As we are talking about theory.

A wrap-around mortgage (AITD is another name) has the effect you are
suggestion but only if you are selling. The new buyer pays you on a
note that has the underlying low-interest loan still in place.

There are issues with the Due On Sale clause (DOS). It can be managed
but not a bit complex.

The use of wraps and AITDs was common back when interest rates had gone
up to high levels after being at a low level for years. Late 1970's
into the early 1980's was really the last time this was popular.

Note that we are definitely talking about a sale where you do want to
see the property. This is not going to work to do what you first
suggested (raise the loan level from its present level but keep the
historic interest rate on the new amount borrowed).

A different tangent. If you are borrowing at a low rate and you can
invest at a higher rate it can make a lot of sense to borrow an amount
higher than you need at the time. If you expect rates to increase in
the future and still can make a higher return than the money is costing
you there is even more reason to consider the opportunity. You really
need to know what you are doing.

Debt secured by your home or other real estate is the lowest cost
credit available to most consumers. Just because you can does not mean
you should take advantage. As this is an investing list some people
will know that they can produce positive returns in excess of the cost
of capital.

woessner[at]gmail.com wrote:
- quote -

HW "Skip" Weldon cautioned thusly about the hazards of *not* paying down a
mortgage because the interest rate is low:

- quote -

A good point that illustrates how the prepayment analysis should consider
both financial AND emotional factors. You have to be honest with yourself
regarding what you are REALLY going to do with the money you have left
over after making the minimum payment on a low rate mortage.

Who says this has to be an either/or decision? Allocate some of it to
paying down the mortgage and some of it to other investments. As interest
rates change and your personal circumstances dictate, change the ratio to
whatever makes the most sense for you at the time. In the current
environment, for example, it's easy to get six percent on no-risk,
short-term investments like CDs. So that's the smart play for anybody
paying five percent on a mortgage. But suppose there's some kind of global
crisis and despite Ben Bernanke dropping money from helicopters the
economy tanks and the mother of all recessions results in a stock market
selloff and absurdly low rates even below those seen post 9/11? At that
point getting a guranteed five percent by paying down a mortgage might be
the best option in a miserable investment landscape.

One related question: Do people still throw mortgage burning parties?

<BreadWithSpam[at]fractious.net> wrote in message
news:yobk66vaftv.fsf[at]panix1.panix.com...
- quote -

My mistake. My apologies.
--
Chris Cowles
Gainesville, FL

"Chris Cowles" <spam_magnet[at]remove-me-bellsouth.net> writes:
- quote -

Chris, please be careful with attributions - you cut out
everything I said and left Rich's words as if I'd written
them. Thanks very much.


--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
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"Rich Carreiro" <rlcarr[at]animato.arlington.ma.us> wrote in message
news:m3ac7v1sgv.fsf[at]animato.home.lan...
- quote -

I'm doing that now. Sadly, I haven't gotten any 0% offers lately. Or, if I
have, they've been of such short duration to not be worth the bother or the
initial transaction fee. (I never did that unless the maximum fee was
relatively small.)
--
Chris Cowles
Gainesville, FL

<woessner[at]gmail.com> wrote in message
news:1151608561.986700.77240[at]x69g2000cwx.googlegroups.com...
- quote -

On food -- you're proposing to both "have your cake *and* eat it"
which we all know can't be done. Once you eat it, it's gone.

You really can't borrow the same money to both secure the house
*and* use for investments. Just can't be done. One or the other.

On Fri, 30 Jun 2006 10:39:28 -0500, joetaxpayer <joetaxpayer[at]nospam.com> wrote:
- quote -

Absolutely, yes.

- quote -

Yes, if the bond owner (bank or another institution) insists on
holding it and losing money, there is not much that we can do.

If, because of higher interest rates, I could buy a bond for $240,000
that would pay my payments to the bank (who holds my nominal $250,000
obligation), then, in effect, it would be the same for me as would be
paying a lower amount to the holding bank outright. (sans lien issues)

- quote -

Yep.

- quote -

I think that the difference is not yet big enough, but I do expect it
to get bigger, for certain relatively simple reasons related to trade
deficit and how it is funded. That was my reason for getting a fixed
rate mortgage.

i

Ignoramus2330 wrote:

- quote -

Ah, you saw my analogy to a bond, and how you are short the bond, which
is now worth far less. The part I didn't say was that you are rarely
able to buy that very bond back, unfortunately.

Most, I believe 90%+ banks sell their portfolios into the secondary
market (FNMA, Freddie MAC etc).
If the bank has kept your loan, and you have the cash, and you can get
to the guy who really understands the numbers, not a clerk, you can
certainly make an offer.
A 15 year Mort at 4.875 has a payment of 1960.74.
That same payment at 6.25% will buy $228679 of mortgage.

So a smart banker would be ahead by taking the $240K, which he could
then relend. Good Luck.
JOE

On Fri, 30 Jun 2006 07:43:02 -0500, joetaxpayer <joetaxpayer[at]nospam.com> wrote:
- quote -

Joe, good point. I am in a similar situation, with 4.875% 15 year
mortgage. (maybe I should have taken a 30 year loan then, but I
figured that we'd be unlikely to live in the house for 30 years)

Here's what I am thinking.

Would it not make sense, for a bank, to offer the borrower to pay off
the load earlier, at a discount? Suppose that I owe 250,000, perhaps
it would make sense for a bank to offer me to relieve me of my debt
obligation if I, say, pay $240,000 to the bank?

That way the bank would be able to invest the money at a higher rate
than my fixed rate that it is getting.

Make sense?

i

On Fri, 30 Jun 2006 07:43:02 -0500, joetaxpayer
<joetaxpayer[at]nospam.com> wrote:


- quote -

We are entering a period of indeterminate length where even the
old-fashioned debt haters like me agree that not paying off fixed-rate
lower interest debts makes financial sense.

But it can't be emphasized enough that there is a caveat: The debtor
must send the extra money (that would have gone to debt acceleration)
to permanent long-term savings like 401k. If they instead use those
dollars for emergency funds, cars, college ed, beer, other
consumption, etc., then all bets are off. In that case they should
have accelerated the debt regardless of the interest rate
differentials.

Well, maybe not beer.



-HW "Skip" Weldon
Columbia, SC

Ron Peterson wrote:
- quote -

The 5.25% money OP borrowed was sent to the seller of the house. He
doesn't have it to invest. OP is now short a bond, which likely carries
a put provision. i.e. he can repay it with no fee (I'll assume).
But you see, since a bond trades lower when rates go up, the bond is now
valued at 75% or so of face value.
OP doesn't have a new chunk of money borrowed low, he already spent what
he got. There's nothing to 'reinvest'.

The only advise to offer is that he *not* pay this mortgage early. He
can now find CDs paying more than the 5.25 he's paying on the mortgage.
JOE

<woessner[at]gmail.com> wrote in message
news:1151608561.986700.77240[at]x69g2000cwx.googlegroups.com...
- quote -

Don't use any savings to pay down the mortgage if you can get a higher rate
than the mortgage rate.

704set

woessner[at]gmail.com wrote:
- quote -

You can reinvest the money in the stock market and make more on the
average, you to suffer a risk of losing money.

--
Ron

BreadWithSpam[at]fractious.net writes:

- quote -

I've played this game with credit card cash
advances as well. I have a couple of cards I
don't use for normal purchases (key point!) but
don't close for FICO reasons because I've had
them a long time.

Back when card companies were doing 0% "convenience checks"
I'd max the card out with an advance, put it in a MMF,
make the minimum monthly payments, and pay the balance
off when the promo expired.

Even though the spreads remain (I got a 1.99% promo
the other day) or are even higher, the card companies
(not surprisingly) are more likely to impose an advance fee
(back in the 0% offer days, quite a few companies were
waiving the cash advance fee on convenience checks),
which tends to wipe out all of the benefits from the
rate arbitrage.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

"woessner[at]gmail.com" <woessner[at]gmail.com> writes:

- quote -

If you can borrow (you already have) at 5% and lend at a higher
rate, you keep the spread. Sure.

- quote -

Nope. You can't extract *more* of your equity, but you can take
care not to build it up any faster than you need to - ie. if
you'd been prepaying any extra principal, don't do that. Instead,
lend that money that you'd otherwise have used for extra principal
payments out to someone else.

But, no, you can't really make your existing mortgage any bigger.
You can just keep it from getting smaller any faster than it
needs to.

The other half of the equation, though, is also tricky - you'd
have to lend it at > 5% - and with as little risk as possible
inasmuch as paying off your mortgage is basically a totally
riskless 5% return for you - sure, you could take huge risks
and potentially do a lot better than your 5% - ie. instead
of prepaying your mortgage, use extra $$ to buy stocks - but
if you're specifically talking about arbitraging the low-risk
rates, you need to look elsewhere.

Now, as of two days ago, the highest yielding money market
funds were paying just under 5%, so at least as of 2 days
ago, any money you put into a money market fund instead of
into your mortgage was losing you money (ie. 5% - the MM yield).
However, all of the top 10 funds were yielding 4.77 to 4.9%,
so if they go up by the same 25bp that the Fed rate went up,
then you do, in fact, at least break even with some of them.

Moreover, as of even a week or so ago, it wasn't hard to
find FDIC-insured Bank CDs with maturities of 2 yrs with
5.25% yields - if those go up, you can make a small win
with them if you're pretty sure you'll be in your house
for at least a few more years.

The bottom line seems to be that with rates where they
are, there's not much reason to pre-pay your mortgage -
any money you were going to use to prepay it might just
as well be put, at least, into the highest yielding
money market fund you can find. Worst case, the MMF yields
drop and you can always still pay down your mortgage with
that money. But if you prepay your mortgage, you have
a much harder time pulling that money back out.

- quote -

You are. It's the cheapest money you'll ever borrow and
while some folks are all kinds of keen on paying down mortgages
as fast as they can, at that rate, I, for one, wouldn't be
in much of a rush to pay it down. At worst, as I said
above, you can break even without any real risk, so it's
a good time to think about other options.

Even in less favorable environments, I usually encourage
folks to have a nice sized emergency fund - usually invested
in MMFs or other low-risk, relatively high liquidity
investments - because extracting equity from one's home is
not always that easy (ie. credit lines can dry up, etc).
And I recommend that even when the MMFs or whatever are
yielding *less* than the mortgage rate. When the mortgage
rate is less than the MMFs, it's a no-brainer, AFAIC, to
put $$ into MMFs rather than prepaying mortgages (perhaps
even if you already have an emergency fund).

* reference: highest yielding MMFs:
<http://www.imoneynet.com/retailPrimeMMF.htm
* reference: just as an example, ING's CD rates
<http://home.ingdirect.com/products/p...asp?s=OrangeCD


--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
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This is more of a theoretical question than a practical one.

I was just reading that the Fed has raised the federal funds rate to
5.25%. Hey, at least it was just 1/4 point instead of 1/2. And
mortgage rates have gone up, too. According to BankRate.com, a 30-year
fixed mortgage in Virginia now averages 6.3%.

So this got me thinking. My wife and I bought our first house a few
years ago when interest rates were REALLY low (5%). Could someone with
a low, fixed-rate mortgage somehow capitalize on this situation and
make some money?

Again, this is just idle thinking... I was thinking you could somehow
'relend' the money that was lent to you. But all that money is only
realized as equity in your house. And to tap that equity, you'd have
to do something like take out a home equity loan... at today's rates.
So that wouldn't work.

Surely I'm not the only person to have thought of this. Of course, you
could say, quite rightly, that we're already saving a bunch of money
buy having such a low interest rate. And I'm happy about that. It's
just some food for thought.

--Bill