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BWillie
07-16-2010, 04:02 PM
I've been reviewing amortization chart & schedules for the last year or so now. I've owned my own home for 14 months now. I don't even have a high interest rate, but I don't understand why all of the people w/ 30 year mortgages don't live cheaply at the start of their mortgage. You get fist f*cked in interest on the first 5-10 years of your loan especially. Yeah I know you get a little tax write off on the interest you paid, but it isn't even CLOSE to how much you would save if you paid early and reduced it early in your loan.

Maybe I'm missing something, and maybe I'm just really, really cheap, but by paying $3000 a month instead of the $1250 or so I'm supposed to, I'm set to own my home in 4 years instead of 30. I only put down 3.5% on my home too. My interest rate is only 4.75% as well but if I continue to do this I will save $130,000 in interest throughout the course of my loan and get out of paying PMI much earlier.

I know some people $600 car payments or even married couples who have $1000-1200 in car payments, and pay the minimum on their home and I just don't get it. My car is paid for. Instead of having that $600 being paid on essentially nothing, they could use it to go towards their mortgage each month. I live real cheap. I don't go on many extravagant vacations. Don't have any "toys" or have a whole lot of gumption for material things outside of the furniture in my home. I'm not married. I don't have kids. I have a couple roommates that help me out too.

I don't know much about investing, so maybe this is a bad idea by paying so much more to my mortgage every month, but I pretty happy about all the money I will save. Each month when my mortgage is due, I just pay the $1750 or so extra straight to principal, but I've been told that it is better to do it biweekly or certain times in the month as it hedges your interest? Does anybody know the best way to go about doing this?

Rain Man
07-16-2010, 04:04 PM
You're not married, are you?

CaliforniaChief
07-16-2010, 04:04 PM
I think the only reason bi-weekly is better is because you end up making more payments.

Keep doing what you're doing, bro. It's good financial sense.

BWillie
07-16-2010, 04:09 PM
I think the only reason bi-weekly is better is because you end up making more payments.

Keep doing what you're doing, bro. It's good financial sense.


I don't understand much about bi-weekley payments. I just want to make sure I'm paying at the right time of the month. Or if I should split it up and make two payments per month? Somebody told me it's much better to do that but I have no idea why that would be.

JASONSAUTO
07-16-2010, 04:09 PM
pay your actual payment bi-weekly. THATS what saves you in interest from what ive heard.

then make the 1750 payment towards the principal whenever you want.

JASONSAUTO
07-16-2010, 04:10 PM
I don't understand much about bi-weekley payments. I just want to make sure I'm paying at the right time of the month. Or if I should split it up and make two payments per month? Somebody told me it's much better to do that but I have no idea why that would be.

less money per day owed saves interest from what my accountant says

Valiant
07-16-2010, 04:11 PM
I don't understand much about bi-weekley payments. I just want to make sure I'm paying at the right time of the month. Or if I should split it up and make two payments per month? Somebody told me it's much better to do that but I have no idea why that would be.

Seems it would be easier for the bank not to fuck up if you did two payments. Normal payment, and then extra payment towards principle. That way if they mess up it is easier to fix.

BWillie
07-16-2010, 04:12 PM
pay your actual payment bi-weekly. THATS what saves you in interest from what ive heard.

then make the 1750 payment towards the principal whenever you want.

So if your mortgage was say $1200 and it was due on the 1st of every month you'd pay the $600 on the 1st and 14th or 7th and 21st?

BWillie
07-16-2010, 04:14 PM
Seems it would be easier for the bank not to **** up if you did two payments. Normal payment, and then extra payment towards principle. That way if they mess up it is easier to fix.

They did mess it up when I first started paying more than double my mortgage. I saw it on my mortgage online and called them and just told them to make it all straight to principal. They were originally going to hold onto the 2x payment to pay for the mortgage when it was due the nexst month. But I can see everything they are doing, and if it's going to principal and how much interest is being accrued and all that good stuff.

mikeyis4dcats.
07-16-2010, 04:16 PM
depends on your loan agreement, but some loans don't recognize bi-weekly. Sure you can send it, but they don't actually apply it against the principal at the time it's received.

also, at one time you had to specifically identify that you wanted overpayments to go to principal, but that may have changed.

JASONSAUTO
07-16-2010, 04:16 PM
So if your mortgage was say $1200 and it was due on the 1st of every month you'd pay the $600 on the 1st and 14th or 7th and 21st?

1st and 14th is what i do


but i'm a mechanic not an accountant, i'm sure there will be someone along shortly who disagrees.:D

Mojo Jojo
07-16-2010, 04:16 PM
If you have extra money it always wise to pay extra to your house. Any money paid above the original amount due goes to principle and takes payments off the back end of the loan and gives you more equity.
Paying every two weeks means you are paying for 13.5 months per year and not 12. If you can afford it you will end up with a lot more money in your pocket in the end.

CaliforniaChief
07-16-2010, 04:17 PM
Here's a link from Bankrate that will answer a lot of questions.

http://www.bankrate.com/brm/news/mtg/20010920a.asp

OnTheWarpath58
07-16-2010, 04:19 PM
http://www.yourbonus.org/incoming/Amortization.xls

BWillie
07-16-2010, 04:21 PM
If you have extra money it always wise to pay extra to your house. Any money paid above the original amount due goes to principle and takes payments off the back end of the loan and gives you more equity.
Paying every two weeks means you are paying for 13.5 months per year and not 12. If you can afford it you will end up with a lot more money in your pocket in the end.

I don't know why you couldn't afford it? It's the same amount of money, you just pay more often? (2x a month instead of 1x a month) I don't see the catch. Unless you have a really hard time w/ the cash flow and are living pay check to pay check to the extreme I don't see an issue.

Donger
07-16-2010, 04:21 PM
I'm not married. I don't have kids.

LMAO

Pestilence
07-16-2010, 04:26 PM
That's cool that you can do that. Some people can't......that's why they don't.

BWillie
07-16-2010, 04:35 PM
That's cool that you can do that. Some people can't......that's why they don't.

I understand because of kids and what not. But when you are paying interest on a $600 car payment or some stupid possession that gives you no financial benefit or additional practical benefit, you can be using that as extra towards your principal each month and it is a no brainer decision.

Say for example, if you have a $150,000 mortgage and you decided to not get that new car for the $600 car payment you wanted and instead just drove a modest dependable older Honda Accord or something that you could pay for w/ cash. If you put that $600 each month extra to your mortgage, it changes your 30 year loan into a 9 year loan, and you save around $45,000 over the course of your loan....and you aren't getting screwed w/ the other interest as well for the depreciating asset (vehicle).

I don't know if people just don't think about the amount they pay in the long run or not because it's not really "visible" to them, but the benefits of doing so are staggering.

DaFace
07-16-2010, 04:36 PM
Depends on how confident you are in your investing skills. In a better economy, you'd be much better off investing in a nice portfolio of stocks than you would in your house. Keep in mind that your interest on your home is tax deductible, so your effective interest rate is even lower than 4.75%. I'd guesstimate more like 4%. It's not too hard to make more than that in the stock market.

That said, paying off a mortgage quickly is a nice, safe way to build equity, so there's nothing necessarily wrong with it.

Pestilence
07-16-2010, 04:37 PM
I understand because of kids and what not. But when you are paying interest on a $600 car payment or some stupid possession that gives you know financial benefit, you can be using that as extra towards your principal each month and it is a no brainer decision.

Say for example, if you have a $150,000 mortgage and you decided to not get that new car for the $600 car payment you wanted or and instead just drove a modest dependable older Honda Accord or something that you could pay for w/ cash. If you put that $600 each month extra to your mortgage, it changes your 30 year loan into a 9 year loan, and you save around $45,000 over the course of your loan....and you aren't getting screwed w/ the interest as well for the depreciating asset (vehicle).

I understand man.

But you can do this because you:

A. Don't have a wife.
B. Don't have kids.
C. Do have roommates that help you out.

If I was like you....I'd be doing the same thing. So good on you for doing it....but you have to understand why most people can't.

BWillie
07-16-2010, 04:38 PM
Here's a link from Bankrate that will answer a lot of questions.

http://www.bankrate.com/brm/news/mtg/20010920a.asp

Ah..it says here that it doesn't actually help you hedge your interest. It's just kind of a ploy that since you pay twice a month (1st and 15th) it actually schedules you to make one more payment over the course of the year. So in reality, it looks pointless for the purposes I was thinking about, it's more or less just a way to manage your finances to add an extra payment.

BWillie
07-16-2010, 04:39 PM
Depends on how confident you are in your investing skills. In a better economy, you'd be much better off investing in a nice portfolio of stocks than you would in your house. Keep in mind that your interest on your home is tax deductible, so your effective interest rate is even lower than 4.75%. I'd guesstimate more like 4%. It's not too hard to make more than that in the stock market.

That said, paying off a mortgage quickly is a nice, safe way to build equity, so there's nothing necessarily wrong with it.

Right, that was another question I was wanting to find out as well. Because I have all this money that I could be investing somewhere instead of putting into my mortgage, but I don't know anything that isn't a huge risk or that would UNDOUBTEDLY yield me more utility/results.

DaFace
07-16-2010, 04:40 PM
Also, I could be wrong, but I don't think you can get out of PMI for 5 years unless you pay off the whole thing. In other words, even if you end up with 20% into your home pretty quickly, you're still stuck with PMI for a while.

I'm only about 75% confident in that though. (Not a financial advisor, just someone who has the same type of loan.)

BWillie
07-16-2010, 04:40 PM
I understand man.

But you can do this because you:

A. Don't have a wife.
B. Don't have kids.
C. Do have roommates that help you out.

If I was like you....I'd be doing the same thing. So good on you for doing it....but you have to understand why most people can't.

The example I provided doesn't have anything to do with being married, having kids, or having a couple roommates. Even if you pay more towards your principal at a lower scale than I do you still see a HUGE benefit.

BWillie
07-16-2010, 04:41 PM
Also, I could be wrong, but I don't think you can get out of PMI for 5 years unless you pay off the whole thing. In other words, even if you end up with 20% into your home pretty quickly, you're still stuck with PMI for a while.

I'm only about 75% confident in that though. (Not a financial advisor, just someone who has the same type of loan.)

Unless my bank is lying to me, they said in two months I can request to have PMI taken off because I will have that 20% equity in my house. I've heard it's a pain in the ass though, and if your house price fluctuates in value from what you bought it for it can hurt or help you and you might even have to hire an appraiser.

Pestilence
07-16-2010, 04:43 PM
Honestly....with the economy the way it is today....I'd be taking that extra money and putting it into a savings account that earns some interest. It's always nice to have a backup plan....and if it turns out that you're fine....you can always just make a HUGE payment on your house.

I mean if you're paying an extra $1750 into your house every month.

$1750 x 12 months = $21000 a year

Donger
07-16-2010, 04:43 PM
Also, I could be wrong, but I don't think you can get out of PMI for 5 years unless you pay off the whole thing. In other words, even if you end up with 20% into your home pretty quickly, you're still stuck with PMI for a while.

I'm only about 75% confident in that though. (Not a financial advisor, just someone who has the same type of loan.)

Oh yeah, I remember PMI. That was my first house WTF!!!! moment.

I'm pretty sure that you can get rid of it as soon as get to 20% equity with no time restraints, but it's been a while since I was in that position.

DaFace
07-16-2010, 04:43 PM
Unless my bank is lying to me, they said in two months I can request to have PMI taken off because I will have that 20% equity in my house. I've heard it's a pain in the ass though, and if your house price fluctuates in value from what you bought it for it can hurt or help you and you might even have to hire an appraiser.

Yeah, let me know what you find out on that. The problem is that your bank isn't the one making the choice (assuming this is an FHA loan), so I wouldn't take their word for truth until you dig into it. It's probably buried in your (and my) loan contract somewhere. Everything I find online says that there MAY be a time condition in there somewhere, but I haven't cared enough to really dig into it.

DaFace
07-16-2010, 04:44 PM
According to this, it's 5 years. Just one source, though.

http://www.mtgprofessor.com/A%20-%20PMI/how_do_i_cancel_fha_mtg_ins.htm

EDIT: Here too.

http://www.fhaloanpros.com/2007/07/can-you-cancel-the-fha-mortgage-insurance-premium-mip-you-bet/

Again, I'm assuming this is an FHA loan based on the 3.5 percent you mentioned. If that's not the case, then ignore me.

JASONSAUTO
07-16-2010, 04:45 PM
I understand man.

But you can do this because you:

A. Don't have a wife.
B. Don't have kids.
C. Do have roommates that help you out.

If I was like you....I'd be doing the same thing. So good on you for doing it....but you have to understand why most people can't.

im on track to pay off my 15 yr in 4 on the shop.

house was a 30 And it was paid for in 7.
married 2 kids live with me one in kc to pay child support on.

i buy what i can pay for now. only had a car loan once on our conversion van we HAD to have for our disabled daughter, and paid that off in a year. we just dont do things we cant afford.
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Pestilence
07-16-2010, 04:46 PM
im on track to pay off my 15 yr in 4 on the shop.

house was a 30 And it was paid for in 7.
married 2 kids live with me one in kc to pay child support on.

i buy what i can pay for now. only had a car loan once on our conversion van we HAD to have for our disabled daughter, and paid that off in a year. we just dont do things we cant afford.
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Which is why I said MOST people.

tmax63
07-16-2010, 04:47 PM
Paying your home off sooner gets that mortgage monkey's name off your title sooner and having leverage on you. My note is a 10yr balloon with minimum payment of about $720 per month. The war department and I pay $500 on the 5th and $525 on the 20th of the month. That makes it paid in full 3 months before the balloon would have been due and gives the potential of cutting back on a payment or 2 if everything went to hell in a handbasket. Haven't had to do that yet (we're at about 5 yrs in) and don't foresee needing to do that but it's a little peace of mind in these economic times.

Mojo Jojo
07-16-2010, 04:50 PM
Ah..it says here that it doesn't actually help you hedge your interest. It's just kind of a ploy that since you pay twice a month (1st and 15th) it actually schedules you to make one more payment over the course of the year. So in reality, it looks pointless for the purposes I was thinking about, it's more or less just a way to manage your finances to add an extra payment.

Here is the thing...you DON'T pay on the 1st and 15th. You pay every other...pick a day Monday, Wednesday, Friday. That is the only way to make up the extra payments.

Another trick is to look at your amortization chart...every month pay the next months principle and mark it as to be applied to principle. This is a good way to take time and money off the loan.

BWillie
07-16-2010, 04:55 PM
Here is the thing...you DON'T pay on the 1st and 15th. You pay every other...pick a day Monday, Wednesday, Friday. That is the only way to make up the extra payments.

Another trick is to look at your amortization chart...every month pay the next months principle and mark it as to be applied to principle. This is a good way to take time and money off the loan.

Is that not what I'm doing when I pay the extra in addition to my payment each month? I'm getting confused :doh!:

DaFace
07-16-2010, 04:56 PM
Is that not what I'm doing when I pay the extra in addition to my payment each month? I'm getting confused :doh!:

It's all just a different trick to "pay more than you have to." It really doesn't matter exactly how you do it.

BWillie
07-16-2010, 04:57 PM
Honestly....with the economy the way it is today....I'd be taking that extra money and putting it into a savings account that earns some interest. It's always nice to have a backup plan....and if it turns out that you're fine....you can always just make a HUGE payment on your house.

I mean if you're paying an extra $1750 into your house every month.

$1750 x 12 months = $21000 a year

Good point. I've looked around for savings accounts and I haven't really seen any that offer that great of interest rates. I have a checking account that I get 3% but only up to 25K. Anything after that is only 1%.

If there is any savings accounts that yield 5% and don't cap at how much you can have in there I'm all ears.

bevischief
07-16-2010, 05:00 PM
The rumor is that Obama wants to get rid of the mortgage tax deduction...

DaFace
07-16-2010, 05:01 PM
The rumor is that Obama wants to get rid of the mortgage tax deduction...

Well hell...I do often make my financial decisions on rumors...

bevischief
07-16-2010, 05:03 PM
Well hell...I do often make my financial decisions on rumors...

I have heard it from more than source over the past few months.

JASONSAUTO
07-16-2010, 05:16 PM
Which is why I said MOST people.

i can see that side too. BUT i made 12 bucks an hour befofe i bought the shop and STILL NEVER got a loan for anything except the house. if we couldnt afford it we couldnt do it. i never had a credit card before owning my owb business.
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ferrarispider95
07-16-2010, 05:47 PM
It is a good idea for financial security, however the only reason I would caution not to is the opportunity cost. We are record mortgage lows, you most likely won't be able to acquire these type of rates as the economy finally turns and they start raising rates.

I don't believe in 30 year mortgages, only 15. I got locked in at 4% a couple months ago, which was a screaming deal at the time, but it seems like the average as of the last couple weeks.

If you really want to move up the fast track, you need to take advantage of no capital gains tax on the sale of your house every 2 years. You can buy foreclosures right now for 1/2 of what they sold for in the peak of 2006-2008 and this in Kansas. Don't kid yourself in think it won't need work, but a guy that can fix up these properties and take advantage of the tax free status of maintaining it as a primary residence for 2 years can really start to build some assets.


Should not matter on PMI, it should just be 80% and most lenders should automatically due it when you hit 78% if you do not tell them to do it at 80%.

ferrarispider95
07-16-2010, 05:50 PM
Unless my bank is lying to me, they said in two months I can request to have PMI taken off because I will have that 20% equity in my house. I've heard it's a pain in the ass though, and if your house price fluctuates in value from what you bought it for it can hurt or help you and you might even have to hire an appraiser.



Break out your real estate contract, it is specifically stated in there. Tell them to blow you if they won't take it off and you will take your business else where. I would also pull my escrow account and setup your own bank account to hold your funds and earn interest on it. I know most people can't do this because they are not disciplined to put this money away, but if you can, do it.

DaFace
07-16-2010, 05:53 PM
Break out your real estate contract, it is specifically stated in there. Tell them to blow you if they won't take it off and you will take your business else where. I would also pull my escrow account and setup your own bank account to hold your funds and earn interest on it. I know most people can't do this because they are not disciplined to put this money away, but if you can, do it.

As I mentioned earlier, if it's an FHA loan (which I suspect it is), the bank doesn't have any control over the rules. It's a government-backed loan, so the feds control it.

Mojo Jojo
07-16-2010, 06:17 PM
Is that not what I'm doing when I pay the extra in addition to my payment each month? I'm getting confused :doh!:

It depends on your available cash each month. There are several ways to pay off early. You just need to find the way that works best for you and your cash flow.

Ugly Duck
07-16-2010, 06:22 PM
The rumor is that Obama wants to get rid of the mortgage tax deduction...

President Bush's Advisory Panel on Federal Tax Reform made that recommendation back in 2005 - it was rejected. The Obama rumor started in May of this year, and when asked about it he said, “I don't want to get into the details of discussions that aren't happening.” Red herring.

i'm paying the mortgage off early - I'm sick of it. Only 53K left on a 275K loan... not much deduction left.

BWillie
07-16-2010, 07:44 PM
As I mentioned earlier, if it's an FHA loan (which I suspect it is), the bank doesn't have any control over the rules. It's a government-backed loan, so the feds control it.

Im going to be pissed if I cant get that taken off. I hate paying $100 a month for no reason.

DaFace
07-16-2010, 08:27 PM
Im going to be pissed if I cant get that taken off. I hate paying $100 a month for no reason.

Me too. Definitely keep me posted if I'm wrong.

Hog Farmer
07-16-2010, 09:08 PM
You have the right idea Mr. Bwillie. How many years will it take you to pay that extra $130,000 . Pay it off as soon as possible and then you have your biggest life challenge behind you!

Deberg_1990
07-16-2010, 09:25 PM
There's a lot of people out there that love driving a shiny new $45000 SUV with the $600 payment.

Fine.....I gave that status stuff up a long time ago. I like having more expendable income each month
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BWillie
07-16-2010, 09:52 PM
I know theres probably better ways to use the excess income than putting it into your mortgage but I wouldn't know where to start. Ira, stock, 401k.....I guess I could contribute to that but I don't really want to wait until I'm old to benefit. And with the market the way it is right now who knows what would happen. It would kind of suck to see 100k flop. Id actually like to rent the house out to a family when I pay it off. Then Id always have continuous income and then could work on buying my dream house and go from there.

DaFace
07-16-2010, 10:00 PM
I know theres probably better ways to use the excess income than putting it into your mortgage but I wouldn't know where to start. Ira, stock, 401k.....I guess I could contribute to that but I don't really want to wait until I'm old to benefit. And with the market the way it is right now who knows what would happen. It would kind of suck to see 100k flop. Id actually like to rent the house out to a family when I pay it off. Then Id always have continuous income and then could work on buying my dream house and go from there.

Could be worth a call to some sort of financial advisor or something. The way I look at it, you'll have to figure the investment thing out sooner or later (once you pay off your house, for example), so eventually, you'll need to have an idea of WTF to do with your cash.

Guru
07-16-2010, 10:01 PM
If I didn't have 6 mouths to feed and 4 kids to put through school and college I would do the same as you.

alnorth
07-16-2010, 10:03 PM
I assume 2 or 3 (or 4?) people have already said this, so I might as well too.

If I had your rate, there is no way in hell I'd pay it off early. Maybe after 25 years when the balance is irrelevant and annoying to free up cash flow, but not in the first few years.

4.75%, I'm in the 25% federal income tax bracket, about 7% for the state, so 32% total. That loan would therefore cost me about 3.23%

If you are talking about someone who will blow the money on a car or something equally stupid, sure but I am a very disciplined investor. I currently squirrel away 18% of my income into the 401k and I'm constantly looking to see if I can afford to save more. You give me an after-tax loan of 3.23%, I'll dump it into my 401k and make the interest payments for the next 25-30 years.

Consider: there has never been a 15-year period in history where a broadly diversified stock portfolio lost money. there has never been a 20-year period in history where a broadly diversified stock portfolio failed to beat inflation. That is the worst case scenario, I'm fairly sure I can beat 3-4% after tax, probably more like 7-8% over the long run.

For 90% of the people out there, this is probably a good-intentioned pipe-dream where they dont actually follow through on the promise to invest the money, but I will. For those few 10%-ers like me, Dave Ramsey is just flat-out wrong, I will have more money in the end not paying off the home.

Also, lets say you run into a total disaster in your financial situation, you get hurt, you lose your job, your income almost completely disappears, whatever and you need the money. Is the bank going to loan you back your equity? In this environment if you cant prove reliable income? Good luck.

So, I make more money by investing vs paying off a dirt-cheap loan AND I hold on to the money vs the bank folding their arms and telling me "no thanks" when I most desperately need it? Yeah, I'm not paying it off. If its a 6% car loan thats a different story, you cant reliably earn more than that in 3-5 years so you pay your car off first before saving more, but not a dirt-cheap income tax-deductible mortage or student loan.

DaFace
07-16-2010, 10:07 PM
I assume 2 or 3 (or 4?) people have already said this, so I might as well too.

If I had your rate, there is no way in hell I'd pay it off early. Maybe after 25 years when the balance is irrelevant and annoying to free up cash flow, but not in the first few years.

4.75%, I'm in the 25% federal income tax bracket, about 7% for the state, so 32% total. That loan would therefore cost me about 3.23%

If you are talking about someone who will blow the money on a car or something equally stupid, sure but I am a very disciplined investor. I currently squirrel away 18% of my income into the 401k and I'm constantly looking to see if I can afford to save more. You give me an after-tax loan of 3.23%, I'll dump it into my 401k and make the interest payments for the next 25-30 years.

Consider: there has never been a 15-year period in history where a broadly diversified stock portfolio lost money. there has never been a 20-year period in history where a broadly diversified stock portfolio failed to beat inflation. That is the worst case scenario, I'm fairly sure I can beat 3-4% after tax, probably more like 7-8% over the long run.

For 90% of the people out there, this is probably a good-intentioned pipe-dream where they dont actually follow through on the promise to invest the money, but I will. For those few 10%-ers like me, Dave Ramsey is just flat-out wrong, I will have more money in the end not paying off the home.

Also, lets say you run into a total disaster in your financial situation, you get hurt, you lose your job, your income almost completely disappears, whatever and you need the money. Is the bank going to loan you back your equity? In this environment if you cant prove reliable income? Good luck.

So, I make more money by investing vs paying off a dirt-cheap loan AND I hold on to the money vs the bank folding their arms and telling me "no thanks" when I most desperately need it? Yeah, I'm not paying it off. If its a 6% car loan thats a different story, you cant reliably earn more than that in 3-5 years so you pay your car off first before saving more, but not a dirt-cheap income tax-deductible mortage or student loan.

Nice work. That's basically my opinion, only much better stated than I did.

Guru
07-16-2010, 10:11 PM
I assume 2 or 3 (or 4?) people have already said this, so I might as well too.

If I had your rate, there is no way in hell I'd pay it off early. Maybe after 25 years when the balance is irrelevant and annoying to free up cash flow, but not in the first few years.

4.75%, I'm in the 25% federal income tax bracket, about 7% for the state, so 32% total. That loan would therefore cost me about 3.23%

If you are talking about someone who will blow the money on a car or something equally stupid, sure but I am a very disciplined investor. I currently squirrel away 18% of my income into the 401k and I'm constantly looking to see if I can afford to save more. You give me an after-tax loan of 3.23%, I'll dump it into my 401k and make the interest payments for the next 25-30 years.

Consider: there has never been a 15-year period in history where a broadly diversified stock portfolio lost money. there has never been a 20-year period in history where a broadly diversified stock portfolio failed to beat inflation. That is the worst case scenario, I'm fairly sure I can beat 3-4% after tax, probably more like 7-8% over the long run.

For 90% of the people out there, this is probably a good-intentioned pipe-dream where they dont actually follow through on the promise to invest the money, but I will. For those few 10%-ers like me, Dave Ramsey is just flat-out wrong, I will have more money in the end not paying off the home.

Also, lets say you run into a total disaster in your financial situation, you get hurt, you lose your job, your income almost completely disappears, whatever and you need the money. Is the bank going to loan you back your equity? In this environment if you cant prove reliable income? Good luck.

So, I make more money by investing vs paying off a dirt-cheap loan AND I hold on to the money vs the bank folding their arms and telling me "no thanks" when I most desperately need it? Yeah, I'm not paying it off. If its a 6% car loan thats a different story, you cant reliably earn more than that in 3-5 years so you pay your car off first before saving more, but not a dirt-cheap income tax-deductible mortage or student loan.Pretty much sums up what my financial adviser told me as well. We are 4.75% on a 30 year mortgage also.

greg63
07-16-2010, 10:22 PM
We've been paying on our mortgage for twenty-six years and have about six more to go. The place is falling down around us but in just six short years it will be ours, then we can bull doze it. Yeah, the real estate company saw us coming from two miles away.

BWillie
07-16-2010, 10:23 PM
Yeah I have about 20 grand in my 401k, my company matches up to 6% but I usually just put my yearly bonus check in there which its usually around 6k. Isn't there a penalty too take anything out by a certain date? I consider my house somewhat of a liquid asset because if push comes to shove I could always sell it and make about 20 grand even if it has dropped in value since I bought it.

The Little bit I have in my 401k took a huge hit (just like everybody) so I'm just leary too dump so much into something like that. At least its cut and dry with my mortgage but I'm sure your advice the best way to go.

alnorth
07-16-2010, 10:37 PM
Isn't there a penalty too take anything out by a certain date?

Yeah, I don't necessarily plan for disaster. The long-term rate of return is the reason why I do what I do, access to the money is just a side-benefit. That magic penalty-free age is 59 and 1/2. (why not 59 or 60? No idea, ask congress)

But, if financial armageddon strikes you, there are steps you can take to minimize the tax penalty. First, this sort of situation implies that you have lost your job, are unemployed or working a really low-paying new job, and cant make money for a while to eat. (If its just a big unexpected debt that is crushing you like a huge surgery in the hospital or something but you still have income, dont raid your retirement. Go bankrupt, put up with bad credit, and keep saving)

401k's are usually pretty well locked up tight until retirement, but if you lose your job you roll it into an IRA. Then you can use IRS rule 72(t) on that IRA to take penalty-free (but still taxable) distributions every year based on life expectancy. If you aren't 59 1/2 and need more money than what 72(t) will allow, then yeah you eat a 10% penalty on the excess but I'd think you would lose at least that much in a forced fire-sale of your home between fees and reduced prices for a quick sale anyway.

The main reason I try to save so much is because the simple financial math behind wanting a decent retirement can produce a horrifyingly high number. (and I'm a bit pessimistic about Social Security) Unless you are happy with a modest retirement, you need a LOT more money than you probably think, and unless you have a great executive job, that probably wont happen without the long-term growth of the stock market.

RedNFeisty
07-16-2010, 11:02 PM
I assume 2 or 3 (or 4?) people have already said this, so I might as well too.

If I had your rate, there is no way in hell I'd pay it off early. Maybe after 25 years when the balance is irrelevant and annoying to free up cash flow, but not in the first few years.

4.75%, I'm in the 25% federal income tax bracket, about 7% for the state, so 32% total. That loan would therefore cost me about 3.23%

If you are talking about someone who will blow the money on a car or something equally stupid, sure but I am a very disciplined investor. I currently squirrel away 18% of my income into the 401k and I'm constantly looking to see if I can afford to save more. You give me an after-tax loan of 3.23%, I'll dump it into my 401k and make the interest payments for the next 25-30 years.

Consider: there has never been a 15-year period in history where a broadly diversified stock portfolio lost money. there has never been a 20-year period in history where a broadly diversified stock portfolio failed to beat inflation. That is the worst case scenario, I'm fairly sure I can beat 3-4% after tax, probably more like 7-8% over the long run.

For 90% of the people out there, this is probably a good-intentioned pipe-dream where they dont actually follow through on the promise to invest the money, but I will. For those few 10%-ers like me, Dave Ramsey is just flat-out wrong, I will have more money in the end not paying off the home.

Also, lets say you run into a total disaster in your financial situation, you get hurt, you lose your job, your income almost completely disappears, whatever and you need the money. Is the bank going to loan you back your equity? In this environment if you cant prove reliable income? Good luck.

So, I make more money by investing vs paying off a dirt-cheap loan AND I hold on to the money vs the bank folding their arms and telling me "no thanks" when I most desperately need it? Yeah, I'm not paying it off. If its a 6% car loan thats a different story, you cant reliably earn more than that in 3-5 years so you pay your car off first before saving more, but not a dirt-cheap income tax-deductible mortage or student loan.

I disagree. At the current rate, the mortgage will be paid off in ten years or less. When the house is paid off, the extra income can then go to investments. He is already building a 401k.

If after paying the mortgage off he continues paying out $1730 to a group of investments, then puts the money that was paid for P&I into another form of savings; verses not giving himself a pay raise. Once the mortgage is paid, he would have more savings and investments, instead of still paying on a mortgage for thirty years and trying to save for retirement at the same time.

I'm thinking he has a good, stable job that isn't going anywhere soon, that is based off the numbers that have been flown around, so, he will continue getting raises and the bonuses should continue to grow over the years, hence the 401k grows.

For a young person, no spouse, no kids, pay the mortgage off asap.

DaFace
07-16-2010, 11:08 PM
I disagree. At the current rate, the mortgage will be paid off in ten years or less. When the house is paid off, the extra income can then go to investments. He is already building a 401k.

If after paying the mortgage off he continues paying out $1730 to a group of investments, then puts the money that was paid for P&I into another form of savings; verses not giving himself a pay raise. Once the mortgage is paid, he would have more savings and investments, instead of still paying on a mortgage for thirty years and trying to save for retirement at the same time.

I'm thinking he has a good, stable job that isn't going anywhere soon, that is based off the numbers that have been flown around, so, he will continue getting raises and the bonuses should continue to grow over the years, hence the 401k grows.

For a young person, no spouse, no kids, pay the mortgage off asap.

From a purely bottom-line perspective, if he can make more than his after-tax effective interest rate on the mortgage by investing now, that's the best option. There are other reasons why the mortgage could be a better option for a person's specific situation, but long term financial position clearly points toward investing the extra unless you think the stock market is going to suck hardcore for an extended period of time.

DaneMcCloud
07-16-2010, 11:17 PM
Maybe I'm missing something, and maybe I'm just really, really cheap, but by paying $3000 a month instead of the $1250 or so I'm supposed to, I'm set to own my home in 4 years instead of 30. I only put down 3.5% on my home too. My interest rate is only 4.75% as well but if I continue to do this I will save $130,000 in interest throughout the course of my loan and get out of paying PMI much earlier.

Well, there are several people chiming in, so I'll give it a shot:

I'd put all that extra money into a tax-free money market account and if in five years, you still love the house, refinance and reduce your monthly nut. That way, you're earning interest and have money in a safe place if things change.

I don't know anything about your home but if you decide to marry in the next 8-10 years, you may need to move (schools, property size, etc.). There's a distinct possibility that while you may have paid off this home (or come close), you may actually have lost value in your home. It's happening all around the country, so don't think it can't happen to you.

And as for $600 per month for a car payment, who does that?? Lease, lease, lease. My lease payment on a $54k Lexus is $440.14 per month with tax. The lease will be up in less than six months and the dealership has been calling and begging for me to swap it for a brand new 2010 model while keeping the same exact monthly (the price to move up is about $1,000).


I applaud you for your forward thinking but believe there are better alternatives for your earnings than simply paying off your home. And you're better off leasing a Honda Civic for $179 a month than buying a used car that will give you maintenance issues and headaches.

Good luck, Broheim.

alnorth
07-16-2010, 11:37 PM
You can disagree if you want for the security and warm feelings you get by knowing you own a home, and there could be value in that too, but the math is not arguable. It doesn't even matter if it doesn't intuitively make sense at first, the calculator neither cares what we humans think nor does it lie. If your investments would have made 8%, you can't make it up.

Simple example:

mortgage $100,000 @ 4.5% (or 0.367% compounded monthly in this example)
fully amortized payment: roughly $501/month
needed payment to pay off in 5 years: roughly $1,860/month
excess money available: roughly $1,360/month
long-term investment yield: 8%/year (or 0.643% compounded monthly in this example)

Year 0
payer: mortgage 100,000; savings 0
saver: mortgage 100,000; savings 0

Year 1
payer: mortgage 81,706; savings 0
saver: mortgage 98,359; savings 16,910

Year 5
payer: mortgage 0; savings 0
saver: mortgage 91,055; savings 99,205

Year 10
payer: savings 135,750
saver: mortgage 79,909; savings 244,969

Year 15
payer: savings 335,211
saver:mortgage 66,018; savings 459,145

Year 20
payer: savings 628,285
saver: mortgage 48,707; savings 773,839

Year 25
payer: savings 1.06MM
saver: mortgage 27,135; savings 1.24MM

Year 30
payer: savings 1.69MM
saver: mortgage 0; savings 1.92MM

saver wins by not paying it off early by almost a quarter million. That extra $501/month beginning in year 5 for the payer is not going to make up for the extra 5 years of compounding for the saver. That is going to be true in every case where you can earn more than the mortgage rate, whether its 8%, 12%, or 5% over the 30 years. This is a conservative example in my opinion, I'd hope to make more like 9-10%/year

PMI? True, the saver pays that for maybe 10 years (maybe less if home values rise), call it about $500/year. An extra 5 years or so of $500/year followed by 20 years of compounding doesn't begin to bridge the gap.

DaneMcCloud
07-16-2010, 11:43 PM
You can disagree if you want for the security and warm feelings you get by knowing you own a home, and there could be value in that too, but the math is not arguable. It doesn't even matter if it doesn't intuitively make sense at first, the calculator neither cares what we humans think nor does it lie. If your investments would have made 8%, you can't make it up.

I guess if you never, ever plan to move, paying off your home would have its benefits. But in my case, my home is worth three times the purchase price (and will only increase over the years) and the money gets cheaper each and every year.

If I were BW, there's no way at age 26 I'd dump all my extra money in a home in Kansas. Hell, he could have taken all that extra dough, dumped it in BP when the bottom fell out and walked away with some serious cash.

It's a waste, IMO.

alnorth
07-16-2010, 11:48 PM
And as for $600 per month for a car payment, who does that?? Lease, lease, lease.

I admit I'm cheap, but I drive cars into the ground while maintaining them the best I can. If I got spectacular raises and knew I didn't need to save so much I might splurge a little. Even then there are all kinds of nasty traps with a lease. (God help you if you significantly go over on mileage!)

RedNFeisty
07-16-2010, 11:48 PM
From a purely bottom-line perspective, if he can make more than his after-tax effective interest rate on the mortgage by investing now, that's the best option. There are other reasons why the mortgage could be a better option for a person's specific situation, but long term financial position clearly points toward investing the extra unless you think the stock market is going to suck hardcore for an extended period of time.

I'm looking at it from his perspective and goals. Actually, any person in their 20's. I stick by my opinion of paying off the mortgage, then start investing. Even, if he does marry and needs to move, if the home is paid for, then he can put that value down on another home.

RedNFeisty
07-16-2010, 11:50 PM
You can disagree if you want for the security and warm feelings you get by knowing you own a home, and there could be value in that too, but the math is not arguable. It doesn't even matter if it doesn't intuitively make sense at first, the calculator neither cares what we humans think nor does it lie. If your investments would have made 8%, you can't make it up.

Simple example:

mortgage $100,000 @ 4.5% (or 0.367% compounded monthly in this example)
fully amortized payment: roughly $501/month
needed payment to pay off in 5 years: roughly $1,860/month
excess money available: roughly $1,360/month
long-term investment yield: 8%/year (or 0.643% compounded monthly in this example)

Year 0
payer: mortgage 100,000; savings 0
saver: mortgage 100,000; savings 0

Year 1
payer: mortgage 81,706; savings 0
saver: mortgage 98,359; savings 16,910

Year 5
payer: mortgage 0; savings 0
saver: mortgage 91,055; savings 99,205

Year 10
payer: savings 135,750
saver: mortgage 79,909; savings 244,969

Year 15
payer: savings 335,211
saver:mortgage 66,018; savings 459,145

Year 20
payer: savings 628,285
saver: mortgage 48,707; savings 773,839

Year 25
payer: savings 1.06MM
saver: mortgage 27,135; savings 1.24MM

Year 30
payer: savings 1.69MM
saver: mortgage 0; savings 1.92MM

saver wins by not paying it off early by almost a quarter million. That extra $501/month beginning in year 5 for the payer is not going to make up for the extra 5 years of compounding for the saver. That is going to be true in every case where you can earn more than the mortgage rate, whether its 8%, 12%, or 5% over the 30 years. This is a conservative example in my opinion, I'd hope to make more like 9-10%/year

PMI? True, the saver pays that for maybe 10 years (maybe less if home values rise), call it about $500/year. An extra 5 years or so of $500/year followed by 20 years of compounding doesn't quite bridge the gap. including the impact of not paying PMI, the break-even investment yield might be 5-5.5% or so.

We are talking about a kid in his 20's right? I still say have the home paid off before turning 30 if possible, and again it is just my opinion.

DaneMcCloud
07-16-2010, 11:51 PM
I admit I'm cheap, but I drive cars into the ground while maintaining them the best I can. If I got spectacular raises and knew I didn't need to save so much I might splurge a little. Even then there are all kinds of nasty traps with a lease. (God help you if you significantly go over on mileage!)

Well, my wife and I both work from home and even after nearly 3 years, I've only put 12k on my car with a limit of 33k.

Everyone's situation is different of course, but there are definitely alternatives to buying a junker, just to "save" money.

DaneMcCloud
07-16-2010, 11:52 PM
We are talking about a kid in his 20's right? I still say have the home paid off before turning 30 if possible, and again it is just my opinion.

I have a friend that paid his home off in Vegas (against my repeated advice and wishes) and lost more than $100,000.00 dollars.

Let's not pretend that paying off a home doesn't come with significant risk.

Guru
07-17-2010, 12:00 AM
You can disagree if you want for the security and warm feelings you get by knowing you own a home, and there could be value in that too, but the math is not arguable. It doesn't even matter if it doesn't intuitively make sense at first, the calculator neither cares what we humans think nor does it lie. If your investments would have made 8%, you can't make it up.

Simple example:

mortgage $100,000 @ 4.5% (or 0.367% compounded monthly in this example)
fully amortized payment: roughly $501/month
needed payment to pay off in 5 years: roughly $1,860/month
excess money available: roughly $1,360/month
long-term investment yield: 8%/year (or 0.643% compounded monthly in this example)

Year 0
payer: mortgage 100,000; savings 0
saver: mortgage 100,000; savings 0

Year 1
payer: mortgage 81,706; savings 0
saver: mortgage 98,359; savings 16,910

Year 5
payer: mortgage 0; savings 0
saver: mortgage 91,055; savings 99,205

Year 10
payer: savings 135,750
saver: mortgage 79,909; savings 244,969

Year 15
payer: savings 335,211
saver:mortgage 66,018; savings 459,145

Year 20
payer: savings 628,285
saver: mortgage 48,707; savings 773,839

Year 25
payer: savings 1.06MM
saver: mortgage 27,135; savings 1.24MM

Year 30
payer: savings 1.69MM
saver: mortgage 0; savings 1.92MM

saver wins by not paying it off early by almost a quarter million. That extra $501/month beginning in year 5 for the payer is not going to make up for the extra 5 years of compounding for the saver. That is going to be true in every case where you can earn more than the mortgage rate, whether its 8%, 12%, or 5% over the 30 years. This is a conservative example in my opinion, I'd hope to make more like 9-10%/year

PMI? True, the saver pays that for maybe 10 years (maybe less if home values rise), call it about $500/year. An extra 5 years or so of $500/year followed by 20 years of compounding doesn't begin to bridge the gap.Nice job. Rep to you.:thumb:

Guru
07-17-2010, 12:01 AM
I have a friend that paid his home off in Vegas (against my repeated advice and wishes) and lost more than $100,000.00 dollars.

Let's not pretend that paying off a home doesn't come with significant risk.We put a little extra towards principal when we can but our investment accounts are earning better than the 4.75% we pay in to our mortgage so we are coming out ahead irregardless. We are even conservative investors and still come out ahead.

DaneMcCloud
07-17-2010, 12:05 AM
We put a little extra towards principal when we can but our investment accounts are earning better than the 4.75% we pay in to our mortgage so we are coming out ahead irregardless. We are even conservative investors and still come out ahead.

I've got a financial adviser and even with the crash in 2008, we're doing extremely well and are beyond where we were before the crash.

I really think that finding a talented advisor is more than half the battle. There were years before the crash were we pulled in more than 22%.

As I mentioned earlier, everyone's situation is different but getting sound advice certainly helps.

And to reiterate, I don't think BW should be dumping his money in a home that he won't likely even own in seven years.

Miles
07-17-2010, 12:13 AM
We are talking about a kid in his 20's right? I still say have the home paid off before turning 30 if possible, and again it is just my opinion.

Just curious of what the advantages of having that much equity in a home in your 20's would be? With interest rates as low as they are right now reduced by the usual inflation/CPI and tax deductions for interest he has a seriously inexpensive loan.

Guru
07-17-2010, 12:15 AM
I've got a financial adviser and even with the crash in 2008, we're doing extremely well and are beyond where we were before the crash.

I really think that finding a talented advisor is more than half the battle. There were years before the crash were we pulled in more than 22%.

As I mentioned earlier, everyone's situation is different but getting sound advice certainly helps.

And to reiterate, I don't think BW should be dumping his money in a home that he won't likely even own in seven years.OH, I am definitely in agreement with NOT paying off a mortgage early. I just like to throw a little extra towards principal every now and then. There is no way in hell I would consider dropping my investments just pay pay off my GOOD debt.

A lot of people don't understand that House debt is GOOD debt to have. Car debt and credit card debt is what needs to be at ZERO.

DaneMcCloud
07-17-2010, 12:19 AM
OH, I am definitely in agreement with NOT paying off a mortgage early. I just like to throw a little extra towards principal every now and then. There is no way in hell I would consider dropping my investments just pay pay off my GOOD debt.

A lot of people don't understand that House debt is GOOD debt to have. Car debt and credit card debt is what needs to be at ZERO.

If you can, start a DBA or LLC or some company in which you can write off your car payment, mileage, etc. and you'll save quite a bit come tax time. As for credit cards, they're an asset as long as you pay your balance each month. There are so many money saving programs out that there that can really help your bottom line that you're really missing out if you avoid them altogether.

Guru
07-17-2010, 12:29 AM
If you can, start a DBA or LLC or some company in which you can write off your car payment, mileage, etc. and you'll save quite a bit come tax time. As for credit cards, they're an asset as long as you pay your balance each month. There are so many money saving programs out that there that can really help your bottom line that you're really missing out if you avoid them altogether.We tried running our own business once and it was just too frustrating for me to keep track of. I know it is the best way to eliminate some debt but it caused me more headaches than I wanted to deal with.

On the credit cards, you describe exactly what I do. We charge everything and we pay the balance in full every single month.

DaneMcCloud
07-17-2010, 12:35 AM
We tried running our own business once and it was just too frustrating for me to keep track of. I know it is the best way to eliminate some debt but it caused me more headaches than I wanted to deal with.

On the credit cards, you describe exactly what I do. We charge everything and we pay the balance in full every single month.

I forgot to ask but did rewardsnetwork.com work out? Entertainmentbook.com?

DaneMcCloud
07-17-2010, 12:37 AM
And BW, having $150-$180k tied up in a home in Kansas while you're in your 20's is lunacy.

You could take that dough and earn $15-18k per year with minimal investments.

Guru
07-17-2010, 12:38 AM
I forgot to ask but did rewardsnetwork.com work out? Entertainmentbook.com?huh?

Buehler445
07-17-2010, 12:42 AM
Good discussion in this thread.

I will say that most people aren't disciplined investors. Most people do like BWillie is saying and blow the extra cash. And given the choice between blowing it and paying the shit off, definitely pay the shit off. But if you are willing to play the game, you can come out further ahead.

And FFS, does everyone have a 1250/month mortgage? Jesus tits. I must live in a terrible house compared to you fuckers, although I do live in BFE.

DaneMcCloud
07-17-2010, 12:43 AM
huh?

There was a thread a while back about CC advantages and I linked to both programs.

I thought you were in that thread. If not, my bad.

But check them both out. They're great money-savers.

Buehler445
07-17-2010, 12:45 AM
Consider: there has never been a 15-year period in history where a broadly diversified stock portfolio lost money. there has never been a 20-year period in history where a broadly diversified stock portfolio failed to beat inflation. That is the worst case scenario, I'm fairly sure I can beat 3-4% after tax, probably more like 7-8% over the long run.


Are you sure about that? I thought the stock market didn't recoup its value after the 29 crash until the 50's. I could be wrong though, it's been a hell of a long time since I've looked at that.

Miles
07-17-2010, 12:48 AM
And BW, having $150-$180k tied up in a home in Kansas while you're in your 20's is lunacy.

You could take that dough and earn $15-18k per year with minimal investments.

Agreed. With 10%+ it would have to be long term which is what I'm figuring you are referring to.

DaneMcCloud
07-17-2010, 12:52 AM
Agreed. With 10%+ it would have to be long term which is what I'm figuring you are referring to.

We're doing a minimum of 10% per year.

I don't want to insult anyone, but there's an advantage to having an Ivy League money manager with Ivy League contacts on the East Coast.

Now, I'm not implying "insider trading" but I do think the results are different when you have people that are very connected.

DaneMcCloud
07-17-2010, 12:55 AM
And FFS, does everyone have a 1250/month mortgage? Jesus tits. I must live in a terrible house

Child, please.

:D

You're married, you're happy and you're doing what you want to do.

That's all that matters.

Guru
07-17-2010, 01:04 AM
Good discussion in this thread.

I will say that most people aren't disciplined investors. Most people do like BWillie is saying and blow the extra cash. And given the choice between blowing it and paying the shit off, definitely pay the shit off. But if you are willing to play the game, you can come out further ahead.

And FFS, does everyone have a 1250/month mortgage? Jesus tits. I must live in a terrible house compared to you ****ers, although I do live in BFE.I don't. Not even close.

Miles
07-17-2010, 01:04 AM
We're doing a minimum of 10% per year.

I don't want to insult anyone, but there's an advantage to having an Ivy League money manager with Ivy League contacts on the East Coast.

Now, I'm not implying "insider trading" but I do think the results are different when you have people that are very connected.

You have managed to blow away the return on the market and some the past few years then. Congrats and still agree with your advice but using that as a suggested benchmark for what someone could expect is a little unrealistic.

ChiefsCountry
07-17-2010, 01:32 AM
And BW, having $150-$180k tied up in a home in Kansas while you're in your 20's is lunacy.

You could take that dough and earn $15-18k per year with minimal investments.

It sounds like he has roommates that are paying the bulk of his mortgage. Thats basically free money.

RedNFeisty
07-17-2010, 08:36 AM
Just curious of what the advantages of having that much equity in a home in your 20's would be? With interest rates as low as they are right now reduced by the usual inflation/CPI and tax deductions for interest he has a seriously inexpensive loan.

I get what you guys are saying, I don't disagree with your logic and the math. However, young people around here do not invest nor do they save. Not having a mortgage means the home can be borrowed against at anytime, or sold with nothing but profit. In my opinion, I think a young person not wanting to dabble in the stock market is making a wise choice in paying off the mortgage.

3rd&48ers
07-17-2010, 08:47 AM
Pay it off... Debt free is a wonderful lifestyle

Paid mine off in 09 and even though I had to pay about 1500 more in taxes, that was much better than 3000 to Wells-Fartgo
to offset that 1500, this year I increased my 401-k to 15% , hopefully this will negate that unless they seize our 401-k's

Stewie
07-17-2010, 09:14 AM
There's a tipping point in paying off a mortgage. It will get to the point where paying interest on the loan is offset by the standard deduction come tax time. Even if you have a low interest rate (4-5%) it's worth it because that's a guaranteed return on your money. You'd be hard-pressed to get that return in any guaranteed investment.

As for playing the stock market instead of paying off the loan, that's a completely personal decision. The stock market has become a casino with the hedge funds and their algorithms. You can see it in action every day. A large position will be taken on Monday and dumped a day or two later. It's insane. There are a few exceptions that make money, but it's usually because they cheat. (See the GS settlement this last week.) There are some money makers out there that play the arbitrage game, but that takes enormous amounts of money to make a decent return.

BWillie
07-17-2010, 11:58 AM
And BW, having $150-$180k tied up in a home in Kansas while you're in your 20's is lunacy.

You could take that dough and earn $15-18k per year with minimal investments.

Sounds like I need to talk to a financial advisor because I don't know how to invest my money and get the immediate returns you guys talk about. I understand that its better to donate to a long term investment but I would like to have the availability of the gains at a young age. If I own a home outright when Im 31 I could just move and rent that house out to a family while making 1600 a month our sell it and make 180-200k depending in the market.

BWillie
07-17-2010, 12:03 PM
It sounds like he has roommates that are paying the bulk of his mortgage. Thats basically free money.

I have two roommates that I get 500 and 400 a month from. I have a four bedroom house so I don't know what else I would do with the rooms.

Stewie
07-17-2010, 12:13 PM
We're doing a minimum of 10% per year.

I don't want to insult anyone, but there's an advantage to having an Ivy League money manager with Ivy League contacts on the East Coast.

Now, I'm not implying "insider trading" but I do think the results are different when you have people that are very connected.

It has nothing to do with Ivy League, or anything like that. In fact, it's computer geeks and mathematicians that have taken over Wall Street. It's flash trading with algorithms that are the rule of the day. Long gone are the days of buy and hold on fundamentals - the hedgies have made sure of that. It's writing computer programs based strictly on technical analysis and moving in and out quickly. That's not investing, that's gambling and hoping your algorithm works as intended. It has become splitting hairs and hoping your short term investment will pay you pennies per share.

alnorth
07-17-2010, 12:36 PM
I get what you guys are saying, I don't disagree with your logic and the math. However, young people around here do not invest nor do they save. Not having a mortgage means the home can be borrowed against at anytime, or sold with nothing but profit. In my opinion, I think a young person not wanting to dabble in the stock market is making a wise choice in paying off the mortgage.

I agree with a lot of this. Most people, especially young people, simply will not save the money they would have used to pay down the mortgage. Or they will start but something they think is important comes up and they blow the money on that. Or they panic after losing 10% in a year and swear off investing forever, or... etc. In that case, paying down the mortgage is sort of like buying a 20 or 30-year CD that pays you 4 or 5 percent a year, which is not bad at all.

Those who have the discipline to invest the money no matter what, the ability to not make stupid bets and have good diversification, and the iron will to blissfully ignore short-term losses will likely come out much better by not paying off the mortgage, but that is unrealistic for most people. Paying off the mortgage early means you'll earn less in the long run and you might be buried in your home and unable to move if values take a dive in the first few years you start paying it down, but thats about it. It is certainly a hell of a lot better than buying new cars, eating out every day, and going on expensive vacations.

alnorth
07-17-2010, 12:43 PM
As for playing the stock market instead of paying off the loan, that's a completely personal decision. The stock market has become a casino with the hedge funds and their algorithms. You can see it in action every day. A large position will be taken on Monday and dumped a day or two later. It's insane. There are a few exceptions that make money, but it's usually because they cheat. (See the GS settlement this last week.) There are some money makers out there that play the arbitrage game, but that takes enormous amounts of money to make a decent return.

You might have investing confused with day-trading. I don't care what happens to my 401k next year, I'm not investing everything in 4 or 5 stocks, I'm in 11 mutual funds spread to thousands of stocks here and around the world. (Actually, I kind of hope the stock market craters again to 6000 or 7000, I'd feel sorry for the older folks who had too much in the market, but I am young and would gladly buy more if stocks go on sale)

What little money I do use to "play around" with, I act more like Buffett than Cramer, looking for companies that seem cheap compared to their dividend and intrinsic value, and when I buy a single stock it is with the intention of holding it for 20-30 years. I don't have a huge amount of confidence in my ability to do that, so with most of my money, I basically overweight a bit into value mutual funds.

I wasn't burned nearly as bad by the crash as a lot of people, I'm already back to a little above even. (Not that I am afraid of a crash right now, see the first paragraph)

Stewie
07-17-2010, 12:48 PM
You might have investing confused with day-trading. I don't care what happens to my 401k next year, I'm not investing everything in 4 or 5 stocks, I'm in 11 mutual funds spread to thousands of stocks here and around the world. (Actually, I kind of hope the stock market craters again to 6000 or 7000, I'd feel sorry for the older folks who had too much in the market, but I am young and would gladly buy more if stocks go on sale)

What little money I do use to "play around" with, I act more like Buffett than Cramer, looking for companies that seem cheap compared to their dividend and intrinsic value, and when I buy a single stock it is with the intention of holding it for 20-30 years. I don't have a huge amount of confidence in my ability to do that, so with most of my money, I basically overweight a bit into value mutual funds.

I wasn't burned nearly as bad by the crash as a lot of people, I'm already back to a little above even. (Not that I am afraid of a crash right now, see the first paragraph)

I'm talking about how the big boys now play. It's investing in nano-seconds. These are the market makers and everyone else is at their mercy. And nobody can invest like Buffett. He takes a position in a company that's so large he has a say in how things are run.

BTW, BRK-A is up a staggering 45% in 12 years. :rolleyes:

alnorth
07-17-2010, 01:02 PM
I'm talking about how the big boys now play. It's investing in nano-seconds. These are the market makers and everyone else is at their mercy. And nobody can invest like Buffett. He takes a position in a company that's so large he has a say in how things are run.

Obviously not a perfect analogy, but the fundamentals are the same. I'm pretty much a buy-and-hold value investor.

If a company is able to make a profit of $1.50 per share for the forseeable future, the value of all the equipment, land, etc minus debt if everything has to be sold off is about $20/share, and we are living in a world where we demand at least 7% for the risk, then that hypothetical company is worth about $52. If there is a lot of fear, trading games, or temporary insanity that drives the price down to $40, that price will eventually have to bounce if the company continues on making money like clockwork and looking as strong as ever.

alnorth
07-17-2010, 01:17 PM
BTW, BRK-A is up a staggering 45% in 12 years. :rolleyes:

Thats a pretty convenient time frame. Go back just half a year for the start (12.5 years) and it is about 162% (about 8%/year). Go forward about 2 years for the start (10 years) and it is about 103.9% (about 7.4%/year).

Still seems short to me though, I always believe you need at least a 15-year horizon from buy to sell. Anything less than 15 years and you begin to take more risk. Move that start back to 15 years and it is about 388.7% (about 11.2%/year)

Not that you should go out and put it all on BRKA or BRKB, but this "stock" is basically just one big value mutual fund that has done pretty well unless you pick and choose the perfect time frame to make it look as bad as possible. (That said, I'd be especially careful about this one anyway though, because I suspect if Warren dies everyone will go into a screaming panic until the new guy(s) prove they are capable. Same with Apple and Steve Jobs, I'm leery about companies or funds with a huge bigger-than-life personality driving it)

aturnis
07-17-2010, 03:23 PM
Which is why I said MOST people.

The problem with your way of thinking though is that NOBODY in the entire freaking world NEEDS a $600/mo. car payments. Some just CHOOSE to have it. MOST people(the majority that you are talking about) CHOOSE to live OUTSIDE of their means.

The only thing we need is food, shelter and clothing to live healthy lives. So BWillie is right, MOST people SHOULD be able to afford this. They just choose immediate results over the long hard froogle road that will provide maximum benefit.

The only thing that should affect this at all is kids. You don't really have a choice but to pay for their food, daycare and schooling. Not to mention clothes. Fuck, this really puts things into perspective as I'm having my first kid in October.

DaneMcCloud
07-17-2010, 03:40 PM
The problem with your way of thinking though is that NOBODY in the entire freaking world NEEDS a $600/mo. car payments. Some just CHOOSE to have it. MOST people(the majority that you are talking about) CHOOSE to live OUTSIDE of their means.




Have you ever been outside of Iowa?

DaneMcCloud
07-17-2010, 03:42 PM
Sounds like I need to talk to a financial advisor because I don't know how to invest my money and get the immediate returns you guys talk about. I understand that its better to donate to a long term investment but I would like to have the availability of the gains at a young age. If I own a home outright when Im 31 I could just move and rent that house out to a family while making 1600 a month our sell it and make 180-200k depending in the market.

Yeah, you need to speak to a savvy financial advisor. Try to get recommendations from successful people in your area or around the city.

You'd be better off saving the extra money you'd put towards your loan now for a second property, although don't let anyone try to fool you: Rental properties a pain in the ass, especially lower end properties.

Stewie
07-17-2010, 03:43 PM
Thats a pretty convenient time frame. Go back just half a year for the start (12.5 years) and it is about 162% (about 8%/year). Go forward about 2 years for the start (10 years) and it is about 103.9% (about 7.4%/year).

Still seems short to me though, I always believe you need at least a 15-year horizon from buy to sell. Anything less than 15 years and you begin to take more risk. Move that start back to 15 years and it is about 388.7% (about 11.2%/year)

Not that you should go out and put it all on BRKA or BRKB, but this "stock" is basically just one big value mutual fund that has done pretty well unless you pick and choose the perfect time frame to make it look as bad as possible. (That said, I'd be especially careful about this one anyway though, because I suspect if Warren dies everyone will go into a screaming panic until the new guy(s) prove they are capable. Same with Apple and Steve Jobs, I'm leery about companies or funds with a huge bigger-than-life personality driving it)

Of course! Are you a short term trader? Do you pick and choose when to buy BRK-A? Buffett is a very conservative investor. He owns insurance companies and railroads. He has to be and he HAS to be long term. When I look at something like BRK-A I look back 10 years, at least. A six month snapshot of BRK-A won't get you anywhere.

DaneMcCloud
07-17-2010, 03:47 PM
It has nothing to do with Ivy League, or anything like that. In fact, it's computer geeks and mathematicians that have taken over Wall Street. It's flash trading with algorithms that are the rule of the day. Long gone are the days of buy and hold on fundamentals - the hedgies have made sure of that. It's writing computer programs based strictly on technical analysis and moving in and out quickly. That's not investing, that's gambling and hoping your algorithm works as intended. It has become splitting hairs and hoping your short term investment will pay you pennies per share.

The stock market has now become a market of stocks.

But if everyone where using the same algorithms, everyone would be gaining and losing at the same rate, which isn't the case at all.

Back from 2004-2006, we had a fund manager that had us about 80% invested in emerging markets. During those three years, we were averaging more than 22% per quarter in gains.

That guy left for Calpers in 2007 and we hooked up with our current fund manager, who quickly pulled us out of those emerging markets and completely changed our portfolio (good thing, too). Since then, we're running somewhere between 10-12% annually. We have Uni 401's, 401's, Money Markets, CD's, and several different funds doing different things.

If you've got a good fund manager, it's definitely possible to get more bang for your buck. It may be a little risky, but someone like BW (and myself) can take a few risks because we have a lot of time to invest (BW has probably 40 years before retirement age).

Stewie
07-17-2010, 03:55 PM
The stock market has now become a market of stocks.

But if everyone where using the same algorithms, everyone would be gaining and losing at the same rate, which isn't the case at all.

Back from 2004-2006, we had a fund manager that had us about 80% invested in emerging markets. During those three years, we were averaging more than 22% per quarter in gains.

That guy left for Calpers in 2007 and we hooked up with our current fund manager, who quickly pulled us out of those emerging markets and completely changed our portfolio (good thing, too). Since then, we're running somewhere between 10-12% annually. We have Uni 401's, 401's, Money Markets, CD's, and several different funds doing different things.

If you've got a good fund manager, it's definitely possible to get more bang for your buck. It may be a little risky, but someone like BW (and myself) can take a few risks because we have a lot of time to invest (BW has probably 40 years before retirement age).

If your mix has CDs and MMs that's a drag on your return. BTW, my fee-based adviser is in your back yard and has been a sage since 2002.

DaneMcCloud
07-17-2010, 04:00 PM
If your mix has CDs and MMs that's a drag on your return. BTW, my fee-based adviser is in your back yard and has been a sage since 2002.

It is a drag on the return but we like to keep a certain amount of cash liquid (around $25k). It's a personal decision, not a decision that our advisor necessarily backs.

3rd&48ers
07-17-2010, 04:02 PM
The problem with your way of thinking though is that NOBODY in the entire freaking world NEEDS a $600/mo. car payments. Some just CHOOSE to have it. MOST people(the majority that you are talking about) CHOOSE to live OUTSIDE of their means.

The only thing we need is food, shelter and clothing to live healthy lives. So BWillie is right, MOST people SHOULD be able to afford this. They just choose immediate results over the long hard froogle road that will provide maximum benefit.

The only thing that should affect this at all is kids. You don't really have a choice but to pay for their food, daycare and schooling. Not to mention clothes. ****, this really puts things into perspective as I'm having my first kid in October.

most people can't distinguish between a want and a need

aturnis
07-17-2010, 04:03 PM
And as for $600 per month for a car payment, who does that?? Lease, lease, lease. My lease payment on a $54k Lexus is $440.14 per month with tax.

Lease huh? So pay $2148/yr. for something you will never, ever, ever own? and that's at the 179./mo. you suggested.

You pay $5280/yr. for something you we never ever ever own. That just doesn't equate.

He's MUCH better off with the paid for out of pocket Accord. Even if it's 10yrs. old he will have VERY minimal maintenance for it. It is after all one of the cars that has helped to force the domestic vehicles to stop selling shit or fail. There's a reason for that. Reliable as ****.

3rd&48ers
07-17-2010, 04:07 PM
dude must be knocking down about 150 per year and can afford to never own the Lexus, who knows

DaneMcCloud
07-17-2010, 04:24 PM
Lease huh? So pay $2148/yr. for something you will never, ever, ever own? and that's at the 179./mo. you suggested.

You pay $5280/yr. for something you we never ever ever own. That just doesn't equate.

He's MUCH better off with the paid for out of pocket Accord. Even if it's 10yrs. old he will have VERY minimal maintenance for it. It is after all one of the cars that has helped to force the domestic vehicles to stop selling shit or fail. There's a reason for that. Reliable as ****.

Car ownership is highly overrated.

As a business owner, I write off the lease and the mileage, which I need for our income level.

Owning a $54k car is stupidity.

aturnis
07-17-2010, 04:44 PM
most people can't distinguish between a want and a need

Isn't that the truth?!

DaneMcCloud
07-17-2010, 05:50 PM
Isn't that the truth?!

No, it's a ridiculous generalization.