lumped together that shouldn't be.

1) Should you refinance? If you plan to live there for the long term and you can get a point and 3/8 lower rate, then you should refinance.

2) Should you take most of your liquid assets and put them in your house? No. You want to keep a substantial emergency fund on hand in case you need cash. It should be at least 6 months of living expenses and preferably closer to a year. This should be in something 100% safe eg not stocks.

If you have no other debts, a substantial emergency fund, and adequate retirement planning AND still have extra cash flow, I would start paying down the house a bit each month. You will be surprised how quickly you can pay down a 128k mortgage if you put a couple hundred extra bucks on it each month. If you had a 30 year mortgage for 128k and paid $300 extra a month, you'll pay it off in close to 15 years WITHOUT the risk of depleting your cash reserves.


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RE: Pay down mortgage and refinance?

Hi Linda,

I would *NOT* pay off my mortgage (not even an extra dollar) until I could do so in its entirety with guaranteed safety.

What does guaranteed safety entail? After writing the check to eliminate the entire balance, you are still left with more than sufficient liquidity for all self-insuring you are doing (covering risks where you are not paying for institutional insurance,) PLUS at least a full year of all living expenses.

Prudent planning would go further, and wait until your remaining assets are earning enough safe yield on their own to pay for your living expenses WITHOUT dipping into principal.

Prior to that, frankly, you're playing with fire. You're giving away your compounding working assets & safety money by the thousands to save interest in the pennies.

Luck!
Dave Donhoff
Leverage Planner


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RE: Pay down mortgage and refinance?

reallife example why it is a BAD idea...We put down over 50% on our home,and with the market decline in the last several years, 1/2 of that downpayment money is gone FOREVER!!!! Dave is spot on with his advice...


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RE: Pay down mortgage and refinance?

Thank you all for your advice. Please let me go into a Little more detail and see what your thoughts are then....
Our home sits on five acres. Our son wants to buy 1 acre from us.The 1 acre is not on a seperate deed. In order for us to seperate it we need to get an appraisal and go thru lots of paper work with our mortgage holder. I have talked to my credit union and it would be done thru the title company when the refinance is done if we go thru with it.
My thoughts are paper work and appraisal have to be done either way. Rates are low, we having money in savings that is making very little for us might as well be put to use on our mortgage. I would automatically be coming ahead at least $300.00 a month to put back into the mortgage or into our savings.
I understand where you are coming from with the idea that sinking it all into it is risky but I would still retain a good cushion in my savings and when the transaction is complete with my son mortgage would be paid off.


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RE: Pay down mortgage and refinance?

Linda: I think you should do it, but keep a cushion of money on hand. However, if you have lots of money in 401K and IRA, you can always use some in an emergency and actualy can get it surprisingly quick. You can even take out of your IRA once per year and pay it back in 60 days with no tax or penalty.

Keep your homeowners insurance, which I am sure you will, so you don't have to worry about self insuring as suggested above.

I recently paid off my mortgage, and struggled with deciding wheher to refinance or pay it off. I realized that the CDs and Money Markets were paying very low interest and the mortgage interest, while historically low, is much higher than what I can earn in CDs and money markets. This will probably be the case for at least the next few years.

I also hate having bills to pay, and like you, I have zero debt. However, I have a decent amt of money in savings, plus more 401k and IRA.

I am soooooo glad I paid of the mortgage. It is most wonderful - a great feeling to not have the monthly mortgage(which really wasn't tough at all to pay, but for someone that hates debt, it is a hassle and I just wanted that bill gone.).

2 months after paying it off, I lost my job. I am so darn happy that I have one less bill to pay (still have utilities and insurance and food and misc expenses and property taxes, that's about it.).

And because I have zero debt, my living expenses are very low and I can comfortably live on unemployment insurance and can even live off my other investments even if I don't get a job for many years.

As long as you retain a cushion of money if anything unforeseen occurs, go for it. You will be glad you did. The smaller mortgage will have a tiny monthly payment and you will be glad and can save a lot of extra money each month having lower payment. In no time, you will be growing your savings, as long as you save it and don't spend it.

The person's comment above about losing 50% value in their home does not affect your situation since you already have a massive amount of equity.

Just make sure you have access to a cushion if needed.

Having no debt, or very low debt, as a near priceless feeling. A feeling so good that I would depict a dancing icon for it. Take that into account for your decision making also. Just be smart about it and you will be fine.


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RE: Pay down mortgage and refinance?

Hi Linda,

OK... since your current loan is collateralized by the full 5 acres, you will HAVE to refinance anyway. Its not like that's going to be a choice.

Rates are low, we having money in savings that is making very little for us might as well be put to use on our mortgage.

Given that any dollar recaptured into your real estate is basically "long term" illiquid, the equivalent comparable safe investments to compare it against would be OK to be equally illiquid. As such, it is quite easy to have your safe money grow on a compounding basis at a significantly stronger rate than any post-tax mortgage interest rate.

An example (one of many... but just one, to make the point.)
A) Take a 30 FRM mortgage at, say, 4.5% pre-tax... 3.4% or less post-tax, non-compounding interest costs,
B) Acquire either zero-coupon bonds (through your securities account,) or fixed-index annuities (through your insurance agent,) at a 5% to 9% rate, compounding on a tax-deferred (or tax-free) basis.

You'll accumulate the funds to completely eliminate your mortgage MUCH faster this way, and in a safer manner as well, than if you try to 'strangle the mortgage one dollar at a time.'

Regarding sweet tea's comment;
Keep your homeowners insurance, which I am sure you will, so you don't have to worry about self insuring as suggested above.

Homeowner's insurance is irrelevant in this conversation... you don't get the choice when you have a mortgage to try to "go naked" on homeowners and hazard insurance coverage (and I propose it is insane to *ever* try it.)

Rather, we're talking about everywhere else you are vulnerable.

MANY people choose to self-insure on longterm care costs. The impending statistics on the likelihood (and the scope of expenses) is breathtaking... but nonetheless, even when faced with the facts, *most* folks choose to simply gut-it-out and hope they have enough money or die quickly. THIS is where it is far more valuable to keep your cash in your own control.

For other personal policies, such as basic health coverage.... sometimes you can drop your premium payments in half or less merely by self-insuring a larger deductible up front. This is a very intelligent way to use your leverage... as the after-tax interest costs on the money kept aside for a higher potential deductible can easily be more than recouped from the premium savings on health, auto, umbrella, business, and other insurance policies.

As I say all the time;

EVERYONE ought to pay off their mortgage...
HOWEVER, not a single day, nor a single dollar, earlier than it is safe to completely do so.

Cheers,
Dave Donhoff
Leverage Planner


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RE: Pay down mortgage and refinance?

EVERYONE ought to pay off their mortgage...
HOWEVER, not a single day, nor a single dollar, earlier than it is safe to completely do so.

So let me play the devil's advocate...

EVERYONE ought to pay off their mortgage.
Why do you say this??
I doubt I will ever pay off my mortgage, I always find a better use of my money than giving up my low interest and tax deductible home mortgage. I easily earn more than I pay in payments, if that changes in the future, I may change my mind, but so far it never works out that I should pay off my mortgage.
I've gained more more financial security using my cash in investments, and as you say I have the case available, if necessary, for an emergency.
I don't question the emotional peace of mind of having no mortgage, I'd love that, but it is not a high priority for me.

okay, leave the devil out of it, for me it is common sense.


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RE: Pay down mortgage and refinance?

cmarlin,
No need to play devil's advocate,as Dave's comments/beliefs are EXACTLY what your's are...


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RE: Pay down mortgage and refinance?

I would be extremely cautious buying either annuities or long-term care insurance. Both are complex products, and most people buy the wrong ones. They think because they like their insurance agent "s/he will take care of me, I trust their judgment in what's right for me," that they'll get the correct policy for their situation.

I think most agents are honest, well-meaning folks. But no offense intended, these products can be landmines for folks who thought they bought something quite different than what they're actually paying premiums for. Conseco and its subsidiaries were so bad, they eventually negotiated a settlement with the Pennsylvania Dept. of Insurance and withdrew from the LTC business after having generated so many complaints against their policies. This isn't like buying level term insurance, or even homeowner's insurance.

Annuities and LTC require a lot of research before selecting what would be the best policy for your personal situation. And finding an objective professional opinion from someone who isn't going to make a commission on your purchase, would be a really, really good idea.


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RE: Pay down mortgage and refinance?

Annuities and LTC require a lot of research before selecting what would be the best policy for your personal situation. And finding an objective professional opinion from someone who isn't going to make a commission on your purchase, would be a really, really good idea.

I'll go further;
Make sure you use a fee-based, or fee-only INSURANCE planner to do so. You are going to generally be better off with a NON-securities licensed professional for such analysis.

Look for state-licensed life, health, disability & annuity FIXED insurance BROKERS (or 'Producers.') Such professionals are licensed to advise on a fee-basis, and can guide you without a commission-driven bias (nor an anti-bias for fear of losing your fee-based managable asset account.)

There are MANY licenses for securities professionals who may charge on a fee-basis... but overwhelmingly, securities folks are clueless (or worse, adversarial) to the safer fixed and indexed insurance products. It takes money out of their risk-management game, so they have little incentive to really bone-up on the current world of offerings in the insurance realm.

CFPs can be OK... but only if you make sure they came from the insurance world, and later added securities... rather than vice-versa.

As if overwhelmingly obvious, it is more critical than ever HOW you choose your advisor. Friendliness is not sufficient... applicable knowledge base & skillset are paramount.

Luck!
Dave Donhoff
Leverage Planner


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RE: Pay down mortgage and refinance?

Look for state-licensed life, health, disability & annuity FIXED insurance BROKERS (or 'Producers.') Such professionals are licensed to advise on a fee-basis, and can guide you without a commission-driven bias (nor an anti-bias for fear of losing your fee-based managable asset account.)
Are you assuming they are selling their product net?
The insurance broker is just as narrow when viewing an annuity.
Okay, I don't like annuities, can you explain why you like them? I see low risk, low return?


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RE: Pay down mortgage and refinance?

Hi cmarlin,

Are you assuming they are selling their product net?

No... jkom suggested getting advice from a non-commissioned financial advisor, and I was making the important distinction that when looking for risk-management and safety strategies you are best off talking to an INSURANCE advisor on a non-commissioned fee basis, not a SECURITIES advisor (regardless of their compensation.)

The insurance broker is just as narrow when viewing an annuity.

Just as narrow as a Securities-focused advisor? I think not.

Okay, I don't like annuities, can you explain why you like them? I see low risk, low return?

1st off, there is no "one size fits all" strategy for anything. SOME annuity products exclusively provide SOME benefits that SOME individuals cannot find (or cannot afford) with securities products.

One example (not a panacea, but an example of one product with a LOT of power) are the Fixed-Indexed products. These earn credits that match the lion's share of any upside in the large-market indexes (like the S&P500, or the Dow, or NASDAQ, or a Gold index,) but are protected against losing ANY money when those indexes go down.

These can easily earn an average crediting return in the 6-8% range, with no market downsides risks. Of course, they require time commitments (generally 3-10 years with gradually increasing liquidity access) so that the provider can employ the funds long enough to cover the costs and the guarantees.

FURTHER, the fixed-index annuities charge no external fees... they are like bank CDs in that the provider pays all their administrative & sales costs from the provider's own internal banking profits, and NOT from the investor's accounts.

*MOST* securities-trained financial advisors have little to no clue about how these programs work... if they are aware of their existence at all. Most securities salespeople hear "fixed" and immediately assume they have no upside... or hear "upside" and immediately assume they are Variable Annuities, and carry all the loss risks of regular stocks & mutual funds.

Again... not a perfect fit for everyone... but superior for a certain category of many folks portfolios.

Cheers,
Dave Donhoff
Leverage Planner


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RE: Pay down mortgage and refinance?

Well I see now that maybe there are better ways to achieve our goal and I have been doing alot more thinking about our situation.
I think maybe my husband and I have such discomfort when we know we owe someone (mortgage co) that we tend to want to take care of it as quickly as possible and not have what we consider a "burden" on our budget. Maybe calling it a burden is a not correct way to describe it as we live well within our means and are good savers.
A quick little story...Before my husband and I turned 30 we had bought our second home. It was in the disasterous early 1980's when interest rates where crazy.The builder that we bought our 1st home offered to build us a home with ZERO percent interest with a 5 year loan. We jumped at the chance. He took our first home in on trade as NO homes were selling in our area and kept 10% of apprased value. The second home he built for us he marked up 10% also. Our payments were high especially on one income. (my boys still won't touch beans!) We knew from the beginning that this second home was not going to be our final home. After 3 years and 11 months I called the builder and asked if I paid off the remainder balance right then would he give me a better deal. His answered suprised me as he said yes and in the end ended up Not paying the 10% mark up.
So knowing that feeling of owning our home free and clear was awesome. Payday rolled around without even a thought.
Money that went to mortgage went to buying a piece of property to build.
Maybe we are too disciplined by our upbringing that you should never be in debt.
I do again want to Thank you for your ideas and know that you have added to mine.


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RE: Pay down mortgage and refinance?

There's nothing wrong with not wanting to be indebted. Indeed, for many people that would be an excellent lesson to learn.

But you do need to understand that most wealthy people are usually leveraged. The adage that money must move to make money, is true. Otherwise, it's just a piece of paper with some colored inks on it, that slowly becomes worthless over time. If you stuff it in your mattress, you get...a lumpy mattress, LOL.

May you build the home of your dreams on your land, and enjoy it in good health for many years!


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RE: Pay down mortgage and refinance?

Jkom51 is correct, "most wealthy people are usually leveraged". I would like to add that these people "understand" and can "afford" leverage. Before taking any kind of investment risk, one should fully understand what the investment is about, and should have contingent plan to handle worst-case scenarios.

It is wonderful not want to be indebted. Sounds to me you are doing quite well. There are so many ways to build financial security, as long as you are comfortable with your strategy, and you are balancing risk and reward, then it is perfect.


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RE: Pay down mortgage and refinance?

In the world of finance you get higher Return for accepting higher risk on your investments. The markets are very efficient at making sure that this axiom remains. Therefore, it is not possible to "borrow" money, and "invest" it in such a way to get higher return at equal risk. An on top of that, annuities that are protected on the downside as described above are loaded with fees.

I think the average wealthy person would understand this risk / reward scenario and act accordingly. They are also very concenred with Fees and spending. Also, my opinion, is that that most wealthy people (i.e those who have a high Net Worth) do not get involved in leverage in this way. The average weatlhy person gets there by living far below their means, and thus appear to all observers as unwealthy. High debt is not a typical wealth attaining strategy (but sure is a good stragegy for the opposite).


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RE: Pay down mortgage and refinance?

Hi landmarker,

In the world of finance you get higher Return for accepting higher risk on your investments. The markets are very efficient at making sure that this axiom remains.

This is a fallacy. If it were anywhere near true, then the entire securities markets would creep along (zero bubbles, zero crashes,) at exactly the rate of monetary inflation... not a nickle more, nor faster.

The reality is that the markets TEND toward efficiency, ON AVERAGE, and OVER TIME.

Therefore, it is not possible to "borrow" money, and "invest" it in such a way to get higher return at equal risk.

Oh, it is not only possible, but it is absolutely "the name of the investment game." It is the *ONLY* financial (non-emotional) reason to even attempt to invest.

EVERYTHING is "borrowed"... if you take $1,000 from your paycheck to buy MSFT stock, you are taking it away (or "borrowing" it) from the amount you COULD have used for a vacation, or a new car, or mortgage acceleration payments, etc.

Further, you're being blind to the inefficiencies of the market THROUGH time.

Generic Example in principal;
Taking a 30 FRM at a 4.5% interest rate today, and 'investing' it in 'equal-risk' 30 year bonds at, say, a 4% longterm yield is an apparent 0.5% RIGHT NOW..... However, when inflation blossoms and when you can roll those bonds into 9% yield bonds... the market is COMPLETELY willing to allow you to do so... for the entire duration of your remaining 30 year term.

An on top of that, annuities that are protected on the downside as described above are loaded with fees.
Again, fallacies & blindness. The fixed-indexed annuities I named above have *ZERO* in owner fees. There is no free lunch, of course, so these are structured the same as bank CDs (which, as you might now, also have no owner fees.) The issuer of the fixed annuities finance their costs from their own internal returns.

It really does pay to understand finance.

Cheers,
Dave Donhoff
Leverage Planner


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RE: Pay down mortgage and refinance?

Risk Reward ratio is not a fallacy. Why does a short term T-Bill have a lower yield than a 30 year T-Bond? This is due to higher risk on the longer term bond. Likewise, you get a higher average Rate of return on your stocks (i.e. 12% historical) becuase there is a higher risk of principal loss.

Taking your Bond vs Mortgage example... There is 1/2 point spread where the FRM is higher than the Bond's rate. This spread will exist every day... The moment it goes away, arbitrage will will drive it back. For example if there was a moment in time where the 30 year fixed mortgage went below the t-Bond, then investors would suddenly borrow at the lower rate and invest at the higher return. This activity would drive demand for mortgage capital, thus raising the rate on borrowing. This is the basic concept of efficient market theory.

If I buy a bond today with a 4% yield, and bond rates move to 9%, what do you think happens to my 4% bond? The Price will fall. Again, this is caused by efficient markets... which cannot allow a 4% yield to coexist with a 9% yield. That's what the yield curve is.

What you propose and advocate is not "wrong", but you are not bootstrapping either.


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RE: Pay down mortgage and refinance?

Taking your Bond vs Mortgage example... There is 1/2 point spread where the FRM is higher than the Bond's rate. This spread will exist every day...

No, it won't... you are trying to make the case on a VARIABLE mortgage, not a FIXED mortgage.

Fixed residential mortgages set the cost of money firm... then, when investable yields rise, there *IS* a risk-free arbitrage available. Of course, this adds the risk management of a time component to the consideration.

There is also taxation and subsidy skews where real arbitrage *IS* frequently available (the real costs of safe money are less than an equivalent safe investment rate of return,) but the strategy is only applicable to people who are in certain tax brackets with certain liquidity and expense profiles.

If there ever *WAS* perfect market efficiency, the government guarantees it warps the fabric of economics to eliminate it (but in truth, there never really is perfect efficiency, especially in less liquid and less frequently executed trades or strategies.)

Cheers,
Dave Donhoff
Leverage Planner


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RE: Pay down mortgage and refinance?

The spread exists at any point in time. Meaning, 1:57PM on Tuesday there will be a spread on the rates, eliminating the possiblity for an investor to buy and sell instantaneously and realize a profit. That is the concept of market efficiency.
Market efficiency is not perfect, and there are many who make livings off of innefficenies in the market. However, the concept of taking out a loan in order to invest the funds elsewhere is not the same as doing arbitrage. It is speculative investing based on your belief that a better rate of return will be attained on the investment than the borrowing. There is nothing wrong with doing this, as you are right that is what investing is all about (making a choice with capital in order to attain a better result). However, fundamental risk vs reward relationship is not engineered away.

Regarding the so-called risk free option of a indexed annuity... There is no way to hedge the downside risk of the S&P 500 without fees used to buffer it, or fees paid to financial managers to hedge it. There cannot exist an investment that peforms only S&P up, fixed minimum down, equal cost... This would be a financial equivalent to a perpetual motion machine.


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RE: Pay down mortgage and refinance?

Regarding the so-called risk free option of a indexed annuity... There is no way to hedge the downside risk of the S&P 500 without fees used to buffer it, or fees paid to financial managers to hedge it.

Never said there are no paid professionals creating the results... I said they are paid from internal returns beyond the owner's credits, not reductions in the owner's returns, nor owner-paid fees.

There cannot exist an investment that peforms only S&P up, fixed minimum down, equal cost... This would be a financial equivalent to a perpetual motion machine.

Respectfully; you are simply wrong.

The structured trade isn't even a secret...
A) start with some principal (say $100k,)
B) use a portion to by a 100k-face fixed security at a discount (i.e. bond) at 90 cents (or whatever,)
This guarantees that no matter what else occurs, $100k remains at maturity.
C) Take the remainder, and lay on a directional option spread designed to exploit market inefficiencies (highly sophisticated, and highly risky... but all risks are borne INTERNAL to the company, not with the contract owner at risk.)

When the aggressive "haircut" trades pay off, the insurance company makes tons of money.
When the option trades fall on their face, the maturing bond guarantees the client is whole.
When the traders fail *AND* the index rises (extremely rare)the company fulfills its guaranteed payouts from reserves established for exactly such an occasion.

The management professionals win far more than they lose, always pay the client their fixed calculation tied to the market indices, and charge the annuity client nada.

This is nothing new, by the way... fixed-index resetting-principal strategies have been on offer to the public since 1995.

Cheers,
Dave Donhoff
Leverage Planner


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RE: Pay down mortgage and refinance?

You described exactly what I said. It is a hedge, with fees going to the insurance co. taken off the upside. The risk / reward peformance reflects the 90 / 10 mix of stable to volatile investments. Hedging just flattens the peformance curves (does not eliminate risk vs reward). So instead of seeing a choppy daily balance like you would with the S&P, you will see a smoother daily balance. There are 2 key points... 1. It costs money to peform this hedge 2. This hedge cannot come with a guarantee > the cost of borrowing. There will be many days the hedge out peforms the S&P and there will be many days the S&P outpeforms the hedge. There will be no days the fees for investing in the S&P exceeeds the fees for investing in the hedge. So the question an investor needs to ask is do they get a benefit from the annuity (worth the cost?)... For many the answer is yes. For many more the answer will be no. That's why S&P 500 index is a more popular investtment than annuties.


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RE: Pay down mortgage and refinance?

Despite Dave's assurances, all investments hold risks. A complicated investment strategy doesn't eliminate risk, but it may obscure it to the point that even professionals no longer recognize it. You can make all the option bets you want, but when you are making that bet you take on the risk of the bet holder being able to pay off. Many very smart people forgot about that in the recent debacle. Over the long term, risk and reward go hand in hand. You may try to "exploit inefficiencies," but there is always a chance that the exploiter becomes the exploited.

As to the OP's question with the added details, you definitely will need to refinance, but I would still not pay down a mortgage in one lump sum. While you are currently paying more in interest than you can make in a "safe" investment like a CD, that won't always be the case. In addition, moving money from something that is relatively liquid into a house comes with its own set of risks.

As to "most wealthy people are leveraged" - I think that is a bit misleading. Most wealthy people are actually "Millionaire Next Door" types. They live below their means and stock money away at rates that would make most people's head spin. They start saving when they are very young and it compounds over time. They have pretty conservative saving, spending and investment patterns. They aren't flashy in clothing, cars, or houses and would cringe if they heard someone say "fixed-index resetting-principal strategies." Theirs certainly isn't the only way up the mountain, but it is the most reliable path.


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RE: Pay down mortgage and refinance?

Hi Landmarker,

You described exactly what I said. It is a hedge, with fees going to the insurance co. taken off the upside.

No, that is not what I said. You leave "the upside" as an ambiguous statement, while I am explaining the factual detail. The costs to manage the funds are *NOT* taken from the CLIENT'S gains, which are based on a fixed calculation tied to the performance of the index.

Rather, the costs are paid from the company's own internal performance. The client is *NOT* exposed to the risks of direct investment in the securities (in this particular type of product.)

There are 2 key points... 1. It costs money to peform this hedge

It does NOT directly cost the client's money*, it is paid by the company's money.
(*Given that the client keeps their time commitment to allow the company sufficient time to work the funds to earn enough internal returns, on average. The time commitment is *NOT* relative to performance, but a pre-specified concrete amount of time (typically from 3-10 years, contracted in advance.)

2. This hedge cannot come with a guarantee > the cost of borrowing.

Currently individuals can take out 30 FRM loans at 4.5% or lower, and put that money to work at a guaranteed 7.2% growth rate for a 10 year term, and if done inside a ROTH IRA it grows tax free, and can be accessed to spend tax free.

You *ARE* correct that no specific provider guarantees that the market will provide this opportunity... *HOWEVER*, the market is doing so right now on a very safe basis, at much lower costs than direct securities investments (of *ANY* level of sophistication.)

There will be many days the hedge out peforms the S&P and there will be many days the S&P outpeforms the hedge.

That depends on the time frame you look at. Your statement is correct in a blind one-annual basis. Taken at a string of consecutive years, the S&P has historically *NEVER EVER* outperformed the hedge on a 3-consecutive-year basis or longer.

For those willint to take the short-term risks for the possibility of the short-term home runs... there is the lottery... or there is direct market investing. Either is attractive to some people. Neither is the long-term best choice.

There will be no days the fees for investing in the S&P exceeeds the fees for investing in the hedge.

That would be *every* day, if you are referring to the fixed-index annuities.

So the question an investor needs to ask is do they get a benefit from the annuity (worth the cost?)... For many the answer is yes. For many more the answer will be no. That's why S&P 500 index is a more popular investtment than annuties.

No, that's not why at all. It *IS* true that direct index investment is more popular, but the overwhelming reason is that the industry that promotes it makes *MUCH* more money by doing so, *AND* leaves the burden of downside risk on the shoulders of the clients. This creates a MASSIVE incentive for allegiance and promotion of the concept, and a MASSIVE incentive to keep client's money *AWAY* from the safer annuities with the same (and better) performance. Allowing funds into the annuities kills the golden goose of management fees for securities.

It really is tantamount to the promotions of the lottery, and the securities world knows it quite well. Humans (a very unfortunately large number, anyway,) LOVE the thrill of the gamble, and the meme of "you gotta be in the game in order to win the home runs" keeps people in... to be fleeced over and over and over again.

Its tragic that people only stop & think about it (if/when they think about it deeply at all) when the markets drop and they discover that THEY are the ones holding the bag all the way down, despite having paid 1-3% of their total funds in securities fees to the stock brokerage companies and their salesmen for years and years.

One size definitely does not fit all... but unprotected and ungauranteed securities investment is playing with a very volatile fire... it burns even the sophisticated traders, and decimates the unsophisticated public.

Cheers
Dave Donhoff
Leverage Planner


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Risks

Hi billl,

Despite Dave's assurances, all investments hold risks.

Actually, that's not contrary to my explanations at all. With fixed-indexed annuities the MARKET risks (the ability to lose your principal) is eliminated from the contract-owner's side of the table, and the insurance company adopts that risk.

There *ARE* other trade-off risks to be considered, however. There is liquidity risk, which the annuity OWNER carries on a diminishing basis for the pre-agreed lock-up period of time. During their 1st year, they may have 100 cents on the dollar access to just 10-20% of their total principal, with the balance available (if they needed it) at 90 cents on the dollar. In the 2nd year they may have 100 cent access to 20-30% of their funds, with the 'haircut' if they take more than that out, in the 3rd year they may have 100 cent access to 30-40% with a haircut on the balance, and on & on until there is no haircut on their funds at withdrawal at all (typically after 3-10 years.)

There is also inflation risk. This is the risk that the value of the actual dollars they have growing is decaying due to monetary inflation at a faster rate than alternative uses of those funds.

There are other esoteric risks to be considered, for sure... but in many (most?) cases these risks can either be covered within a well structured financial plan, or simply cannot be easily avoided at all (such as governmental systemic risks... the only way to avoid is to move... and even then, the U.S. global effect is so large you would be hard pressed to move far enough away to not be affected.)

Else, I agree with all the rest of your post.

Cheers,
Dave Donhoff
Leverage Planner


 o
RE: Pay down mortgage and refinance?

Dave, I'm sure you are a successful salesman for annuities, but your theory doesn't hold water because you are overlooking a key risk - the company selling these products!

All these strategies are basically complicated versions of insurance. Yes, you can buy insurance type products to cover all sorts of losses, but you are counting on some company being around to pay out when the time comes. That is a risk (see AIG etc!) Sometimes that risk is worth it, but it is not a trivial risk.

Like all insurance, there is no free lunch. You either give up some upside for more security or you give up some security for more upside. Anyone who tries to convince you otherwise is likely trying to sell you something.

Anyway, you've taken this thread WAY off topic, so I"m sure the OP would appreciate it if you saved the hard sell for your own website.


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RE: Pay down mortgage and refinance?

Hi billl,

Dave, I'm sure you are a successful salesman for annuities

C'mon... really? In light of being called on your inaccuracy, the best civil conversation you can have starts off with a patronizing insult? You *can* do better than that, can't you?

your theory doesn't hold water because you are overlooking a key risk - the company selling these products!

OK... looking at the current observable weaknesses, failures, meltdowns, vountary and forced bankruptcies and take-overs.... which is riskier for collapse, takeover or outright failure; securities companies, banking companies, or insurance companies?

Go ahead... think it through carefully. Open book test, you can consult the web as well if you need to.

All these strategies are basically complicated versions of insurance.

Nope;
A) "all these strategies" are simply prudent financial management. SOME may be best utilized from insurance companies, to be sure, but there are many pieces to the puzzle that have nothing to do with insurance companies.

B) Further, insurance itself is irrelevant when comparing the functionality of (for example) an indexed bank-CD versus an indexed annuity. The functional difference is in taxation and returns. Which type of company can provide the critical results is secondary to the result itself.

Yes, you can buy insurance type products to cover all sorts of losses, but you are counting on some company being around to pay out when the time comes. That is a risk (see AIG etc!) Sometimes that risk is worth it, but it is not a trivial risk.

We've seen the FDIC foreceably close down over 100 banks now, and the federal government (not just here, but in the UK as well) "condemn" the majority of the largest and oldest investment banking houses in history.

Zero is the number of insurance companies that have been closed down, and the division of AIG that was troubled was completely seperate from any life insurance entities that offered financial products to the public.

Anyway, you've taken this thread WAY off topic, so I"m sure the OP would appreciate it if you saved the hard sell for your own website.

Facts are hardly any "hard sell" and I am selling nothing in these conversations (other than, perhaps, the actual truth of the financial world.)

I've only been correcting fallacies with actual facts, like this post itself. If anyone is creating "drift" it is the various posters who disseminate their misunderstandings of the actual financial mechanics in the markets. I am sure that you and landmarker have good intentions (doubtlessly sure,) but that doesn't change the fact that you are mistaken, and publishing fallacies or deceptive half-truths.

Are you capable of cleaning up the interaction and bringing it back to a mature financial level without insults?

Dave Donhoff
Leverage Planner


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RE: Pay down mortgage and refinance?

Dave - anybody with access to a search engine can quickly verify that one of your listed professions is selling annuities. The OP wants to know what she should do about her mortgage. If you have any advice about that, I'm sure she would appreciate that instead of a sales pitch.


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RE: Pay down mortgage and refinance?

Billl,
Anybody with an 8th grade or higher reading capability could see that on these forums I strictly talk the facts, no selling of anything.

The fact that I am well educated in finance, and properly authorized to structure and advise on financial services is also what anyone can find about me, if that is important to them.

What is your level of authorization & expertise?

The OP wants facts, I'm sure she'd appreciate more of those, and less obfuscation.

Cheers,
Dave Donhoff
Leverage Planner


 o
RE: Pay down mortgage and refinance?

Dave, I'm glad you are happy with your chosen profession to sell financial products. If you are half as knowledgeable as you think you are, I'm sure your clients are extremely satisfied. For the life of me though, I can't figure out what your pages of postings about insurance and annuties have to do with whether the OP should take the majority of her liquid assets and sink them into her house. I think there is a pretty clear cut answer to that completely unrelated to the majority of things you seem to want to talk about here.

In short -to the OP - if you are splitting up a property, you will have to refinance. Since you can get a lower rate now, that is a big win for you. Don't spoil your big win by piling the rest of your cash into your house. It is great to be able to pay off your house, but it is even better to have that cash in hand and keep your options open.


 o
RE: Pay down mortgage and refinance?

Bill, you answered your own question about Dave..

"Since you can get a lower rate now, that is a big win for you. Don't spoil your big win by piling the rest of your cash into your house. It is great to be able to pay off your house, but it is even better to have that cash in hand and keep your options open"

He also believes NOT to pay down the mortgage,and he gives examples of how to better invest the cash..Whether you agree with his views is NOT answering the OP question ;)


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RE: Pay down mortgage and refinance?

Hi billl,

For the life of me though, I can't figure out what your pages of postings about insurance and annuties have to do with whether the OP should take the majority of her liquid assets and sink them into her house.

C'mon... you're not really THAT new to message board threads, are you? If you start at the top, and read each post, in context, you can actually (hopefully) recognize a "call and response" conversational dynamic where people participate in a conversation dynamically... YOU are the perfect example of someone drifting away from the OP.

If you actually read, you'll see that my posts consistently respond to a prior question... not necessarily the ORIGINAL question(s)... but sometimes subsequent questions. Its not necessarily a bad thing... its simply a conversational dynamic. Knowledge (applied) is power!

Cheers,
Dave Donhoff
Leverage Planner


 o
RE: Pay down mortgage and refinance?

If you have sufficient savings and emergency fund then I think it is fine to refinance paying off as much of the mortgage as you can if you have reserves to pay off the remaining mortgage if you had to. I am not a fan of simply making larger mortgage payments unless you have reserves and could pay off the entire mortgage at any time. That seems very risky to me. Refinancing and paying off most of the mortgage is also risky if you have any possibility of any kind that you might not be able to pay it in the event of a catastrophe.


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