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Author: dozer183e Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1492  
Subject: Howdy Date: 5/26/2004 11:42 PM
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I've posted this on other boards; but I just found this board and wanted to hear what you had to say:::
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I'm selling my home in an expensive area and moving to buy a home in a much less expensive area.

I am 35, married with 4 young kids. Currently, DW and I have about $30,000 each in 401(k)s and IRAs. We have about $25,000 in an e-fund.

I'll have about $280,000 net profit after the sale of my home. We'll be buying a new home for $211,000. My thought was to put 20% down on that home and take a mortgage on the rest. We'll invest the remaining money (approx $240,000) in various ways and for various reasons including: Kids College, Real estate investments, max out IRAs annually, maybe contribute more to 401(k), keep some in money market for future expenses (car, home improvement, vacations, etc).

I've been asked lately by a few people why I am not just buying my home outright to avoid having any mortgage payments. Each time I try to explain that I am diversifying this way, I find it harder to explain myself, and I start to think perhaps it would be better to pay off the house and have less monthly liabilities.

If I do buy the house outright, I'll have approx. $70,000 to use in the various ways mentioned above, and will be able to put away more cash on a monthly basis.


So I'm looking for any opinions on what someone my age, in my situation should do. I should also mention that employment will be a question mark at first, I do not know how long it will take me to find a job at the time of our move.

Dozer
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Author: dougdoogle Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 595 of 1492
Subject: Re: Howdy Date: 5/26/2004 11:56 PM
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Visualize you and your DW sitting around the kitchen table in the first or tenth month of unemployment. If you can see yourself even thinking of borrowing a quarter million dollars for investments, vacations, and such then sure, go ahead.

Doug

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Author: tmeri Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 596 of 1492
Subject: Re: Howdy Date: 5/26/2004 11:59 PM
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I've been asked lately by a few people why I am not just buying my home outright to avoid having any mortgage payments. Each time I try to explain that I am diversifying this way, I find it harder to explain myself, and I start to think perhaps it would be better to pay off the house and have less monthly liabilities.


I vote for taking zero mortgage. The transaction expenses for a mortgage are absolutely horrible, and unless you HAVE to have a mortgage, don't do it. You'll be spending a couple of thousand, maybe more, up front for what, nothing, just the privilege of borrowing.

However, if you don't get a mortgage, there are a couple of things you SHOULD do that normally are required by the bank, anyway, and will benefit you:

• title insurance--get an owner's policy. Banks always require one for themselves, but you need one for you.
• get an inspection prior to close
• get a property survey prior to close
• get an appraisal prior to close
• make sure you buy fire/HO insurance; banks require it, but you need it, anyway

If you feel like you need to borrow against the house, set up a HELOC (home equity line of credit) on your house. Look for one with no closing costs. They exist all over the place, so don't let someone talk you into paying for the privilege to borrow here, either.

- tmeri

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Author: Evelynk Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 597 of 1492
Subject: Re: Howdy Date: 5/27/2004 12:20 AM
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DH and I were in a similar situation last year. We sold a nice house and bought a dumpy fixer-upper. In our case, we put 20% down on the new house just because we find mortgage insurance really annoying.

I really enjoy having the extra money freed up for other investments. We have a nice interest rate, so our payments are pretty low. Plus, we may sell this house in the near future, so it didn't make sense to pay off the house right away.

If I were you, I think I would feel better about having the money in the bank while I was looking for employment.




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Author: Thurst Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 598 of 1492
Subject: Re: Howdy Date: 5/27/2004 12:26 AM
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If I were you, I think I would feel better about having the money in the bank while I was looking for employment.

I'd be disinclined to buy a house before finding employment (if employment was a necessity)...

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Author: Evelynk Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 599 of 1492
Subject: Re: Howdy Date: 5/27/2004 12:28 AM
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If I were you, I think I would feel better about having the money in the bank while I was looking for employment.

Oops- I just reread you post. I guess you will have some extra money from the house to see you through until your next job even if you paid off the mortgage.

However, I still vote for taking a mortgage, if you think your investments will do better than your mortgage rate. Just my two cents.

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Author: LEOLOneeds2Bfire Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 600 of 1492
Subject: Re: Howdy Date: 5/27/2004 12:34 AM
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If I do buy the house outright, I'll have approx. $70,000 to use in the various ways mentioned above, and will be able to put away more cash on a monthly basis.

If you take out a mortgage then you may end up spending that extra money but if buy your house outright that money saved.

Mortgage rates are low so you might make more by investing that money.

If you believe, like some of us do, that we are in a secular bear market that will last 10+ years then you would be better off using the money to pay for your house then dollar cost average for the next decade.

I imagine that there is a great feeling of security in knowing that you own your house free and clear.

I pondered these items when I had an extra $300 a month and I was trying to decide if I should use it towards my mortgage or invest it. I decided to split that $300 and use half to pay extra on the mortgage and half to invest. Why not purchase half the house now ($106K) and use the rest to invest. A $106K 15 year mortgage would not be a bad thing to have.

I also agree with thurst: I would not buy a house while unemployed: would if you can't find a job in that area and have to leave it. Then you would be stuck with a house that you can't use.

Leolo


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Author: sykesix Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 601 of 1492
Subject: Re: Howdy Date: 5/27/2004 12:56 AM
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I guess I would be included to get the mortgate. Here's why (in no particular order):

You said you wanted to save for college for your young kids, that means you have a long investment horizon. We don't know what the stock market will do in that time, but its almost certain to be better than the cost of your mortgage.

Money is cheap right now. We always hear about the geniuses who loaded up on 14% bonds in the 1980s. I think in 10 or 15 years we'll be hearing about the geniuses who borrowed lots of money at 5 or 6% at the turn of the century.

Diversification. People would never recommend you put all your money in one stock, but they will recommend you put all your money in one house. I think its only prudent not to have any one assett be outsized.

Opportunity Cost. Often overlooked but it is a real cost. You don't know what the future holds. Being able to take advantage of future opportunities is valuable.

Time value of money. When you kids go to college your mortage payment will be so small it will be laughable. It won't be significant. If you buy your house outright, you are using expensive dollars now to save cheap dollars later. Worth keeping in mind.

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Author: chooey98 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 602 of 1492
Subject: Re: Howdy Date: 5/27/2004 9:27 AM
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I like to be totally debt-free as much as possible. There is wisdom in taking out a mortgage at low rates, and it may be that investments would give you a higher rate of return than you would be paying on your mortgage, but there is no guarantee.

The way I think, if employment is uncertain, owning a house free and clear would help me sleep better at night. There would be no pressure to get a high-paying job, either. You could settle for a lower paying job, possibly one with less stress. And, you would have a chunk in your nest egg to see you through.

That's the way I would go... but I'm pretty risk averse.

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Author: decath Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 604 of 1492
Subject: Re: Howdy Date: 5/27/2004 9:57 AM
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As I've heard many times on the FIRE board, LBYM board and many other places on the Fool, this is a personal decision that has more to do with the risk aversion of the individual than it does with the right choice. The only way to know for sure which is the right thing to do is to have a time portal about 10 years into the future so you know what interest rates and investment returns will be. <g>

As long as you LBYM and continue to make regular progress towards your investments, you will succeed regardless of which option you choose. Just don't kick yourself too hard if you end of choosing the least rewarding option.

I'm 42 and have battled this issue back and forth ever since I bought my 1st home at the age of 24. I had a mortgage rate at 10 3/8%. At that time, I chose to put 10% of my salary in a 401k and another 10% to pay down the mortgage. After 10 years, my first home was paid off. The feeling of having a paid off home was euphoric as you can imagine but I missed out on the 20% gains of the 80's and 90's that money could have gained.

I bought my 2nd home in 96 and decided to put only 20% down and invested the remaining profits in individual stocks and a tech fund. The tech fund did spectacular for 4 years and I thought I was an investing genious (just lucky of course). After 8 years now, the tech fund is about even and the individual stock investments have returned an average of around 15%. So it was basically a wash with the investments averaging about 7-8% compared to an interest rate of 7.5% for the new home mortgage.

The same decision in 1991 would have brought me spectacular gains but if I had done that in early 2000, I would have done miserable. Its all about timing which most of us can't predict. In my case, it also involved the stupidity to shove 50% of my house profits into a tech fund but I've learned since then and will not repeat that mistake.

decath



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Author: dozer183e Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 605 of 1492
Subject: Re: Howdy Date: 5/27/2004 11:13 AM
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Thank you all for your quick and well informed replies. This board is now on my faves.

Here is what I am thinking:

Maybe I put down a 50% downpayment. I'll still have a large emergency fund, money to invest for kids college, money to spend on necessary items so I won't have to borrow (car, furniture, etc.), and reserve funds ready if the right investment opportunity comes along. Then I start to pay off this loan somewhat aggressively. If I can do that, I can have it paid off in 10-15 years. If for whatever reason it is too hard to pay off that much, then I don't have to.

That will be about the same time the kids start to go to college. DW and I are of the mindset that we will not be fully funding college costs. It would be too hard with 4 kids, and both of us went through college and graduated with little financial help from parents. But we do want to have some funds available as a help. So we'll have a fund, but I don't think we'll be working to pay off college in those years.

So in my mind, in about 15 years, we'll have the mortgage paid off, we'll have nice (I hope) investments diversified over a variety of vehicles, and kids will be out of the house (well, maybe, but they'll be 18+).

As far as employment goes, I have some interviews lined up next week in my new location, and I don't have any fears of not getting a job. Of course, who really wants to work?

Dozer

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Author: tmeri Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 606 of 1492
Subject: Re: Howdy Date: 5/27/2004 1:00 PM
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I am truly amazed at the number of people who wouldn't think of borrowing money to put into the market, but when a choice comes up of taking out a mortgage and using that to put into the market or buying the house outright, so many people are willing to take out the mortgage, in spite of the 2%-3% transaction costs UPFRONT. Most of you don't like load funds. What gives on the mortgage thing? You don't object to those enormous fees, but you'd yowl if a stock broker charged you 1% to let you into a fund.

The mortgage industry seems to have infected us all to their benefit and our detriment. We got wise to stock broker fees; maybe we need a dose of the same medicine for mortgage brokers.

- tmeri

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Author: inparadise Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 608 of 1492
Subject: Re: Howdy Date: 5/27/2004 5:01 PM
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... so many people are willing to take out the mortgage, in spite of the 2%-3% transaction costs UPFRONT.

Tmeri,

When is the last time you applied for a mortgage? We just got one in December and there were no fees involved whatsoever other than about $250 for the appraisal. We went through a mortgage broker who was compensated by citibank. Our rate was very competitive for similar zero point loans through other institutions.

Of course we still had title insurance, and a home inspection, both of which I would do either way. The broker had tried to impose other fees on us as well, but was told if he wanted our business, he would waive them, which he did.

I'm not one for piling on debt, but it is much easier to get a loan when you don't need it than when you do. Personally, I would go the low cost mortgage route to retain financial flexibility.

IP

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Author: iamdb Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 609 of 1492
Subject: Re: Howdy Date: 5/27/2004 6:17 PM
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I agree with inparadise.

We got a zero point 5.5% loan last summer directly from BoA, in which the other costs were credited. We could have gotten a lower rate had we been willing to pay up-front costs.

To pay off our RE loan, we would have to take the funds from an IRA, and the tax liability would make such a decision untenable.

Disclosure: This loan was a refi, and the loan to value ratio is under 20%, so the lender assumed no added risk other than a 1.25% reduction in interest rate.

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Author: sykesix Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 612 of 1492
Subject: Re: Howdy Date: 5/28/2004 3:28 PM
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I am truly amazed at the number of people who wouldn't think of borrowing money to put into the market, but when a choice comes up of taking out a mortgage and using that to put into the market or buying the house outright, so many people are willing to take out the mortgage, in spite of the 2%-3% transaction costs UPFRONT.

Most mortgages don't cost nearly that much, and you can usually finance the cost with the loan.

Its important not to neglect costs, of course. But they don't change the basic question: "What is the best use of funds?"

Without a crystal ball you can't answer that question, but right now with interest rates as low as they are, I think you have to seriously consider putting money elsewhere besides your house.

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Author: tmeri Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 614 of 1492
Subject: Re: Howdy Date: 5/29/2004 10:45 PM
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When is the last time you applied for a mortgage?

Last year. I looked all over for the "no closing costs" loans, but it appeared they were not available except for new purchase and for higher interest rates.


We just got one in December and there were no fees involved whatsoever other than about $250 for the appraisal. We went through a mortgage broker who was compensated by citibank. Our rate was very competitive for similar zero point loans through other institutions.

That's great. I wish the mortgage companies I talked to had been more willing to waive the fees. I did try to get them to do it, in addition to looking on my own. You did good.


Of course we still had title insurance, and a home inspection, both of which I would do either way.

Did you pay only for your own title insurance policy, or did you have to pay for the bank's, as well?

I wonder why your mortgage broker wouldn't waive the appraisal? They had other costs that they apparently paid for themselves. Someone had to pay to have the deed of trust recorded, a termite inspection (if required by your state), flood zone cert (if required), title search, etc. I don't know why the bank would charge you the one fee but not the others, but maybe that was the deal you were able to get from them.

- tmeri

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Author: inparadise Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 619 of 1492
Subject: Re: Howdy Date: 5/30/2004 12:51 PM
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I wonder why your mortgage broker wouldn't waive the appraisal? They had other costs that they apparently paid for themselves. Someone had to pay to have the deed of trust recorded, a termite inspection (if required by your state), flood zone cert (if required), title search, etc. I don't know why the bank would charge you the one fee but not the others, but maybe that was the deal you were able to get from them.

Basically, I told him he though we would like to work with him, he was out of line fee wise, to the tune of about $850 too much. He waived about $850 in fees, leaving about $250 which they assessed as the appraisal. Termite inspection around here is not a fee charged by the mortgage co, though indeed a fee incurred to get a mortgage, as would have septic had it had one. This was not a refi, but an out and out purchase. We also got the water tested as it is on a well, and a home inspection. No flood cert required, and the title search is part of title insurance. We did indeed pay both parts of the title insurance. They also invited us to sign for a $100,000 no fee home equity loan, which we declined.

I am not saying there were no fees involved, but it was not as expensive as you seemed to indicate. Banks typically won't budge on fees, but mortgage brokers seem to have plenty of wiggle room. Before rebating us on fees, the broker would have received a $5,000 commission, (it has to be disclosed on the good faith estimates.) Ironically, had we gone directly to Citibank, they would not have reduced our fees at all even though they were saving the $5K by not going through a broker. We tried. The broker was by far the better deal.

IP

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