Mortgages

[Tford]

Without hijacking Spain's thread, I wanted to get a feel for what the smartest way to go with a mortage. The sentiment I got was that extra payments or increased payment frequency really doesn't help. Forgive the ignorance but I don't have a clue when it comes to this stuff.

 

I just bought my first house last month so I haven't really gone through the motions yet but this is my plan anyways.

 

-Weekly payments (52 payments every Tuesday of about $300)

-Option for 15% principal pay down every year (or term, I can't remember)

 

My plan is to roll with weekly payments (I am assuming that this reduces overall interest paid) and then use my yearly bonus to pay down the principal. Is this a good plan or are there other options I should look at?

 

Disclaimer: I'm hopeless with stocks, investing, mutual funds and all that stuff. If any recommendation involves this stuff, please elaborate.

 

Edit: Splelling

Edited March 8, 2007 by Tford

[alexgaddis]

The best thing to do is to refinance every two years or so to consolidate your credit card debts...

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[wiegie]

see this thread: http://forums.thehuddle.com/index.php?showtopic=195535

[Ramhock]

Apparently, you should call Countrywide. But have $4 handy.

[REZ]

Apparently, you should call Countrywide. But have $4 handy.

 

 

[Ursa Majoris]

Pay it off as fast as possible. Screw Wiegie. :ducks:

[Yukon Cornelius]

Pay it off as fast as possible. Screw Wiegie. :ducks:

 

im all payed up and glad

[Tford]

Thanks for the help wiegie. As I said before, this stuff isn't my forte.

[yo mama]

Paying down your mortgage fast is a risk-free investment tool *assuming* you will incur no prepayment penalites, and even more so if you cannot deduct the interest you pay on the mortgage for income tax purposes.

 

Let's say your mortgage has a 6% rate of interest and you cannot deduct the interest. If you throw an extra $1000 at the mortgage at the beginning of the year, that's a $1000 of debt you don't have to pay interest on ever again. Another way to look at it is that if you took that $1000 and invested it elsewhere (assuming you're disciplied enough not to blow it on booze and fireworks), you'd have to earn a 6% annual return AFTER taxes just to break even relative to just paying down your mortgage. A lot of people feel they can do that, but they are incurring extra risk. Paying down your mortgage has zero risk. Plus, you've socked away additional equity in your home that you can tap later in an emergency (via a home equity loan), or will get it back if you later sell the home. Alternative investments (stocks especially) aren't nearly as stable. You can put in $1000 today, not get your 6% return, *and* lose the principle. Not so with the mortgage paydown option.

 

If you can deduct the interest that means you'd have to earn less retun on your alternative investment to break even, relative to the mortgage paydown option. However, the difference will vary in proportion to your individual income tax brackett.

 

Hope that was somewhat helpful.

Edited March 8, 2007 by yo mama

[Tford]

Paying down your mortgage fast is a risk-free investment tool *assuming* you will incur no prepayment penalites, and even more so if you cannot deduct the interest you pay on the mortgage for income tax purposes.

 

Let's say your mortgage has a 6% rate of interest and you cannot deduct the interest. If you throw an extra $1000 at the mortgage at the beginning of the year, that's a $1000 of debt you don't have to pay interest on ever again. Another way to look at it is that if you took that $1000 and invested it elsewhere (assuming you're disciplied enough not to blow it on booze and fireworks), you'd have to earn a 6% annual return AFTER taxes just to break even relative to just paying down your mortgage. A lot of people feel they can do that, but they are incurring extra risk. Paying down your mortgage has zero risk. Plus, you've socked away additional equity in your home that you can tap later in an emergency (via a home equity loan), or will get it back if you later sell the home. Alternative investments (stocks especially) aren't nearly as stable. You can put in $1000 today, not get your 6% return, *and* lose the principle. Not so with the mortgage paydown option.

 

If you can deduct the interest that means you'd have to earn less retun on your alternative investment to break even, relative to the mortgage paydown option. However, the difference will vary in proportion to your individual income tax brackett.

 

Hope that was somewhat helpful.

 

 

The exact reason why I will never make more than the minimum payment on my federal student loan.

Edited March 8, 2007 by Tford

[Big John]

The exact reason why I will never make more than the minimum payment on my federal student loan.

 

How do those work in Canada?

[Azazello1313]

Paying down your mortgage fast is a risk-free investment tool *assuming* you will incur no prepayment penalites, and even more so if you cannot deduct the interest you pay on the mortgage for income tax purposes.

 

Let's say your mortgage has a 6% rate of interest and you cannot deduct the interest. If you throw an extra $1000 at the mortgage at the beginning of the year, that's a $1000 of debt you don't have to pay interest on ever again. Another way to look at it is that if you took that $1000 and invested it elsewhere (assuming you're disciplied enough not to blow it on booze and fireworks), you'd have to earn a 6% annual return AFTER taxes just to break even relative to just paying down your mortgage. A lot of people feel they can do that, but they are incurring extra risk. Paying down your mortgage has zero risk. Plus, you've socked away additional equity in your home that you can tap later in an emergency (via a home equity loan), or will get it back if you later sell the home. Alternative investments (stocks especially) aren't nearly as stable. You can put in $1000 today, not get your 6% return, *and* lose the principle. Not so with the mortgage paydown option.

 

If you can deduct the interest that means you'd have to earn less retun on your alternative investment to break even, relative to the mortgage paydown option. However, the difference will vary in proportion to your individual income tax brackett.

 

Hope that was somewhat helpful.

 

 

what are the primary reasons someone wouldn't be able to deduct the interest they paid on their mortgage? AMT? not their primary residence? i am pretty sure the vast majority of people can and do deduct the mortgage interest they pay....which of course means they're ultimately paying significantly less than 6% on that debt.

[i_am_the_swammi]

Paying down your mortgage fast is a risk-free investment tool *assuming* you will incur no prepayment penalites, and even more so if you cannot deduct the interest you pay on the mortgage for income tax purposes.

 

Let's say your mortgage has a 6% rate of interest and you cannot deduct the interest. If you throw an extra $1000 at the mortgage at the beginning of the year, that's a $1000 of debt you don't have to pay interest on ever again. Another way to look at it is that if you took that $1000 and invested it elsewhere (assuming you're disciplied enough not to blow it on booze and fireworks), you'd have to earn a 6% annual return AFTER taxes just to break even relative to just paying down your mortgage. A lot of people feel they can do that, but they are incurring extra risk. Paying down your mortgage has zero risk. Plus, you've socked away additional equity in your home that you can tap later in an emergency (via a home equity loan), or will get it back if you later sell the home. Alternative investments (stocks especially) aren't nearly as stable. You can put in $1000 today, not get your 6% return, *and* lose the principle. Not so with the mortgage paydown option.

 

 

 

While paying down your mortgage may be a good idea to some on the surface, there is much more than simple math that goes into this argument.

 

Do you have any other loans with a rate higher than 6%? If so, pay those off first.

Do you have a nest egg set aside for emergencies? if not, put 2 months worth of salary into a money-market account in case you need to tap cash (rather than have to take out a home equity loan at 8-10%)

 

6% is about the lowest interest rate you are ever going to have to pay on anything. Cars are 8-9%, credit cards are 8-15%....

 

Borrowing @ 6-7% is pretty efficient, and most likely tax deductible.

[yo mama]

what are the primary reasons someone wouldn't be able to deduct the interest they paid on their mortgage? AMT? not their primary residence? i am pretty sure the vast majority of people can and do deduct the mortgage interest they pay....which of course means they're ultimately paying significantly less than 6% on that debt.

 

The main reason is that their standardized deductions exceed itemized, despite the mortgage interest. You see that every so often on inexpensive homes in areas that have a very low cost of living. Not being one's primary residence is another possible reason (vacation homes, and the such). Another potential reason is that there are caps on how much interest you can deduct on home equity loans not used to purchase a residence. People will sometimes use those to pay down consumer debt, or what not, but not be able to deduct the full amount.

 

Mortgage interest is deductible for AMT purposes, thankfully.

Edited March 8, 2007 by yo mama

[Def.]

Paying down your mortgage fast is a risk-free investment tool *assuming* you will incur no prepayment penalites, and even more so if you cannot deduct the interest you pay on the mortgage for income tax purposes.

 

Let's say your mortgage has a 6% rate of interest and you cannot deduct the interest. If you throw an extra $1000 at the mortgage at the beginning of the year, that's a $1000 of debt you don't have to pay interest on ever again. Another way to look at it is that if you took that $1000 and invested it elsewhere (assuming you're disciplied enough not to blow it on booze and fireworks), you'd have to earn a 6% annual return AFTER taxes just to break even relative to just paying down your mortgage. A lot of people feel they can do that, but they are incurring extra risk. Paying down your mortgage has zero risk. Plus, you've socked away additional equity in your home that you can tap later in an emergency (via a home equity loan), or will get it back if you later sell the home. Alternative investments (stocks especially) aren't nearly as stable. You can put in $1000 today, not get your 6% return, *and* lose the principle. Not so with the mortgage paydown option.

 

If you can deduct the interest that means you'd have to earn less retun on your alternative investment to break even, relative to the mortgage paydown option. However, the difference will vary in proportion to your individual income tax brackett.

 

Hope that was somewhat helpful.

 

 

 

 

While paying down your mortgage may be a good idea to some on the surface, there is much more than simple math that goes into this argument.

 

Do you have any other loans with a rate higher than 6%? If so, pay those off first.

Do you have a nest egg set aside for emergencies? if not, put 2 months worth of salary into a money-market account in case you need to tap cash (rather than have to take out a home equity loan at 8-10%)

 

6% is about the lowest interest rate you are ever going to have to pay on anything. Cars are 8-9%, credit cards are 8-15%....

 

Borrowing @ 6-7% is pretty efficient, and most likely tax deductible.

 

 

 

Thanks for the help wiegie. As I said before, this stuff isn't my forte.

 

 

Much like you I am screwed and will never understand...

 

I like Swammi's thoughts though, seem like solid reasonable advise.

[wiegie]

Another thing to keep in mind is if you think your home is going to appreciate in value and you are not planning to stay there for a long time.

 

The more money you put into buying equity in your home, the lower your overall return on the home will be.

 

For example, suppose you buy a $200,000 home with cash and then sold it in one year for $250,000. Your total return would be 25%. Suppose instead, that you only put $10,000 down on the home, but then still sold it a year later, your return would be 400%.***

 

***Note--this example makes a ton of simplying assumptions (such as no monthly mortgage payments, no interest deduction for taxes, etc.) so as not to obscure the main point of this post.

[Tford]

How do those work in Canada?

 

 

There are three kinds of student loans in Canada; two are public funded, one is not.

 

1) Federal student loan - typically the largest but the award is adjusted based on yours and your parents (if under 20 yrs old) net worth. If you have a car or other assets, you are expected to liquidate them before this award if given out. Interest free until you leave school and interest on this loan is tax deductible.

 

2) Provincial student loan - smaller than the federal loan but more lenient in terms on award size versus net worth. Same stipulations as the federal however the tax deduction apply to provincial taxes only. Oddly enough, this loan can be forgiven under certain circumstances if you continue to work in the province you borrowed from.

 

3) Private student loan - Done through banks similar to what there is the US I'm sure.

[Tford]

Borrowing @ 6-7% is pretty efficient, and most likely tax deductible.

 

 

This makes sense, however I honestly do not know whether I can write off mortgage interest or not.

[Azazello1313]

so, quick calculation...i (i'm probably fairly typical of a lot of people on these numbers) had 14,500 in deductible mortgage interest payments, 5K in other deductions...so basically the mortgage deduction trimmed roughly 9K off of my taxable income versus the standard deduction. in the 25% bracket, that trims $2250 off of my tax bill. on my two mortgages i'm paying an aggregate of 5.8% interest. subtract that $2250 and i'm actually paying under 5%. if you're into the higher brackets or have more deductions, it's even more of a difference. now, considering you can get savings accounts that even pay out greater than 5% (granted, you have to pay taxes on the dividends), that doesn't seem like terrible debt to be carrying around.

Edited March 8, 2007 by Azazello1313

[i_am_the_swammi]

that doesn't seem like terrible debt to be carrying around.

 

 

You are dead-on, Az. Lots of people like the psychological feeling of having their mortgage paid off...I am sure it is very gratifying. But they do so without even realizing that it is very unlikely they will ever be able to borrow funds from anywhere else at 5-6%.

 

Unless you are debt-free in every other area of your life (or that debt is below 5%), then paying off a tax-deductible loan early is not so bright.

[Ramhock]

Lots of people like the psychological feeling of having their mortgage paid off...I am sure it is very gratifying.

 

I wish I had that psychological feeling when the owner came out and said we were out-of-biz, therefore, losing my overpaid, highpaying job.

 

If you are lucky enough to have this type of job, please, don't take it for granted. I may have another opportunity at a high paying job, and I will be paying off my mortgage, ASAP.

 

I like

[The Irish Doggy]

Another thing to keep in mind is if you think your home is going to appreciate in value and you are not planning to stay there for a long time.

 

The more money you put into buying equity in your home, the lower your overall return on the home will be.

 

For example, suppose you buy a $200,000 home with cash and then sold it in one year for $250,000. Your total return would be 25%. Suppose instead, that you only put $10,000 down on the home, but then still sold it a year later, your return would be 400%.***

 

***Note--this example makes a ton of simplying assumptions (such as no monthly mortgage payments, no interest deduction for taxes, etc.) so as not to obscure the main point of this post.

 

 

Huh? I'm no investor or mortgage genius, so please excuse the on my face.

 

Not following the math here:. 50 is 25% of 200, 50 is 500% of 10. Where does the 400% come in?

 

Also, its not evident to me why one should care? If I have 200 and the choice of putting all 200 or only 10 down, do I have other opportunities to make better than 25% that I shouldn't tie up the 190 balance in the house?

[yo mama]

Huh? I'm no investor or mortgage genius, so please excuse the on my face.

 

Not following the math here:. 50 is 25% of 200, 50 is 500% of 10. Where does the 400% come in?

 

Also, its not evident to me why one should care? If I have 200 and the choice of putting all 200 or only 10 down, do I have other opportunities to make better than 25% that I shouldn't tie up the 190 balance in the house?

 

Wiegie is trying to make this point:

- $200k down resulted in a $50k profit (i.e., 25%)

- $10k down resulted in the same $50k profit (i.e., 500%)

 

The dollar amount of profit was the same in each case. However, Wiegie's numbers are flawed/overly simplistic because they assume you made that profit in a single day, or something. Obviously, it would take time for a home to appriciate from $200k to $250k. That could take years. During that time you're paying interst on the $190,000 mortgage in the second option. Even if the interest were tax deductible, after accounting for those benefits you're still looking at over $8000 a year of that profit being lost (I assumed a 6% interest rate and a 25% fed. inc. tax bracket, resulting in an 4.5% effective interest rate. And $190,000 x 4.5% = $8,550, assuming it was an interest-only note. But lets assume you're paying some principle down each year, such that the average annual interst paid - net of tax benefits - is roughly $8,000 per year).

 

Under this illustration after Year 1 your profit drops to $42k. After Year 2 $36k. And so on. If you'd simply paid all cash your $50k profit would have remained in tact. Granted, you wouldn't be able to brag about a 500% rate of return, but you would ended up with more cash in your pocket. Which would you rather have?

 

Obvioulsy, if you only put $10k down you'd have had $190,000 left over to do whatever you wanted with (assuming you had $200k in cash to start out with). Assuming you were diciplined enough to invest every penny *and* you experienced a greater that 6% total return - after taxes - during your ownership of the home you'd come out better off. But (as I pointed out in my initial post) to do that you incur additional risk. Just paying cash for the house (assuming you have no other debts with higher rate of interst than the mortgage itself) is a zero risk, guaranteed TAX FREE profit in this scenario. It just isn't a very sexy use of money. Fiscally savy people like to leverage their cash, and some will do well. Some will lose money. But people who don't know what they are doing in the market, or who are risk averse, simply can't go wrong just paying down their mortgage.

 

Plus, the sooner your mortgage is paid off the less vulnerable you are if lose your job, get hurt, etc. Plus, that equity can still be tapped later on if you need it via a home equity loan, so it isn't like you lost that initial $200k. The same cannot be said if you took that $190,000 in scenario #1 and invested it poorly. Furthermore, assuming you keep your job your cash flow really starts kicking ass in option 1 compared to option 2 because you don't have a mortgage to pay. So you can then use that extra cash flow to invest elsewhere, or spend it, or whatever.

Edited March 9, 2007 by yo mama

[Ursa Majoris]

Just pay off the f'n mortgage as fast as possible, then it doesn't much matter if the $hit hits the fan, you lose your job or whatever.

[wiegie]

Huh? I'm no investor or mortgage genius, so please excuse the on my face.

 

Not following the math here:. 50 is 25% of 200, 50 is 500% of 10. Where does the 400% come in?

 

Also, its not evident to me why one should care? If I have 200 and the choice of putting all 200 or only 10 down, do I have other opportunities to make better than 25% that I shouldn't tie up the 190 balance in the house?

 

I screwed up with my math. (For some reason I was still thinking that the person would be taking out a $200,000 loan instead of only a $190,000 one. This caused me to think that the person would only have 50,000 in equity in the home instead of the 60,000 that they really would have had.)

 

As for why you should care, you do indeed have an opportunity to earn more than 25% on your $200,000. If you put 10,000 down on the house and then put the other 190,000 into CD's at 5% interest, then next year you would have an extra $9,500 in cash plus the 50,000 in capital gains on your home. Making your total return for your 200,000 be 29.75%