Thank you guys -- as always you are an education

James

Optimist wrote:
- quote -

I believe that knowledge is power, and sticking with the point John
made, one should be aware that not paying $X in interest, does not mean
that $X has all been saved. A bit of math and the true numbers come out.
For some, a guaranteed return equal to their mortgage rate is better
than the chance to have a higher return. I don't argue that, I'd just
expect that one acknowledges the tradeoff.

To your point above, you lose your job. Do you prefer no mortgage, or
$100K in bank and some years to go on the loan? That's a tradeoff too,
no? You can choose either one, and however you choose is fine for you.
There's a groundswell of "mortgages are evil" zealots starting to rear
their heads, and many are pushing some math that's questionable, if not
simply incorrect.

Keeping all my thoughts to this post, I understand that not everyone
rises above the standard deduction. Again, that fact should be part of
their decision. I think that it's not over the edge to expect that
people be in touch with their situation in this regard; tax bracket,
standard or itemized deduction, 401(k)/ IRA details including whether
they qualify to deduct IRA or do a Roth. The guy paying 6% on the
mortgage, thinking he's 'really' paying 4%, but in fact can't itemize
and is in the 15% bracket is not who I am addressing in this forum. But
yes, I am sad for such people.

Joe

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

- quote -

I realize all of that. I have been investing for 30 years or so in stocks
and funds. Imagine though, if you paid cash for your home in 1989 as I did
and instead of having a mortgage you invested $2,500 into the market each
month. Then sold all of your equity holdings in 2000 and just started
re-entering now. My point is that it's unpredictable. If you want to deal in
just the numbers, consider this. I own my home and it costs me about
$600/month in taxes and insurance. I'm 63. If I wanted to I could rent my
house for about $2,800/month. My neighbor has been doing that for about 16
years, he gets $2,500/month but I have a much nicer/larger home. He didn't
like the commute so he bought a condo closer to work and the lease on his
house pays for all of it. I could do similar in Florida for winter and
Canada in the summer and just rent out the house to pay for it. You can't do
that with an index fund. I'm not in any way putting down equity investing,
I've done quite well over the years. Everyone is different.

In article <dTr9l.4853$Es4.1119[at]nwrddc01.gnilink.net> ,
"Optimist" <lucky[at]day.net> wrote:

- quote -

Please note that while this seems huge, it is only a 9.25% rate of
return. And this happened during years when the money market was
at 14% and it went through the two biggest boom periods in the stock
market history. In addition, it required the biggest housing bubble
in recorded history to get to these home values.

-john-

--
================================================== ====================
John A. Weeks III * * * * * 612-720-2854 * * * * * *john[at]johnweeks.com
Newave Communications * * * * * * * * * * * * http://www.johnweeks.com
================================================== ====================

On Jan 8, 12:15*pm, JoeTaxpayer <JoeTaxpa...[at]comcast.net> wrote:
- quote -

Inflation impacts both sides of the equation equally doesn't it. If
you invest in treasuries/munis or you pay off your mortgage.

And of course there is risk in the munis. In the last year my muni
funds are down across the board. The capital loss is higher than the
interest rate. Personally I think we haven't seen the worst of the
muni bond market yet. We have lots of defaults to come, with state and
local finances being is a terrible mess. The picture is only now
emerging about how bad that problem is going to be.

Finally, there is some subset of taxpayers for whom the effective
after-tax rate is actually the nominal rate times (1 minus the
combined federal + state marginal income tax rate). It is a rapidly
shrinking subset, because as your income goes higher you get hit with
AMT. As your income gets lower the deductions tend to get smaller, and
more and more of it is just covering the STD deduction. After all,
there is some correlation between income and (property tax + state
income tax).

For example, both my parents and I consider ourselves to be middle
class. Neither of us comes close to realizing the full benefit of the
mortgage interest deduction. They paid off their mortgage when they
realized that they were paying taxes on their investment yields, but
more than half the mortgage deduction was going to just cover the STD
deduction. We on the other hand are getting hammered by the AMT.

Actually out of the seven households in our family (parents and six
kids with spouses) not a single one can take the full mortgage
interest deduction.

It is a pet peeve of mine that everyone talks about the mortgage
interest deduction as if it is a slam dunk. For the two classes of
people for whom I have done volunteer tax prep, it seems to come them
as a complete surprise that they are not getting the benefit they
think they are. Especially young people who have bought their first
house are usually amazed to find that their taxes don't go down much
when they switch from renting to owning. Their parents tell them their
taxes will go down, their realtor tells them the same thing, the
mortgage broker chimes in, their friends who own houses do as well.
Then they find out when filling out their tax return that in exhange
for deducting 13000 in interest and taxes, they have to give up 10700
in the standard deduction. I don't think 90% of them even realize that
this is a trade-off.

Unfortunately, two years later they are telling their friends how
great it is to be able to deduct interest and property taxes on their
tax form! They have basically forgotten all about the standard
deduction.


======================================= MODERATOR'S COMMENT:
A reminder to all posters: Please trim the post you respond to and try to be as succinct as possible.

"JoeTaxpayer" <JoeTaxpayer[at]comcast.net> wrote

- quote -

Ok, it's tough, unless you have a $2,000/month mortgage and lose your job
:-)

- quote -

That was a relatively short period over the life of the mortgage. Since you
brought it up, my lender actually offered to accept $17,000 to pay off my
loan which had a much higher principle balance at the time. If I had the
$17,000 I would have bought some of those treasuries that were paying double
digit interest instead.

- quote -

I do and yes it is.

- quote -

Wonder what he'd do if he had the money to pay it off. Anyway, I've been in
several of these discussions over the years. All of the calculations, the
what ifs, the projections, etc. I'm really glad that I paid cash. Anyway,
I'm not sure what the tax brackets are these days but if there was a 30%
bracket, you have to spend $1,000 on interest to get $300 back. No thanks.

Optimist wrote:

- quote -

Perhaps, but the math shouldn't be ignored. It can be quantified,
whereas 'peace of mind' is tough.
Can we agree than when rates were 15% on fixed rate mortgages, it was a
good idea to pay accelerated? (After the 30% credit card of course)
And if you have a 4% fixed, but find that 5 year treasuries are now at
8%, that *not paying early* makes more sense?

If you believe that one having a $200K mortgage and $200K in cash
equivalents is less happy than the guy that has the paid house, all else
equal, then that's another story.

BTW, the OP asked about numbers and wasn't expressing the emotion either
way.

Joe
www.blog.joetaxpayer.com

"JoeTaxpayer" <JoeTaxpayer[at]comcast.net> wrote

- quote -

I have owned two homes. The first I bought with a mortgage. $27,000. I sold
it in 1989 for $125,000 after about 14 years. The second home I paid cash
for. I paid $238,000 for it and could sell it for almost $500,000 now, it
peaked at about $560,000 but I don't have to tell you about the market. I
didn't get a mortgage interest deduction but those deductions are expensive.
What I got was a nice place to live, no mortgage payment to worry about, and
a bird in the hand investment. My first house paid me back for everything I
put into it. All taxes, mortgage payments, and upkeep didn't come anywhere
near the $125,000 sale price minus the purchase price. Now, I'm in a very
nice home in a desirable neighborhood and it cost me about $600/month for
taxes and insurance. I couldn't live in a slum 2 bedroom apartment for twice
that. I guess what I'm trying to say is that not all gains are financial,
peace of mind is important as well, but in spite of the real estate market
I'm reasonably satisfied with the price performance of the property even
though I have no desire to sell it. There's more to this than dollar
calculations and the outlook of the markets.

"ManChild" <starritt[at]gmail.com> wrote in message
news:44464035-b67d-481c-bc52-757515d75364[at]l33g2000pri.googlegroups.com...
- quote -

Maybe what you are trying to do is see how much you need to pay to pay it
off if it was a 3% loan. You could use a program like TValue5 to calculate
how long it would take to amortize it if it were 3% using $ 1000 payments.
This would reduce the payout period considerable. You could then use the
same payout period at 7% and calculate the required monthly payment to
amortize it over that many years.
For example: if it took 30 years at 7% & $ 1000 per month and only 15 years
at 3%, then you need to calculate the monthly payment to amortize it at 7%
over 15 years.

On 2009-01-08 08:21:55 -0800, "Optimist" <lucky[at]day.net> said:

- quote -

Yes. you have to weigh the 100% certain gain when reducing the debt
against the uncertain possibility of earning more by investing the
money. A lot of people make it sound like the latter is easy. My guess
is that, even in good times when the investment climate is favorable,
it is not as easy to beat the interest rate on the debt as it is often
made out to be.

Optimist wrote:
- quote -

I'll not speak for John, but I nodded when I read his post, agreeing.
I read 'false' to mean that the number is simply not accurate. There is
a risk free rate one knows at any time, right? It's low now, but was
4-5% not long ago. There's also inflation, which cannot be accurately
predicted, but it's there. I respect Tad's view (regarding tax
deduction), but it's specific to each person. I am so far beyond STD
deduction, I am not worried about ever losing my mortgage deduction.
Property tax and state tax fill the bucket well.
So, a 5% mortgage can actually cost one as little as 3% or so after tax,
and if one can get an after tax return near this (my state muni bonds
are over 4%), then that 'savings' is nil. If you will assign risk to
those munis, let's drop to 2%. Over the 30 year mortgage, there's quite
a difference calculating the saved interest at 5%, vs the 'real' savings
of 1% or so.

To simplify this - paying off the mortgage early is equal to investing
in a treasury at the mortgage rate. So regardless, there can be
reduction, but it's not the full interest saved.

Joe

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

- quote -


I agree with the time value of money and the opportunity cost. I disagree
with "But it is a false reduction".
I t *could* be a false reduction if the money you invested elsewhere were to
outperform your interest and principal payments. That hasn't been the
easiest thing to do over recent years. "you *may* have earned even more" is
a key phrase in your post.

On Wed, 7 Jan 2009 20:01:27 -0600, Tad Borek <borekfm[at]pacbell.netwrote:

- quote -

You're not there yet, but you're getting closer.

I'm betting that one of these days I'll see a post from you and you'll
have become an old curmudgeon like me, preaching "DON'T DO DEBT."
<grin

-HW "Skip" Weldon
Columbia, SC

In article <pla9l.4665$Es4.3297[at]nwrddc01.gnilink.net> ,
"Optomist" <lucky[at]day.net> wrote:

- quote -

But it is a false reduction. Money has both a time value and
an opportunity cost. By paying more now on your loan, you do
reduce what you pay on the back end. But you also tie up more
money now, which reduces your opportunity to do other things
with the money, such as invest it. You may save money on your
loan, but at the same time, you may have earned even more if
you had invested that money that you used to prepay your loan.

-john-

--
================================================== ====================
John A. Weeks III * * * * * 612-720-2854 * * * * * *john[at]johnweeks.com
Newave Communications * * * * * * * * * * * * http://www.johnweeks.com
================================================== ====================

"ManChild" <starritt[at]gmail.com> wrote
- quote -

You can't reduce the rate but you can reduce your total cost.
This calculator will let you plug in larger than required payments.
http://www.bankrate.com/brm/popcalc2.asp

On Jan 7, 1:54 pm, ManChild <starr...[at]gmail.com> wrote:
- quote -

You have to remember that while the extra payments each month result
in less total interest, suggesting a lower APR, it is also paid over a
shorter time, suggesting a higher APR. It balances out, so like the
others say, the APR will be the same.

AFAIC, what you want to aim for is giving as little money away to the
banks as possible, in the form of interest and the all-too-common
refinancing fees, and ensuring you and yours always have a roof you
own over your head. Well, the roof and everything underneath it, that
is.

You might like to become familiar with the many free online
amortization calculators that include the option of an extra payment
each month. E.g.
http://www.bankrate.com/brm/amortization-calculator.asp

BreadWithSpam[at]fractious.net wrote:
- quote -

I hear you on that point, it's perfectly valid, but on the flip side I
like it as an illustration of the cash outlay that you're committing to
over the life of the mortgage. It should be a bit of a wake-up call for
some people, that it's an enormous expense that is going to eat a
certain portion of your future earnings - if you lose your job, you need
the cash to pay that, TVM issues aside. I don't think it's particularly
effective towards that goal, unfortunately, but at least the information
is there for people who don't have or know how to use a financial
calculator.

A related issue is the "tax benefit" associated with that mortgage
interest. People think of that as reducing the mortgage cost, and for
many it does. But the standard deduction in 2009, MFJ, is now up to
$11,400, and that's only going up over time (while the mortgage interest
component to a mortgage gradually declines as you pay down principal).
This means that a lot of people aren't really going to get much of a
mortgage-interest tax benefit - fewer and fewer as the years roll on -
and so lifetime interest cost is more "real" (there's no offsetting tax
benefit at a certain point, for many). If incomes rise, that certainly
helps.

-Tad

In article <yobbpui8wrx.fsf[at]panix2.panix.com> ,
BreadWithSpam[at]fractious.net wrote:

- quote -

Another way to look at this is that interest is like paying
rent on borrowed money. If you borrow for less time, you
pay less total rent. But the rate of rent stays the same
no matter how long you keep the borrowed money.

-john-

--
================================================== ====================
John A. Weeks III 612-720-2854 john[at]johnweeks.com
Newave Communications http://www.johnweeks.com
================================================== ====================

ManChild <starritt[at]gmail.com> writes:

- quote -

Your APR doesn't change because you paid it down any faster.

- quote -

Perhaps you mean something else entirely, but what you
wrote above doesn't make any sense.

Just because you paid a loan off faster doesn't mean
the interest rate changed.

Now, one thing that annoys me very much is the nonsense
calculation that mortgage brokers are required to show
you - the "total interest paid" over the life of the
loan. It's nonsense because it ignores time value of
money and the term of the loan.

If you pay your principal down faster than the original
schedule, of course, over the life of the loan, you'll
pay less total interest. Perhaps that's what you mean?

But that has nothing to do with your rate of interest,
or the effective rate of return on money you use to prepay
that mortgage as compared to using that extra money for
something else. Again, the relevant factor is your
(fixed) interest rate - and that is not affected by
whether you prepay or not.

--
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?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

ManChild wrote:
- quote -

You are mixing issues here.
A 7% fixed mortgage is 7%.
You can pay extra, but regardless, your interest rate is 7% on the
remaining balance. In the last month of the mortgage, when you might owe
only $100, it still accrues at 7%. Taking 7%, and multiplying by 30 to
somehow claim 210%, or citing the total interest over 30 years and
dividing by the original balance is all nonsense. There are many simple
spreadsheets for amortization tables that will help you track your
progress or calculate the payment required to cut the term to whatever
you wish.
In this economy, why are you even looking at a 7% mortgage, or is this
completely hypothetical?
Joe
www.blog.joetaxpayer.com