In article <20040801043727.22465.00000748[at]mb-m11.aol.com> , Black Cars
<blackcars1421[at]aol.com> wrote:

- quote -

I'd like to hear the reason for waiting a year or two. When running
the numbers, the original poster is going to spend $44,000 in interest
and, assuming interest rates go up, maybe lose $20,000 value on his
bond holdings. It would cost about $65,000 to wait 2 years. I don't
see any gain in doing so. If some opportunity came up to use the
house money, he could take out a home equity loan to get the money back,
or use his savings from not having to pay house payments. I don't
see any upside of waiting, but I see lots of expenses and high risk.

-john-

--
================================================== ==================
John A. Weeks III 952-432-2708 john[at]johnweeks.com
Newave Communications http://www.johnweeks.com
================================================== ==================

- quote -

This explains why he took out a mortage with an 80 percent LTV ratio.

- quote -

OK, he's paying 6.25 on the 30-year mortgage loan. Let's assume his
federal marginal rate is 28 and his state marginal rate is 5. So the
after-tax rate on the mortgage is 4.17. So every dollar he uses to prepay
the mortage will "earn" 4.17 percent. That's decent in today's low rate
environment. (I'll bet his "conservative" bond funds and his cash accounts
don't earn anything like that. And let's not forget that there is ZERO
risk in prepaying the mortgage. On the other hand, the 4.17 percent will
be spread out over the term of the mortgage, which is 30 years.

Are there investments out there that will do better than 4.17 percent
(after tax) over 30 years? Probably. But none of them have zero risk. I
suggest the original poster consider using *some* of the $365K to pay down
the mortgage. He could prepay principal by, say, $2,000 per month for the
next couple of years while he considers other investment options. That
would only burn about 13 percent of the $365K.

Finally, for what it's worth, we probably need to know how the 403b is
invested. Unless we know this guy's big picture asset allocation
(equities, fixed income, cash, home equity) we can't provide much advice.

- quote -

I'd pay off the car and wait at least a year or two on the house.

- quote -


B.C.

Just as a thought, how about paying down the note and refi so the payments
are the same but the term is 15 years and invest the balance?

In article <1ghqe7b.18iq6uly8ctajN%michael[at]bcect.com> , Michael Sullivan
<michael[at]bcect.com> wrote:

- quote -

Opportunity cost is very valid for someone who is not risk or debt
adverse. In thise case, the poster had $350K sitting in his checking
and savings account, plus some in bond funds. This indicates to me
that he is pretty conservative. Paying down either of his loans
would result in a signficantly higher rate of return.

A would agree, however, that the $350K could potentially be put
to better use. But if someone is risk and debt adverse as this
person seems to be, I'd still suggest paying off the home and
car before putting money at risk.

-john-

--
================================================== ==================
John A. Weeks III 952-432-2708 john[at]johnweeks.com
Newave Communications http://www.johnweeks.com
================================================== ==================

John A. Weeks III <john[at]johnweeks.com> wrote:

- quote -

I wouldn't go down that low if we're talking all of his cash. Actually
in the bank, of course doesn't even need to be any higher than what will
avoid monthly charges and keep a reasonable safety margin on bill
paying. But I'd want to keep anywhere from 3 to 12 months of income in
something highly liquid (money markets, very short term bonds etc.) In
another post, he said he and his wife make 90-100K/year. That
translates to 25-100K that you'd want in liquid investments. Paying off
the mortgage is great, but the house is a highly illiquid investment.
You can't get the money out of the house later if you face the typical
financial emergency of unemployment. Nobody wants to give you a home
equity loan when you have no source of income. Do you want to have to
sell your house to eat just because you and your wife are both out of
work for a couple months?

That said, paying down the house seems like a pretty reasonable idea
with a chunk of the money. 6.25% even before tax is better than anyone
is getting on AAA 30 yr. bonds these days.

- quote -

If you pay cash for a house you lose opportunity cost -- what you could
otherwise have earned on the money. A good proxy is what you'd earn on
a safe mid-long bond because that is a comparable investment. Compare
the before tax return to the interest paid, assuming all interest is
deductable.

BTW, the standard deduction is not that high to someone who owns (and
can afford) a $350K+ house. In most locales around here, the property
tax alone on that house would be higher than the standard deduction, so
all of the mortgage interest might well be deductable.

I was a significant itemizer in 2003, even though my wife and I are
living in a parsonage and have no mortgage interest *or* property tax.
State income tax alone (on no more taxable income than this guy reports)
came most of the way to my standard deduction. Add in property tax on a
$350K home even in a very low tax town, and I'd be surprised if he's not
itemizing with no mortgage at all.

OTOH, for someone in a low tax area, who doesn't make as much and owns a
low-priced home, you may be right. the value of mortgage interest
deduction varies tremendously by case.



Michael


Michael

"John A. Weeks III" <john[at]johnweeks.com> wrote in message news:<290720041415079388%john[at]johnweeks.com> ...
- quote -

I could not pay cash for my house. I bought my house with 20% down
because that was all I had while trying to sell my old house. Once I
sold my other house a couple of weeks later, I ended up with $365,000.

In answering the other posters question I am 36, wife is 34. 2 boys, 4
and 2. My wife and I make a combined $90000. I have about $100,000 in
a 403B in addition to the $365,000 in the bank. 20% equity in my
house. I would describe myself as taking moderate risk when investing.


======================================= MODERATOR'S COMMENT:
Please trim the post to which you respond.

In article <1deea291.0407290803.29d707e1[at]posting.google.com> , MikePier
<mikepier[at]optonline.net> wrote:

- quote -

Pay them both off. This will leave you debt free and just shy of
$10,000 in the bank. Granted, you'll have to cash out the bond
funds, but the bond funds are going to have a few hard years as
interest rates go up (thus you may take a loss), and you have a
sure 5%+ rate of return by paying off your debts. That is far
more than any money market account, and comperable with corporate
bonds but with none of the risk.

Paying off the car is a no-brainer. The car is losing value at a
very fast rate. You never want to end up upside down on a thing,
so pay it off.

Paying off the house also makes sense. This is where your family
lives, and you don't want it to be at risk. The tax advantage is
near zero for most people. Yes, you do get to deduct the interest.
But you pay $1 in interest for each 30 cents in tax advantage. In
addition, the standard deduction is so high that you get most of
the same tax advantage without having a mortgage.

While it is too late now, you should have just paid cash for the
house. You would have avoided the 1% load origination fee, prepaid
interest, and the interest on the payments that you have made so
far. That probably adds up to over $10,000 by now. That is a
pretty expensive error, in my opinion.

-john-

--
================================================== ==================
John A. Weeks III 952-432-2708 john[at]johnweeks.com
Newave Communications http://www.johnweeks.com
================================================== ==================

MikePier <mikepier[at]optonline.net> wrote:
- quote -

People need more information to give you good advice. How much equity to
you have in your house? What is your approximate annual income and how
secure is it? What is your approximate age? What is your marital and
children situation.

- quote -

Pay off your car loan. Sell your bond mutual funds because interest
rates are going up. Buy some stock mutual funds, and pay off some of
your mortgage. I don't think you need more than $80,000 in the bank or
money market.

--
Ron

This is my situation:

$22,000 auto loan [at] 5.5% 4.5 years left.
$333,700 mortgage [at] 6.25% 30 years left (just purchased house)
$365,000 in cash in the bank ( some in conservative bond mutual
funds).

I wanted to pay off my car loan since I am not getting any tax
advantages. Plus it would save me $3100 in interest over the 4.5 years
left on it. I'm not sure if it would be better to put it towards the
mortgage, or just keep the money and find other ways to invest.