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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 127777  
Subject: Re: Are fixed rate loans a no-no? Date: 11/1/2001 7:16 PM
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Hi Liz,

Most of the time you say pretty sensible things, (thanks!)and I enjoy your amusing phrases, (glad to know it!) but this one is pretty bizarre when you think about it. "Accessing capital they've been forced to save through principal paydowns" is saying that now that a person has paid down a loan, they need to borrow that money back again.

No it isn't saying that at all. Where in my above qoute do you read me saying anybody NEEDS to borrow money?

Even the pay-it-down pros (JAFO, Monte, et al.) present that principal payments are a form of forced savings. Whether that's good or bad is an argument oft explored (but not in my last post.)

Isn't that a tad outrageous? (I've been called worse ;~)

Well, I realize you're in the business of persuading people to borrow money up to their eyeballs, but why would you suggest someone do this?

Really, Liz... aren't you being a "tad inflamatory?" Can I assume you've seen me harmonize with the conservative crowds about preferably having emergency funds and safety-net insurance in place prior to hocking-the-farm?

I've said it before & I'll say it again; I'm about "best use of funds."

And on top of this, the "capital" or equity a person has acquired in a home isn't necessarily all due to principal paydowns. Some of it comes from appreciation. DH & I put down $5,000 on our house four a half years ago. Today that $5,000 is worth $175,000, not including our principal reduction.

That's GREAT... and I totally agree! I NEVER SAID that ALL accumulated equity came from principal payments. Didn't even allude to such a thing.

Why would we want to borrow this money? Because that's the only way we're going to get our hands on it without selling the property, which we don't intend to do.

You just answered your own question.. thanks!

I'm not one of those people who suddenly have an urge to spend huge sums of money (that I'd need to borrow to accomplish) on depreciating items. I'd just as soon leave my money where it is. Making more money. Refinancing is not a way to receive FREE money. It's borrowed money.

You are blazingly correct! In addition, I agree entirely with your values about what you would choose to spend your money on.

Some people, however (and it could happen to you... life happens), find themselves in positions where they either need their capital for unforeseen emergencies greater than their personal emergency funds or insurance (bailing out inlaws or teenagers, among other sundry shenanigans,) or find themselves in unforeseen opportunities.

It's not plannable, and it has nothing at all to do with how long you intend to live in your home, or how high or low interest rates are. The financial world rarely cares, nor has direct impact, on your personal, private reality.

And I agree with rsprang, since I'm in pretty much the same situation, I believe, as he is. We've got 15-year amortized loans at a ridiculously low interest rate, and the ARMs offer absolutely no incentive for either of us to refinance. It's not an emotional decision; it's a logical, financial decision.

The 15 year fixed simply forces you to save your money in your real estate (and therefore avoid the interest costs of the mortgage.) If you believe you couldn't get a better after-tax long-term return from your capital than your mortgage interest elimination, AND you're willing to gamble against needing your capital to be liquid (or have the odds stacked so you can afford such a gamble,) then that should be a fine decision.

I'm not presenting ANY option as "one size fits all" (as so rubs Monte so badly,) nor am I saying that anyone choosing the emotional choice is wrong!

The numbers are the numbers. If someone feels absolutely certain that THEY are going to be the 1 out of 10 statistic, then who am I to argue? SOMEBODY has to be the exception, right?

Cheers,
Dave
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