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Author: DeltaOne81 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 127461  
Subject: Poll: What is the 'wisest' way... Date: 8/17/2006 4:54 PM
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Take out every penny of equity to invest (IO + HEL(OC) )
Pay down none of original loan (IO)
Pay standard payment schedule that I took a loan out for
Pay standard payment schedule plus some extra
Throw all free money at my mortgage until paid off

Click here to see results so far.

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Author: brewer12345 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 97987 of 127461
Subject: Re: Poll: What is the 'wisest' way... Date: 8/17/2006 5:29 PM
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Too simplistic and too dependent on the borrower. I took a 15 year mortgage because the payoff date matched my plans. If I had taken a 30 year mortgage, my answer would have been different (pay extra, rather than just pay according to schedule). No doubt there are a thousand variations...

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Author: zol Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 97988 of 127461
Subject: Re: Poll: What is the 'wisest' way... Date: 8/17/2006 5:46 PM
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What is the wisest way for YOU to handle your mortgage?

I have looked at this situation at various points of our life with different results:

<Situation 1> Just bought house with less than 20% down; PMI required (30-yr fixed loan)
<Action 1> Pay standard payment schedule plus some extra and refinanced when value of home increased enough to make equity 20% of value

<Situation 2> Just refinanced with 20% equity and no more savings other than small e-fund (30-yr fixed loan)
<Action 2> Pay standard payment schedule that I took a loan out for; save/invest extra cash each month

<Situation 3> Huge equity (enough for a downpayment on a second house); enough savings to pay off loan; lower interest rates (5/1 ARM)
<Action 3> Refinanced into lower interest rate loan but did not pay the principal down or take any more equity out (decided that if second house was of interest we would use the savings instead). Pay standard payment schedule that I took a loan out for since we are considering selling in less than 5 yrs. Should have considered Pay down none of original loan (IO)

<Situation 4> New house; new loan with more than 20% down (5/1 ARM) and small e-fund
<Action 4> Pay standard payment schedule that I took a loan out for and MAY/MAY NOT pay some extra to lower the impact of ARM resetting. Strategy going forward is to grow savings/investing to a level like in Situation 3 above. In any case, the goal is to pay off the debt before we retire by selling the house and moving to a smaller/less expensive place or simply paying it off from savings. But that is (at most) 30 years down the road. At that point we would re-evaluate if paying it off is really the best strategy. My preference is to have the $$$ on my side rather than on the equity. So, the last option (Throw all free money at my mortgage until paid off) is not attractive for me.

If we look at it from a financial standpoint, mortgages are probably the best way to use other people's money for other things like investing.

- zol

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Author: DeltaOne81 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 97989 of 127461
Subject: Re: Poll: What is the 'wisest' way... Date: 8/17/2006 5:49 PM
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Too simplistic and too dependent on the borrower.

I asked about *you* in *your* situation.

This is not intended to be an answer that is supposed to reflect everyone in all scenarios. It is supposed to reflect the people here in their scenarios (with the assumption that these are generally pretty smart people who are making rational decisions :) ).

This is only to get a sense of what generally financially intelligent people *are* doing. Period. Nothing more, nothing less.

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Author: FlyingDiver Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 97995 of 127461
Subject: Re: Poll: What is the 'wisest' way... Date: 8/17/2006 6:27 PM
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I'm not going to vote because the poll ignores the basic tenet of the philosophy that's being discussed. To wit, that you need to keep a balance in your various investment vehicles (leveraged home equity being one of them). The answer to the poll will vary over time depending on where else you have investments, and what the balance between them is.

I'm not sure I would ever go with option 1. Among other things, the tax accounting might get nasty.

Option 2 would be my choice if I was trying to build up equity in other investments.

Option 3 is the same as option 2 if you have an IO loan. If you don't, there is no option 2.

Option 4 is a good choice if you're trying to balance the other way. That's what I'm doing now.

joe




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Author: DeltaOne81 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 97998 of 127461
Subject: Re: Poll: What is the 'wisest' way... Date: 8/17/2006 7:07 PM
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Option 2 is not the same as option 3 for an IO loan. Option 3 you would pay the higher payments when the IO period expires. Option 2 you would refinance into another IO mortgage until you were ready to pay off in full.

And again, I agree that the answer varies by situation. Think of this as a survey, not a request for advice. The question is only what you are doing now - what YOU have decided is best for YOU... at THIS point in time. Thats all.

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Author: JEDIKNIGHT Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 98001 of 127461
Subject: Re: Poll: What is the 'wisest' way... Date: 8/17/2006 7:19 PM
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I'm sure others here are much wiser financial planners, but just my 2 cents..and of course, EVERYONE's situation is different.

I think about this all the time. My home has done well, and tons of post-soft market equity is still there. Many times I'm tempted to borrow against it for investments, expanding my current businesses, etc etc etc.

But I've decided to leave the house seperate meaning, my last resort. Luckily my business have done well over the years but if that's ever not the case...and I literally don't have a pot to pee in, then I'll tape the equity. Until then, I pretend it doesn't exist.

Also..while I could, I would not pay off my home early, or even extra per month. It's at a low rate...5.75%. Today, I'm not able to borrow money with a 30 year term for only 5.75%! So if I have a Line of Credit @ 8% for some business deal I did, I'd rather pay that off 1st.

Basically...pay off the HIGHEST interest costs 1st. and with the mortgage deduction, Uncle Sam pays a part of it anyway. I'm content to let the mortgage ride into the sunset.

Best of luck.

Jedi



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Author: Donna405 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 98011 of 127461
Subject: Re: Poll: What is the 'wisest' way... Date: 8/17/2006 8:20 PM
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When I refinanced 3 years ago, I took a 5-year mortgage. Then, I could see the light at the end of the tunnel. Because the interest rate is 4.375%, I choose to pay the regular payments and not a penny extra. I can make more money from investments than the mortgage interest.

Donna

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Author: linanil Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 98014 of 127461
Subject: Re: Poll: What is the 'wisest' way... Date: 8/18/2006 10:53 AM
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I like paying a tiny bit above the payment since it goes straight to principal. Basically I round up the amount to the nearest $100 dollars. So sure I could add those dollars together and do something else with them but it is a tiny amount that I wouldn't miss it.

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Author: sgkane One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 98015 of 127461
Subject: Re: Poll: What is the 'wisest' way... Date: 8/18/2006 11:46 AM
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As other posters have stated, this is an individual decision. In our case, thanks to generous bonuses over the last few years we have been able to sock away quite a bit. Two years ago, I threw caution to the wind and was going to go into business for myself with our savings (which was in mutual funds, CDs, etc.) It did not pan out.

DW has ALWAYS wanted to live mortgage free. I, being a 6-year lurker of the Fool, know that there are better things to do with one's money than pay down low-interest, tax-deductible debt. Anyway, I did what DW wanted, and we paid off the mortgage.

1.5 years later, we have built back up our savings, taken a couple of trips overseas, and, as the saying goes, sleep better at night. Was it the smartest thing to do from a financial point of view? Probably not. Was it the smartest thing to do from an emotional point of view? Absolutely.

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Author: coolnewbie One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 98019 of 127461
Subject: Re: Poll: What is the 'wisest' way... Date: 8/18/2006 3:16 PM
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Hello,

I voted for option 3. In my personal situation I would like to take a FR 30-year mortgage. But if I can make some extra payment towards the principal I get the luxury of contributing towards my entire loan while minimizing the interest payments over the 30-year period. Research has indicated if I make one extra payment a year towards my principal I would pay my mortgage off within 23-years.

I realized this after talking with a few mortgage lenders in my area. Now is there any downside to this, i.e. making one extra payment every year and closing out the mortgage early? Your comments/suggestions/advice will be very much appreciated.

Thanks in advance!!

Cheers,
Coolnewbie
Smile and be happy :)

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Author: montecfo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 98023 of 127461
Subject: Re: Poll: What is the 'wisest' way... Date: 8/18/2006 4:28 PM
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I realized this after talking with a few mortgage lenders in my area. Now is there any downside to this, i.e. making one extra payment every year and closing out the mortgage early? Your comments/suggestions/advice will be very much appreciated.

Coolnewbie-

I would say that is a very wise approach. For most folks, the guaranteed return you get from mortgage paydown is attractive. If you think of paying down your mortgage as making a bond-type "investment", then is makes sense for the safe-type portion of your funds.

I would assume you have adequate e-funds in place before beginning this or any other investment-type program since it is a relatively illiquid "investment".

best,

Montecfo


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Author: NutFlush Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 98024 of 127461
Subject: Re: Poll: What is the 'wisest' way... Date: 8/18/2006 4:33 PM
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I realized this after talking with a few mortgage lenders in my area. Now is there any downside to this, i.e. making one extra payment every year and closing out the mortgage early? Your comments/suggestions/advice will be very much appreciated.

If that extra payment had been invested in a mutual fund instead, you would have stood a good chance of coming out ahead. Long term, the return rates of the market have exceeded the interest rates on a mortgage.

But also consider the psychological side. If the market goes down, you don't get any gains, and can even lose some of your principal. Some people like the security of of a known rate of return by paying off the mortgage, instead of 'gambling' in the market.

Either way, you are saving money, which is better than 90% of Americans.







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Author: SeattlePioneer Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 98035 of 127461
Subject: Re: Poll: What is the 'wisest' way... Date: 8/19/2006 11:00 AM
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<<I realized this after talking with a few mortgage lenders in my area. Now is there any downside to this, i.e. making one extra payment every year and closing out the mortgage early? Your comments/suggestions/advice will be very much appreciated.

If that extra payment had been invested in a mutual fund instead, you would have stood a good chance of coming out ahead. Long term, the return rates of the market have exceeded the interest rates on a mortgage.

But also consider the psychological side. If the market goes down, you don't get any gains, and can even lose some of your principal. Some people like the security of of a known rate of return by paying off the mortgage, instead of 'gambling' in the market.

Either way, you are saving money, which is better than 90% of Americans.

>>


I think there are a couple of major reasons why the pay-down-the-mortgage vs investing-in-stocks issue tends to be confusing.


The first major reason is that paying down mortgages reduces interest charges ---a sure thing, while stock market investments historically have a higher return but no guarantees and wide variability in returns.

Secondly, lots of people who face this issue are risk averse in varying degrees and prefer to avoid the risks of debt when they can.


So I think the real key to an answer is how people evaluate the likely returns that are available in other investments versus the piece of mind they can obtain by reducing debt. That winds up with a substantial bias in favor of paying down debt for a lot of people, probably too much of a bias.

I might add that I paid off the mortgage over twelve years, from 1985-1997. I would have been ahead by maximizing stock market investments instead.

<<Either way, you are saving money, which is better than 90% of Americans.
>>


This is another important bottom line fact. Even though paying off the mortgage wasn't the optimal strategy with benefit of hindsight, it was still a reasonable strategy, and once the mortgage is gone I had substantial new cash flow that was then available for investing.






Seattle Pioneer

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 98037 of 127461
Subject: Re: Poll: What is the 'wisest' way... Date: 8/19/2006 12:16 PM
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Even though paying off the mortgage wasn't the optimal strategy with benefit of hindsight, it was still a reasonable strategy, and once the mortgage is gone I had substantial new cash flow that was then available for investing.

I personally think this is the key takeaway from the discussion.

When you're talking about paying down a mortgage on your home vs. investing the money, you are discussing two good things. Neither one can really be said to be wrong. In fact, the only way to see which one is actually better for a particular individual is in hindsight. While the probabilities suggest that investing will be somewhat better over time, a lack of investing skills, a poor stock market, or even a single investing mistake can switch investing around to be the lesser choice for a specific individual.

I could even see an argument that paying down the mortgage while investing other available cash allows you to learn investing on the go without risking all of your investable cash. Then, when the mortgage is gone and that monthly payment can be added to the investing pile of money, you will have learned what investing style works best for you. That additional cash could then be invested more effectively.

--Peter

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Author: mackh Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 98038 of 127461
Subject: Re: Poll: What is the 'wisest' way... Date: 8/19/2006 1:03 PM
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I personally think this is the key takeaway from the discussion.

When you're talking about paying down a mortgage on your home vs. investing the money, you are discussing two good things. Neither one can really be said to be wrong. In fact, the only way to see which one is actually better for a particular individual is in hindsight. While the probabilities suggest that investing will be somewhat better over time, a lack of investing skills, a poor stock market, or even a single investing mistake can switch investing around to be the lesser choice for a specific individual.

I could even see an argument that paying down the mortgage while investing other available cash allows you to learn investing on the go without risking all of your investable cash. Then, when the mortgage is gone and that monthly payment can be added to the investing pile of money, you will have learned what investing style works best for you. That additional cash could then be invested more effectively.


As a lurker it appears that much of the discussion seems to be arguing a false dilemma (that there are only two choices available). I think it is important to remember that it's not an all or none proposal and that the amount of equity that is financed can be adjusted to fit the individual financial situation (and comfort level).

To me it's a valid technique to discuss in an overall financial strategy and one I had not really considered before I started reading this board last year.

-Mack

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Author: montecfo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 98039 of 127461
Subject: Re: Poll: What is the 'wisest' way... Date: 8/19/2006 1:41 PM
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As a lurker it appears that much of the discussion seems to be arguing a false dilemma (that there are only two choices available). I think it is important to remember that it's not an all or none proposal and that the amount of equity that is financed can be adjusted to fit the individual financial situation (and comfort level).

I would agree. I do both. However, clearly the greater risk is to borrow or continue debt to invest. Making sure you understand the risks is my key point. Further, understand that the average fund investor is a market timer, with terrible timing, which causes woeful underperformance, according to studies.

That does not mean no one should invest in equities. It just means than you need to know who you are, and what investment skills you bring to the table.

Best,

Montecfo


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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: 98040 of 127461
Subject: Re: Poll: What is the 'wisest' way... Date: 8/19/2006 4:29 PM
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Hi Mack,

As a lurker it appears that much of the discussion seems to be arguing a false dilemma (that there are only two choices available). I think it is important to remember that it's not an all or none proposal and that the amount of equity that is financed can be adjusted to fit the individual financial situation (and comfort level).

Halleliujah!!! (or however that's spellt!)

My message;
Learn (ongoingly) the key financial principles from all angles,
Question uninspected assumptions,
Consciously choose and build strong financial habits,
Assets, Liabilities, Income, Expense, Cashflow and Leverage all matter,
Fear no individual area, but avoid imbalance,
(ANY extreme can be perilous! Even the extreme of avoiding all leverage,)
Balance assets by the relative measures of Safety, Liquidity and Return,
Keep the big picture in focus,
Navigate for the horizon (keeping the end results in mind,)
Acknowledge emotions, but avoid letting them control your finances.

I'm amazed this has inflamed so many folks...
Clearly some uninspected sacred cows are mooing ;~)

Cheers,
Dave Donhoff
Strategic Equity & Mortgage Planner

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Author: DeltaOne81 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 98041 of 127461
Subject: Re: Poll: What is the 'wisest' way... Date: 8/19/2006 5:13 PM
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I don't think anyone objects to your concepts. I know I don't, Dave. I do strongly object to your inclusion that after balancing "all angles", most people would be best off paying as little principal as possible over long periods of time.

I don't know how to say it any clearer.


(ANY extreme can be perilous! Even the extreme of avoiding all leverage,)

Weird to me then that you continue to say an extreme is 'usually the wisest' strategy.

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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: 98043 of 127461
Subject: Re: Poll: What is the 'wisest' way... Date: 8/19/2006 5:44 PM
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Hi D1,

I don't think anyone objects to your concepts. I know I don't, Dave. I do strongly object to your inclusion that after balancing "all angles", most people would be best off paying as little principal as possible over long periods of time.
I don't know how to say it any clearer.


Ahh... I am still failing to communicate well with you (which means probably quite a few others as well, then.) Please allow me another attempt;

Paying off your mortgage IS APPROPRIATE in the proper balance and timing relative to your overall profile.

YOUR listening and assumption of me proposing a position of "paying as little principal as possible" ignores timing... the timing of your career position, your reserves balances, your risks exposures, and many many other aspects.

Again, my official position;
Paying off your mortgage IS APPROPRIATE in the proper balance and timing relative to your overall profile..

If we can agree to simply apply the core analytical criteria of;
Safety
Liquidity
Returns...

If we apply these to all assets, (plus liabilities and leverage in relation to these assets,) then everything else fits itself into it's appropriate place.

There is NO reason to carry more leverage than is appropriate to your particular desired results. Adding nitrous-oxide to a daily-driver Volkswagen would be silly. In parallel... trying to ride a bicycle to Hawaii is equally as silly.

No one strategy fits all... but the principles, properly applied, do.

Cheers,
Dave Donhoff
Strategic Equity & Mortgage Planner

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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: 98044 of 127461
Subject: Re: Poll: What is the 'wisest' way... Date: 8/19/2006 5:58 PM
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D1,

BTW... I never actually directly answered your poll (my apologies.)

I think it IS a good question... but none of the offered options are what I would answer;

Poll: What is the 'wisest' way...
2% (1 Vote)
Take out every penny of equity to invest (IO + HEL(OC) )

9% (5 Votes)
Pay down none of original loan (IO)

48% (28 Votes)
Pay standard payment schedule that I took a loan out for

40% (23 Votes)
Pay standard payment schedule plus some extra

2% (1 Vote)
Throw all free money at my mortgage until paid off



My answer would be that FIRST we have to determine what a person's desired financial outcome is,
THEN we have to determine "within what timeframe,"
THEN we have to determine their current income capacity, and future growth of capacity,
THEN we have to determine their current expense profile, and expected expense expansion (i.e.family, etc.)
THEN we have to weigh out the emotional capacity of all stakeholders (if Momma ain't happy, ain't NOBODY happy, etc.)
THEN we have to take inventory of all CURRENT assets (including strength of leveragability,)
THEN we would determine what part, if any, real estate investment would be a piece of their portfolio,

THEN we would FINALLY determine what the appropriate leverage useage would be relative to all of the above (and perhaps a few other variables I haven't thought of just now.)

This is "tuning an engine." You can choose not to tune the engine... to your inarguable detriment... or you can choose to simply walk (perhaps that is even more healthy... a whole school of culture believes in "shrinking our world" to far more simplicity... and I certainly have no argument with the person who takes that path as their conscious choice.)

There are those who do not believe in any invasive medicine practices at all. To these, a scalpel is an evil tool to be avoided entirely. I think everyone ought to be afforded the right to make the decisions to use tools, or not to.

For those who DO choose the benefits of leverage tools, applying proper management principles and planning strategies is a good idea.

That's what I would have answered ;~)

Cheers,
Dave Donhoff
Strategic Equity & Mortgage Planner

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Author: DeltaOne81 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 98046 of 127461
Subject: Re: Poll: What is the 'wisest' way... Date: 8/19/2006 11:38 PM
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Yeah, um... I didn't have that many characters :-P


And, think of the poll as a survey, not as an overall answer. What you should answer is which of the following you are currently doing. Its not asking for a strategy (there's no way that can fit in a poll) - it is simply asking for your current actions on your home mortgage.

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Author: montecfo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 98047 of 127461
Subject: Re: Poll: What is the 'wisest' way... Date: 8/19/2006 11:38 PM
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Fear no individual area, but avoid imbalance,
(ANY extreme can be perilous! Even the extreme of avoiding all leverage,)
Balance assets by the relative measures of Safety, Liquidity and Return,
Keep the big picture in focus,
Navigate for the horizon (keeping the end results in mind,)
Acknowledge emotions, but avoid letting them control your finances.


...thousand points of light....

Montecfo
(noting Dave's expertise at using many many words to say little)



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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: 98056 of 127461
Subject: Re: Poll: What is the 'wisest' way... Date: 8/20/2006 5:08 PM
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Hi D1,

think of the poll as a survey, not as an overall answer. What you should answer is which of the following you are currently doing.

Right... sorry, I was actually thinking exactly along those lines for you... your offered answers missed one intermediary option (between #1 and #2,) and I leapt straight out into the analytical support of the answer rather than just stating what it would be.

Here's how I specifically manage my leverage;

Take 80% of current value at point of financing on interest-only (giving me the control of sending funds toward the balance or elsewhere,) and take the remaining 10-20% balance (depending on whether we're talking of my primary or rental homes) as a HELOC, which I then pay in rapidly, and draw out strategically, as liquidity offers opportunity.

I refinance to re-seperate appreciated equity any time the accumulation reaches a point of imbalance in my overall portfolio such that the immediate opportunity returns and/or safety premium surpasses the transaction costs I incur in the refinance. (And yes... I have to pay closing costs like anyone else despite being "in the business" because I cannot originate my own loans for conflict-of-interest reasons. So I am eating my own cooking in terms of what I espouse for equity management.)


Perhaps too many words for some... but I trust it won't confuse everyone else.

Cheers,
Dave Donhoff
Strategic Equity & Mortgage Planner

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Author: Adenovir Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 98078 of 127461
Subject: Re: Poll: What is the 'wisest' way... Date: 8/21/2006 6:04 PM
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Pay standard payment schedule that I took a loan out for.

My 30 yr traditional FRM at 5.375% is cheap money. I'm paying it down as slowly as possible and investing the rest.

This will only change in the future if I can refi at less than 5% or so.

Adenovir

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