Homeowners taking out 10-year mortgages

Wall Street Journal ^ | June 2, 2003 | RUTH SIMON

[Iwo Jima]

Good for you! Sounds like you got your priorities straight.

[sysvr4]

If you're simultaneously offering to loan me money at 4% for as long as I want it, I will take that deal! I'll reinvest it and make a killing in the long-term, but don't worry, you'll get your 4%.

Jeff

[Dog Gone]

I had no idea this would turn into such a great thread when I posted the article. There are lots of intelligent people at this forum, and even though there is some disagreement over the best course of action, the contributions on this thread have been excellent.

[Atlas Sneezed]

"If I lose my job while I still owe on my house, I absolutely HAVE to come up with 1,000 dollars plus whatever I HAVE to come up with for food, electricity, etc.

"If my house is paid off and I lose my job, I have 1,000 dollars LESS to worry about, don't I?"

You forget that in the big-mortgage scenario, you were saving the monthly difference in house payment, so you have a fat nest egg to tide you over until you get a new job. In fact, if you would have paid off the home in your approach, the nest egg would be fat enough to pay off the whole mortgage in the Edelman scenario. Read the Edelman story.

[Atlas Sneezed]

"Then, ask him to print out a report on how much interest you would pay if you got a 30 year loan and made the 10 year payments."

Looking only at total payments is an economically naive approach that emotionally and irrationally ignores the time value of money.

If you must do this, also have your broker put together a scenario of what the monthly savings (with the long-term loan's lower payments), would yield when invested over the same period. If you ignore this, you miss Edelman's entire point.

[Atlas Sneezed]

"That $82,046 is money paid on interest that will never do anything for you."
You forget that investing the monthly payment difference will probably more than offset that cost.

[E. Pluribus Unum]

Just remember that you can get a mortgage while you're working, but once you retire, all of the money you have in equity is tied up there. You can't likely get it for anything else.

If your retirement income is allocated to mortgage payments you won't have much left over for house upkeep, emergency medical bills, buying an occassianal car and taking vacations, will you?

[Atlas Sneezed]

"Their $8,000 house would probably sell for $70K or $80K - almost 10x what they paid."

10x in 34 years? That's a 7% annual appreciation rate. Nice, but not stunning, and less than the stock market would have done for them. They would have profited by keeping their equity low, refinancing when rates were good to pull out equity as it grew, and investing in the market. (A six-figure cash nest egg is more to brag about than a $95 mortgage payment.)

"It's hard to imagine the same thing happening with current prices. Will my $200K house be selling for $2 million in 30 years? It boggles the mind...."

What annual rate of appreciation do you expect?

[Atlas Sneezed]

"Get out of debt. Get out of all debt. Especially debt on your home. This was the standard procedure 50 years ago, and it is just as vital today. Anyone who tries to convince you that you are better off being in debt is just a snake-oil salesman trying to get rich quick off of your hard earned dollars."

You should read what Edelman says to debunk this.

[Orbiting_Rosie's_Head]

am taking out a 15 year at 4.75 through the internet. I wish I could go to ten, it would save me 17000 but I cannot manage the extra 300 per month.

You don't have to reduce the term of the loan to save money on the interest. You can take out the 15 year loan and then make extra principle payments when you can afford it. The interest savings effect is the same. The shorter term will sometimes come with a lowere interest rate, but not always.

I took out a 15 year mortgage at 6.5 in 1999 and paid ahead. That put me on track to pay off in 7 years this year. But when interest rates dropped to below 5, I refinanced for another 15 year period at 4.8% (0 points) and dropped my payments by $300 a month. The overall interest went up for the life of the loan, but with compound interest on $300 additional savings dollars a month, I come out ahead. Plus, I can still pay ahead on the loan if I want to rid myself of debt in 8-10 years instead of putting the money into investments. That's the good thing about it, the choice is there.

[the bottle let me down]

I don't know about demolishing it but I am sure that in the new tax cut Bush has made PMI tax-deductable.

I believe that the PMI deduction was removed from the final version of the bill.

[GOPJ]

bump

the doom & gloomers worst case scenarios are dependent upon folks cashing out all their equity, throwing the cash in the street & then extending their debt back 30 years into the future.

[AdamSelene235]

but the doom & gloomers worst case scenarios are dependent upon folks cashing out all their equity, throwing the cash in the street & then extending their debt back 30 years into the future.

This Gloomster sez:

</booming voice on>

This will hurt the the thinly capitalized GSEs who hold more debt than the publicly held Treasury debt!

Should they destabilize their counterparties will experience contagion via their 1 trillion dollar derivatives portfolio.

GLOOM ! DOOM ! BOGETY BOGETY BOGETY....MUHAHHAHAHHAHA

[bootless]

Speaking of hedging your bets against the possibility of losing your job: how about taking out a revolving line of credit guaranteed by your mortgage while you're employed, DON'T TOUCH IT (unless you're able to pay it off before interest starts accruing), and keep it as a safety net against it. You're already qualified, and it will be there in the event of a between-job-drought.

[razorback-bert]

Hmmm, lots of assumptions.

• Housing prices go up

  Dog Gone and I know this is false.

• Long term the stock market goes up.

  What if you need your money during a downturn?

• Mortgage interest is tax deductable

  Is it really wise to make investment decisions based on today's tax law?

[P.O.E.]

As long as you only refi the existing balance, you're ok. From what I understand, a lot of people are "taking" the extra equity. Sounds like you're doing it right.

btw - thanks for posting this thread, I'm looking into this as we speak. I just bought a new home, so it's mighty tempting...

[Fury]

Speaking of hedging your bets against the possibility of losing your job: how about taking out a revolving line of credit guaranteed by your mortgage while you're employed, DON'T TOUCH IT (unless you're able to pay it off before interest starts accruing), and keep it as a safety net against it. You're already qualified, and it will be there in the event of a between-job-drought

One of things I did was to take a small loan against my 401(k) to put more money down on the house to allow for lower monthly payments - I believe in the first few years of a loan "flow (cash flow) is king". I was able to bail out of the equity based mutual funds in early 2000, so I retained the gains made in the 90s, which made this possible. Plus the interest I pay on the loan gets paid back to me, instead of some finance company. I know some people object to borrowing against a 401(k) and they correctly state that you lose the compounding effect when you borrow, but I believe short-term 401(k) loans.

[FairOpinion]

"taking out a revolving line of credit guaranteed by your mortgage while you're employed, DON'T TOUCH IT "
---

Any credit line can be canceled at any time by the creditor for no reason. The only real security is the money in hand. I've known of people who had credit lines, never missed payments, and still had credit lines closed, just because they borrowed more ( NOT over limit, just multiple cards) then the credit card company thought was reasonable. E.g. supposed you have a total of $40K credit lines, for whatever reason, you actually start using them and borrow up to say $20-$30K. Technically you have another $10K, except that credit card company takes one look at how your balances are increasing, closes your credit line, and there you sit, you can't borrow the other $10-$20K, even though you thought it was there for you for a rainy day.

The only real security is to take out the biggest mortgage at low interest rate on your house, very carefully invest the rest (diversify to ensure safety), then it's there for you, when you need it.

[mlmr]

I just used the internet for the first time. it hasn't been any different than local so far.....

[speekinout]

While I agree that equity in a home is illiquid while you're living in it, the money that you have to devote from your retirment income to pay a mortgage is at least as illiquid.

Not quite the same. Your mortgage payment is - or at least should be - an affordable part of your retirement income. It's not going to change. The important thing about retirement budgets is having fixed costs.
A significant part of your net wealth should be money that you can get if you need it. And if most of your wealth is in equity in your home, you could be in trouble.