Author Topic: DONT Payoff your Mortgage Club  (Read 159425 times)

FIreDrill

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Re: DONT Payoff your Mortgage Club
« Reply #1300 on: March 20, 2019, 12:32:16 PM »
What are the interest rates?
Interest rates on both refi options are the same at 3.875%.  The big difference is the pmi premium you pay on 95% ltv vs 90% ltv. Although that difference is only there until you get to 20% ltv and pmi drops completely.  About 8 years of payments I believe.

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Are these 5/1, 15 or 30?  Just curious as I am shopping rates right now and the 30 is 4.1, 15 is 3.55, and a 5/1 is 3.8 (dropped from 3.9 this morning).
3.875% @ 30yr with 7k in closing costs. I locked in about 20 days ago.

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couponvan

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Re: DONT Payoff your Mortgage Club
« Reply #1301 on: March 20, 2019, 12:42:07 PM »
What are the interest rates?
Interest rates on both refi options are the same at 3.875%.  The big difference is the pmi premium you pay on 95% ltv vs 90% ltv. Although that difference is only there until you get to 20% ltv and pmi drops completely.  About 8 years of payments I believe.

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Are these 5/1, 15 or 30?  Just curious as I am shopping rates right now and the 30 is 4.1, 15 is 3.55, and a 5/1 is 3.8 (dropped from 3.9 this morning).
3.875% @ 30yr with 7k in closing costs. I locked in about 20 days ago.

Sent from my moto g(6) using Tapatalk
Do you mind me asking which bank? Just thought I would check...

FIreDrill

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Re: DONT Payoff your Mortgage Club
« Reply #1302 on: March 20, 2019, 12:42:49 PM »


If it were me, I'd choose option 1, then open an ETrade Account, and put the extra $32,000 into ticker symbol $QYLD. It's an index fund that sells covered calls on the NASDAQ and yields approximately 9% on cash. You'd get approximately double the difference in your monthly payments in yield each month, leaving you ahead, even accounting for taxes.

(disclosure: I am long $QYLD)

I try not to judge individuals' investment recommendations, but at least be forthcoming with the risks involved. Like in this case, for that 9% yield, somebody is paying you to take all of the downside but little of the upside. And that this stock is down 10% over the last 6 years (by comparison, the S&P 500 is up nearly double in that time period). And that it has a 0.6% expense ratio.

Agreed. QYLD is poor choice for total return, but the need for cash flow in this case is important. Someone who doesn't want to make this tradeoff would do better with the "lower payments" approach.

Cash flow is important, unquestionably. In the OP's case, it will probably come from his $200k income, but in the event of job loss he has a taxable account he could pull from if necessary. So, in this specific case, I don't think that cash flow is an overriding factor.

In the hypothetical case where cash flow was an overriding factor, my advice would be to get a smaller house until you have a decent stash and can ensure cash flow in a downturn.

This is the exact reason I am leaning towards maximizing the loan now.  Leaves me with more cash/investments in a taxable account which should reduce foreclosure risk if job loss or income drops.  Nothing currently indicates either of these things will happen but there is always a chance.  Also, investments in a taxable account allow for tax loss harvesting in a market downturn which could be a nice benefit for those in higher income brackets.  I just see more flexibility when having the cash in the taxable accounts which will completely go away if dumped into the mortgage.  It's hard to calculate the value of that flexibility when looking at ROI.

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FIreDrill

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Re: DONT Payoff your Mortgage Club
« Reply #1303 on: March 20, 2019, 12:47:25 PM »
What are the interest rates?
Interest rates on both refi options are the same at 3.875%.  The big difference is the pmi premium you pay on 95% ltv vs 90% ltv. Although that difference is only there until you get to 20% ltv and pmi drops completely.  About 8 years of payments I believe.

Sent from my moto g(6) using Tapatalk

Are these 5/1, 15 or 30?  Just curious as I am shopping rates right now and the 30 is 4.1, 15 is 3.55, and a 5/1 is 3.8 (dropped from 3.9 this morning).
3.875% @ 30yr with 7k in closing costs. I locked in about 20 days ago.

Sent from my moto g(6) using Tapatalk
Do you mind me asking which bank? Just thought I would check...
Sent you a PM.

I'm going through a broker but the loan is with quicken.

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solon

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Re: DONT Payoff your Mortgage Club
« Reply #1304 on: March 20, 2019, 01:47:21 PM »
What are the interest rates?
Interest rates on both refi options are the same at 3.875%.  The big difference is the pmi premium you pay on 95% ltv vs 90% ltv. Although that difference is only there until you get to 20% ltv and pmi drops completely.  About 8 years of payments I believe.

Sent from my moto g(6) using Tapatalk

Are these 5/1, 15 or 30?  Just curious as I am shopping rates right now and the 30 is 4.1, 15 is 3.55, and a 5/1 is 3.8 (dropped from 3.9 this morning).
3.875% @ 30yr with 7k in closing costs. I locked in about 20 days ago.

Sent from my moto g(6) using Tapatalk

3.875%? Did you buy it down?  I have great credit but the best I can get right now is 4.4%

FIreDrill

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Re: DONT Payoff your Mortgage Club
« Reply #1305 on: March 20, 2019, 03:27:29 PM »
What are the interest rates?
Interest rates on both refi options are the same at 3.875%.  The big difference is the pmi premium you pay on 95% ltv vs 90% ltv. Although that difference is only there until you get to 20% ltv and pmi drops completely.  About 8 years of payments I believe.

Sent from my moto g(6) using Tapatalk

Are these 5/1, 15 or 30?  Just curious as I am shopping rates right now and the 30 is 4.1, 15 is 3.55, and a 5/1 is 3.8 (dropped from 3.9 this morning).
3.875% @ 30yr with 7k in closing costs. I locked in about 20 days ago.

Sent from my moto g(6) using Tapatalk

3.875%? Did you buy it down?  I have great credit but the best I can get right now is 4.4%

I am paying the broker and covering the loan costs like origination, title insurance, appraisal, and all that good stuff.  About 7k total for getting the loan pushed through.  There is about another 6k in costs that will cover some interest and escrow funding.  But those arnt truly costs because my previous escrow will be paid back to me.  I am not technically paying the rate down but I could have gotten a rate of 4.18 with 5k in lender credits to almost offset the loan costs.  I chose the lower rate.  My credit is pretty good, over 780 last time I checked.

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« Last Edit: March 20, 2019, 03:33:03 PM by FIreDrill »

TomTX

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Re: DONT Payoff your Mortgage Club
« Reply #1306 on: March 20, 2019, 04:26:42 PM »
What are the interest rates?
Interest rates on both refi options are the same at 3.875%.  The big difference is the pmi premium you pay on 95% ltv vs 90% ltv. Although that difference is only there until you get to 20% ltv and pmi drops completely.  About 8 years of payments I believe.

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3.875% is a 30 year? That's definitely interesting to me, I want to get some equity out.

FIreDrill

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Re: DONT Payoff your Mortgage Club
« Reply #1307 on: March 20, 2019, 05:23:25 PM »
What are the interest rates?
Interest rates on both refi options are the same at 3.875%.  The big difference is the pmi premium you pay on 95% ltv vs 90% ltv. Although that difference is only there until you get to 20% ltv and pmi drops completely.  About 8 years of payments I believe.

Sent from my moto g(6) using Tapatalk
3.875% is a 30 year? That's definitely interesting to me, I want to get some equity out.
Yep, 30yr.

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tralfamadorian

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Re: DONT Payoff your Mortgage Club
« Reply #1308 on: March 20, 2019, 05:54:51 PM »
What are the interest rates?
Interest rates on both refi options are the same at 3.875%.  The big difference is the pmi premium you pay on 95% ltv vs 90% ltv. Although that difference is only there until you get to 20% ltv and pmi drops completely.  About 8 years of payments I believe.

Sent from my moto g(6) using Tapatalk

Are these 5/1, 15 or 30?  Just curious as I am shopping rates right now and the 30 is 4.1, 15 is 3.55, and a 5/1 is 3.8 (dropped from 3.9 this morning).
3.875% @ 30yr with 7k in closing costs. I locked in about 20 days ago.

Sent from my moto g(6) using Tapatalk

3.875%? Did you buy it down?  I have great credit but the best I can get right now is 4.4%

Not FIreDrill but per my latest rate email, I'm also seeing 3.875% as the zero point owner occupant rate.

Goldy

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Re: DONT Payoff your Mortgage Club
« Reply #1309 on: March 20, 2019, 08:42:32 PM »
Wow, rates have dropped quite a bit.  AimLoan has 3.875% with $2800 in closing costs.  I have two years left on my 2.5% ARM so hopefully they stay low for a bit.

TomTX

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Re: DONT Payoff your Mortgage Club
« Reply #1310 on: March 21, 2019, 07:01:53 AM »
I am only seeing these 3.875% rates for a 15 year loan, not 30.

SwordGuy

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Re: DONT Payoff your Mortgage Club
« Reply #1311 on: March 21, 2019, 09:28:08 AM »
Every time y'all post your current rates, I get happy thinking about our 2.75% rate for the next dozen years.  :)   



talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #1312 on: March 21, 2019, 09:30:18 AM »
Holy Sh!t, I just checked on the ten year treasury yield, and they're down to 2.53%. Fed opted not to raise rates yesterday.

That period of substantially rising rates everyone was so sure was coming...is still in the future.

Blahhhh456

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Re: DONT Payoff your Mortgage Club
« Reply #1313 on: March 21, 2019, 10:40:20 AM »
I am only seeing these 3.875% rates for a 15 year loan, not 30.

Me too! I only see 3.875 for 15. Although the 30 is 3.990. I am hoping they drop below 3.6 and then I'm refinancing.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #1314 on: March 21, 2019, 01:07:26 PM »
I read the news with glee for those of you that are in the process of buying a home or contemplating it. It also makes me hopeful that we won't lose our ass on our current flip due to rising mortgage interest rates. Okay, I know we won't lose our ass, but the more we make on this deal, the happier I'll be. It has consumed our nights and weekends for almost ten months. That's because we don't do lipstick-on-the-pig flips. We do work we're proud of, but it does take longer.

SwordGuy

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Re: DONT Payoff your Mortgage Club
« Reply #1315 on: March 21, 2019, 08:06:25 PM »
I read the news with glee for those of you that are in the process of buying a home or contemplating it. It also makes me hopeful that we won't lose our ass on our current flip due to rising mortgage interest rates. Okay, I know we won't lose our ass, but the more we make on this deal, the happier I'll be. It has consumed our nights and weekends for almost ten months. That's because we don't do lipstick-on-the-pig flips. We do work we're proud of, but it does take longer.


Good for you!   We do the same thing with our rentals.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #1316 on: March 21, 2019, 11:42:04 PM »
I read the news with glee for those of you that are in the process of buying a home or contemplating it. It also makes me hopeful that we won't lose our ass on our current flip due to rising mortgage interest rates. Okay, I know we won't lose our ass, but the more we make on this deal, the happier I'll be. It has consumed our nights and weekends for almost ten months. That's because we don't do lipstick-on-the-pig flips. We do work we're proud of, but it does take longer.
Good for you!  We do the same thing with our rentals.
Thank you! We also have rentals, all in the same retirement community. Our rule is to only buy homes that we would be happy to live in. We keep buying, because we love our tenants and don't want to displace anyone when we finally move there. We buy, rehab and rent. Eventually, we will move in to them one by one as our tenants vacate, do the major rehab if/as needed, sell it off and then move on to the next house, until they're all gone. That's the plan anyway.

couponvan

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Re: DONT Payoff your Mortgage Club
« Reply #1317 on: March 22, 2019, 06:22:44 AM »
Now I want to know where Dicey's magic retirement community is....I'm from NCal too, and I can think of a few where I'd be happy to retire and would have old people houses that are of that age and price range.  Although none of the retirement communities lean to iron doors that I am aware of.  You must be in a more ritzy retirement land than me.  Also, I'm more a retirement condo person than house person.  No more lawn mowing for me. 

robartsd

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Re: DONT Payoff your Mortgage Club
« Reply #1318 on: March 22, 2019, 01:28:42 PM »
Now I want to know where Dicey's magic retirement community is....I'm from NCal too, and I can think of a few where I'd be happy to retire and would have old people houses that are of that age and price range.  Although none of the retirement communities lean to iron doors that I am aware of.  You must be in a more ritzy retirement land than me.  Also, I'm more a retirement condo person than house person.  No more lawn mowing for me.
My great-great uncle and his wife lived in a community of duplexes with a HOA that maintained all the landscape except a small patio area for each unit. Of course the less landscaping to maintain per unit, the lower the costs should be.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #1319 on: March 22, 2019, 11:03:25 PM »
Now I want to know where Dicey's magic retirement community is....I'm from NCal too, and I can think of a few where I'd be happy to retire and would have old people houses that are of that age and price range.  Although none of the retirement communities lean to iron doors that I am aware of.  You must be in a more ritzy retirement land than me.  Also, I'm more a retirement condo person than house person.  No more lawn mowing for me.
Lol, let's see...the iron door is on the flip house, which is in NorCal. It should sell for $1.1-$1.2M, or $600/sf, so it gets a fancy door.
The rentals are in a large retirement community in SoCal, where there is very little water. Our "buy" price there is $155-$160/sf, so no fancy iron doors, although there are big gates at all the community entrances. Oh, and everyone' has a gardener and very few have actual lawns.

couponvan

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Re: DONT Payoff your Mortgage Club
« Reply #1320 on: March 25, 2019, 08:06:16 AM »
Now I want to know where Dicey's magic retirement community is....I'm from NCal too, and I can think of a few where I'd be happy to retire and would have old people houses that are of that age and price range.  Although none of the retirement communities lean to iron doors that I am aware of.  You must be in a more ritzy retirement land than me.  Also, I'm more a retirement condo person than house person.  No more lawn mowing for me.
Lol, let's see...the iron door is on the flip house, which is in NorCal. It should sell for $1.1-$1.2M, or $600/sf, so it gets a fancy door.
The rentals are in a large retirement community in SoCal, where there is very little water. Our "buy" price there is $155-$160/sf, so no fancy iron doors, although there are big gates at all the community entrances. Oh, and everyone' has a gardener and very few have actual lawns.

Oh this makes much more sense now.  I thought the flip house was in the same retirement community. (Since I am NorCal born.)  There is a 1980's 55+ community up in Healdsburg, CA.  I had visions of this area getting ritzified now that there is a bigger tourist group.  My great uncle and aunt lived there - River's Bend.

http://healdsburgadultcommunity.com/ It's on my list of potential retirement communities if I want an actual home. However all those places would need a major gut job if you ask me.

FIreDrill

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Re: DONT Payoff your Mortgage Club
« Reply #1321 on: March 29, 2019, 09:41:30 AM »
Here we gooooooo!

Payday! - 3/29/19
726 to 401k
269 to HSA
605 to Taxable

Investment Tracking
2/15/19   - $372,432
3/1/19     - $377,098
3/29/19   - $390,738


Refi should close today as well. Going from 4.75% 30yr  to 3.875% 30yr.  Will post more final numbers on that when it's official.

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Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #1322 on: March 29, 2019, 10:02:20 AM »
Here we gooooooo!

Payday! - 3/29/19
726 to 401k
269 to HSA
605 to Taxable

Investment Tracking
2/15/19   - $372,432
3/1/19     - $377,098
3/29/19   - $390,738


Refi should close today as well. Going from 4.75% 30yr  to 3.875% 30yr.  Will post more final numbers on that when it's official.

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Sweet!

Goldielocks

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Re: DONT Payoff your Mortgage Club
« Reply #1323 on: March 29, 2019, 12:26:14 PM »

UPDATE -- Getting a mortgage renewed while FIRED
I haven't posted in a while.  It's been a couple of months while I have been trying to renew our mortgage, while FIRED with a much lower income (about 1/3 our prior incomes, and 30% of that is from self employment and investments, DH still works).   Canadians have most commonly 5 year terms on the mortgages (with 25 year amortizations), that need to be renewed every 5 years.  If you keep a mortgage while FIRED, you need to have income to renew it, or pay a LOT more.

If you continue with your current lender, they can offer you whatever terms that they want, ours offered us 0.5% more than the competition. That is a large difference in $ per month given our large mortgage amount and normally small $monthly expenses, total.   If you switch to a new lender, you need to re-qualify for the mortgage amount based on your income vs payment ratios.   Canada just required that everyone requalify as if the interest rate is around 5.5%.  Our original mortgage, and what we would actually pay is under 3%, so that makes a big difference in how much we can qualify for, total.

And of course, like good investors, we have a very large mortgage, and a lot of money in tax-sheltered retirement investements, and a smaller amount in after tax investments, so I can't just pay off the whole thing from retirement savings today without paying a lot of taxes.

Good news -- finally signed mortgage papers after submitting a ton of documentation and a lot of research for the best rates.  You would think that having 60%+ equity in a home would make the paperwork easier and that is not the case.   I think I submitted over 12 documents plus the application form.

Hopefully is it done deal now, and we will roll over happily when the renewal date comes.    The new mortgage means our large HELOC will also disappear.  Our income is only enough for the mortgage, not a mortgage plus HELOC.  I was using it for emergencies, it had a zero balance, and it was the only account I could write a cheque on, so that will end.   

We managed to get 2.8% variable, with no legal fees or closing costs to us.  Can prepay 20% principal and up our payments by 20% every year if we choose.  It is signed up for 5 more years, when we need to go through this again, but it will be lower then and I will have freed up more money in after tax funds to pay it down enough to qualify.  As long as we have some income still coming in, in 5 years, it should work out well.

TLDR:   Set up your mortgage for the long term when you retire, or pay it off!
TLDR2:  Pay off your HELOC and any other non-mortgage loans when you retire, even if you are using it to borrow to invest -- having smaller debt servicing exposure made a huge difference to our ability to get the mortgage at the best rates.


TexasRunner

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Re: DONT Payoff your Mortgage Club
« Reply #1324 on: March 29, 2019, 01:04:36 PM »

UPDATE -- Getting a mortgage renewed while FIRED
...snip...

I'm trying to wrap my head around the Canadian market, I know you guys have (basically) a 5/1 ARM as the standard mortgage- but even a ARM in the states doesn't require repetitive closing...  You guys have to renegotiate and re-close every 5 years?...  That just seems so- weird.  But then the advantage si that you can shop around at "Re-up" time whereas US based 5/1 ARMs just have the bank say "here is your new interest amount, enjoy". 

Previously when someone had an overseas mortgage I would say that the (DPOYMC) generally doesn't apply but if what you are going through is representative of everybody FIRE'd up there, there is no way you wouldn't want to kill the mortgage immediately before FIRE as the low income could be seen as risky to the lender and result in much higher rates.  It really changes the equation at FIRE time.

Are fixed rate long term mortgages not an option at all?  It seems if it were an option in the last year before FIRE you could roll into one of those with whatever mortgage amount you have and not risk getting surprised by the rate 5 years later.

Overall its just really different from us in the states, so the thinking has to change accordingly.

Goldielocks

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Re: DONT Payoff your Mortgage Club
« Reply #1325 on: March 29, 2019, 01:59:10 PM »

UPDATE -- Getting a mortgage renewed while FIRED
...snip...

I'm trying to wrap my head around the Canadian market, I know you guys have (basically) a 5/1 ARM as the standard mortgage- but even a ARM in the states doesn't require repetitive closing...  You guys have to renegotiate and re-close every 5 years?...  That just seems so- weird.  But then the advantage si that you can shop around at "Re-up" time whereas US based 5/1 ARMs just have the bank say "here is your new interest amount, enjoy". 

Previously when someone had an overseas mortgage I would say that the (DPOYMC) generally doesn't apply but if what you are going through is representative of everybody FIRE'd up there, there is no way you wouldn't want to kill the mortgage immediately before FIRE as the low income could be seen as risky to the lender and result in much higher rates.  It really changes the equation at FIRE time.

Are fixed rate long term mortgages not an option at all?  It seems if it were an option in the last year before FIRE you could roll into one of those with whatever mortgage amount you have and not risk getting surprised by the rate 5 years later.

Overall its just really different from us in the states, so the thinking has to change accordingly.
Great questions.

First, the 5 year is just like re-upping your mortgage every 5 years, except most people do not take cash out, but they just keep their original amortization schedule by choice.  e.g., amortization drops by 5 years each time.  Not everyone, but it seems to be the default.

You have the choice to auto-renew and continue with your current bank with no other new qualifications, or to shop your mortgage around. The auto renewal rate we were offered by our bank worked out to 3.15% variable rate, which was a bit insulting when they are giving fixed terms to new clients for close to that.

When the 5 year renewal happens, there are usually no up front costs  to switch or obtain a mortgage with a new lender (unlike the USA).  Instead we have penalties for exiting a mortgage before the term you agreed to. (quitting your contract before they make the money that they intended). Hence, having a no cost "out" every 5 years is actually very good.

Canada does have longer term mortgages:  BUT  Rates are best on 5 yr terms.  Longer terms cost more.


A 5 year fixed rate can be had for between 3.3% and 5.5%, depending on the type of mortgage and your credit / equity, and if you pay mortgage insurance (if you pay it, you get a lower rate) etc.
A 5 year variable (changes up to 4x per year) is between 2.8% (hard to find) and 3.6% right now.


Longer terms best rates - Canada

7yr is 3.75% - 4.3% right now.   
A 10 yr is 4.1% - 4.7%, etc.   Those are for the top credit, best rates going.. most people with good credit will not get the bottom rate. 
15 yr fixed terms are 8.5%,
25 yr are 8.75% etc.  This is why many people don't get the 10 year plus rates, they just don't make any financial sense unless you have a unique scenario of no other liquid assets and expecting to lose income forever.

TexasRunner

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Re: DONT Payoff your Mortgage Club
« Reply #1326 on: March 29, 2019, 02:29:26 PM »
Thanks for the answers @Goldielocks .  Canadian mortgages are just a completely different beast altogether.  Not a bad system, just different.

Does seem like it would make for a tough bet in 'proving' that you have income.  For US-based mortages, it means make all of you major purchases pre-FIRE if possible for the best rate.  Assuming the rates are still this good (big assumption), i'll probably lock in another 30 years right before FIRE (I'm 7-14 years out depending on circumstances) and be sure to buy the land that the wife and I want before pulling the trigger.

Also - Another standard mortgage payment this morning.  :)

FIreDrill

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Re: DONT Payoff your Mortgage Club
« Reply #1327 on: March 30, 2019, 11:50:08 AM »
As mortgage rates continue to fall I thought it would be fun to have a format where we could give advice and rate refinances as we look to tap equity and lower our interest rates.  Our refi just closed so I have the official numbers.... Drum roll please....


Old Mortgage:

Original loan         = 608,000
Balance at refi      = 601,794.93
Term                    = 30yr
Rate                     = 4.75%
Time In                 = 9mo
Years Remaining    = 29.25yr
PMI                       = 136
PI                         = 3,171.62

PITI+PMI              = 3,925.12

Average monthly principal pay down over the next 12 mo of loan = 806.92 (This will be used in my break-even calculation).


New Mortgage:

Original loan         = 608,000
Balance at refi      = 608,000
Term                    = 30yr
Rate                     = 3.875%
Time In                 = 0mo
Years Remaining    = 30yr
PMI                       = 122
PI                         = 2,859.05

PITI+PMI              = 3,598.79

Average monthly principal pay down over the next 12 mo of loan = 911.75 (This will be used in my break-even calculation).


Loan costs equal any cost associated with the loan excluding principal buy down, escrow funding, and prepaid interest.

Closing Costs                                = 8,113.70

Mortgage payment reduction          = 326.33

12mo Principal Payoff difference     = + 104.83

Total Mo difference over first 12mo = 431.16

Break-even = 18.8mo (After this period of time the costs of the Refi will be re-coupled by the decreased monthly payments and increased mo principal payoff.)


So how do you think I did?  Are there any other numbers people would be interested in?

Personally, I think a 12mo break-even is a home run, 18mo is still really good, 24mo acceptable, over 24mo is not very ideal.


Goldielocks

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Re: DONT Payoff your Mortgage Club
« Reply #1328 on: March 31, 2019, 06:36:52 PM »
Crap, $3000/mo for mortgage.... $800 a month for Property Taxes... !! 

I thought my FIRE mortgage was tough, ($2k/mo mortgage, $300/mo property tax). I don't think I would be happy swinging your numbers each month in FIRE, even with a large stash to draw down.  I am strangely adverse to drawing down any of the FIRE stash for expenses until I am much older... actual math be damned.

ETA:  Why is your new mortgage balance $608k, not $601k loan that was remaining?  Be careful with upticks liket that.   IMO, closing costs should be refi'd with your cash on hand, not by extending your mortgage (in this case by 9 months).
« Last Edit: March 31, 2019, 06:40:56 PM by Goldielocks »

Mr. Metal Mustache

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Re: DONT Payoff your Mortgage Club
« Reply #1329 on: March 31, 2019, 08:04:32 PM »
The whole point of this club is to use cash at hand to invest instead of taking it and putting it toward to mortgage... So technically didn't he do the right thing by rolling the refi costs into the new loan?

Goldielocks

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Re: DONT Payoff your Mortgage Club
« Reply #1330 on: April 01, 2019, 12:09:07 AM »
The whole point of this club is to use cash at hand to invest instead of taking it and putting it toward to mortgage... So technically didn't he do the right thing by rolling the refi costs into the new loan?
Technically, yes, except origination costs are true bank fees that are added.  In this case, about $7k larger debt to service fees.

It only makes sense because of the huge interest rate difference, and I am left wondering why such a poor rate was had only 9 months ago?  Credit scores would not have changed much, in that time, and that is a huge swing on mortgage rates.

   Why not take the opportunity to reduce PMI?   PMI has a pretty good pay off versus invest calculation.   The mortgage rate is almost 4% so the PMI opportunity cost would be higher than that.   

hmm. now that you have me wondering, I wonder if there really is enough investments to justify this, and if so, why not pay off the PMI..  there is a chance that the home is the primary investment, so the large mortgage is not really to free up money to invest, and having a large home and  mortgage can be a large sucking drain on one's cashflow limiting future power to invest...   Surely that can't be the case on this thread but the idea of keeping PMI when you have ample to pay it off, and renew a mortgage with it anyway baffles me.

Bank Fees, and mortgage insurance fees  are fees, not really investments.... and that is what the $7k went to. 

TexasRunner

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Re: DONT Payoff your Mortgage Club
« Reply #1331 on: April 01, 2019, 08:44:21 AM »
DPOTMC has never been a good excuse for buying too much house.  Only FIreDrill can know if he has purchased 'too much' or not. 

Obviously, buying a 1.5mil house on a 65k/year salary would be unwise whether you get a 0.00% loan or not.  At that point the investing math doesn't apply.  I kind of suspect that a prerequisite to this club be that you didn't buy too much house.  (BTW, the same thing can apply to the 'Pay Off' club, if someone buys a 1.5 mil house and immediate starts to demolish the debt, the question remains was that 1.5mil a good purchase or not).

Overall, I think proving income or eliminating other (high interest) debt can drastically change the rate.  Both of those factors go direct into the equation whereas the credit score just places you somewhere in the underwriting tables...  By eliminating other debts (and thus increasing loan-to-income ratios) you can wind up on a different underwriting tabel completely with much more aggressive rates.  The hard thing is when you (like me) have had 50% or more raises in very few years (46k/year just at 3 years ago to 220k/year now) and 'proving' your income.  In those instances just a few months can make a DRASTIC difference.

Mr. Metal Mustache

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Re: DONT Payoff your Mortgage Club
« Reply #1332 on: April 01, 2019, 10:14:34 AM »
@Goldielocks

That is a very good point you make, they are fees. So if you pay the interest of 3.875% for 30 years on that 7k wouldn't you still be better off rolling that 7k into the loan so that you could use your 7k to be invested for 30 years at an average of 7% a year?

I'm really interested in this scenario especially since I may be refinancing myself soon.

Goldielocks

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Re: DONT Payoff your Mortgage Club
« Reply #1333 on: April 01, 2019, 11:09:15 AM »
@Goldielocks

That is a very good point you make, they are fees. So if you pay the interest of 3.875% for 30 years on that 7k wouldn't you still be better off rolling that 7k into the loan so that you could use your 7k to be invested for 30 years at an average of 7% a year?

I'm really interested in this scenario especially since I may be refinancing myself soon.

I am struggling to put a pin on the precise reason this move to refinance doesn't sit all that well with me as a "great move".  The finances work out.  Shedding 1% interest on a 30 year loan is a huge benefit.

I think that it is the practice of paying more origination fees to get a new mortgage, when the current one is less than a year old.   I have a solid dislike for paying fees, especially when they are more than $1000.   

If the point made above, that the new lower rate is a combination of dilligent paying off other debts, and a reduction in going rates.  (which is fantastic), then why not wait to save up enough, or perhaps borrow enough (that you would quickly pay off) to get rid of the PMI before you refinance?  Many people get about 5-8 years into their mortgage and work very hard to try to get the PMI removed...  why not take the opportunity to remove it now? 

$122 PMI x 360 payments = $43,920  (Is that right?  that the PMI payment is only for the insurance, and not part principal)
Plus approx $7k origination fees.... which ok, are better invested, IF you can get 7% guaranteed returns, and IF you actually put another $7k into investments and could not save the cash.. but reupping the amount, especially for such a small amount, seems to be a bit of a lazy financial habit, rather than a diligent decision?

Contrast to:
Refiance at $601k  -- > save $7k in origination fees, but lose 7k that could have gone to other investments.  Yeah, I understand the math that this is better invested, except they are paying PMI on this $7k.

or

Refinance at $545k (Amount with no PMI, guess, approximate) --> save the $43,920 in PMI costs,   Therefore the amount of borrowed money that PMI is needed for (I assume $60k) is actually borrowed at just under 7% interest, when you add the insurance cost to the mortgage rate.   

There is only marginal value in not paying down the $60k of PMI versus investing at 7%, infact, I would say that you need to be getting 9% or better in your investments, over 30 years, to make it worth the risk differential to keep the PMI.   AND, there is also the risk that arises with having very high mortgage payments and employment that is not guaranteed for 30 years at the current income levels.

So, if the goal is to keep yourself fully invested in the market, while reducing your mortgage rate to as low as possible, should not that also include getting rid of PMI as quickly as possible?   Doesn't adding $7k of origination fees to one's mortgage work against that?


Why not instead..
Pay down the mortgage to 50% equity, and borrow at low (tax deductible) rates against the property to invest.    Depends on the rate you can get, and your current income tax bracket, but is even more flexible than keeping all the borrowing as one fixed mortgage investment, because you could theoretically pay off the investment loan on a moment's notice by selling your investments if you lose your job.  Many mortgages do not accept very large single year pay offs.


At the end of the day, all of the above is trumped by the significantly lower mortgage rate over 30 years. 

I can't help thinking that the poster did not shop around for the best rate originally and now is making a solid good decision to fix that... but still being lazy by not taking the opportunity to pay it down a bit to accelerate PMI elimination.

FIreDrill

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Re: DONT Payoff your Mortgage Club
« Reply #1334 on: April 01, 2019, 11:20:54 AM »
@Goldielocks

That is a very good point you make, they are fees. So if you pay the interest of 3.875% for 30 years on that 7k wouldn't you still be better off rolling that 7k into the loan so that you could use your 7k to be invested for 30 years at an average of 7% a year?

I'm really interested in this scenario especially since I may be refinancing myself soon.

I am struggling to put a pin on the precise reason this move to refinance doesn't sit all that well with me as a "great move".  The finances work out.  Shedding 1% interest on a 30 year loan is a huge benefit.

I think that it is the practice of paying more origination fees to get a new mortgage, when the current one is less than a year old.   I have a solid dislike for paying fees, especially when they are more than $1000.   

If the point made above, that the new lower rate is a combination of dilligent paying off other debts, and a reduction in going rates.  (which is fantastic), then why not wait to save up enough, or perhaps borrow enough (that you would quickly pay off) to get rid of the PMI before you refinance?  Many people get about 5-8 years into their mortgage and work very hard to try to get the PMI removed...  why not take the opportunity to remove it now? 

$122 PMI x 360 payments = $43,920  (Is that right?  that the PMI payment is only for the insurance, and not part principal)
Plus approx $7k origination fees.... which ok, are better invested, IF you can get 7% guaranteed returns, and IF you actually put another $7k into investments and could not save the cash.. but reupping the amount, especially for such a small amount, seems to be a bit of a lazy financial habit, rather than a diligent decision?

Contrast to:
Refiance at $601k  -- > save $7k in origination fees, but lose 7k that could have gone to other investments.  Yeah, I understand the math that this is better invested, except they are paying PMI on this $7k.

or

Refinance at $545k (Amount with no PMI, guess, approximate) --> save the $43,920 in PMI costs,   Therefore the amount of borrowed money that PMI is needed for (I assume $60k) is actually borrowed at just under 7% interest, when you add the insurance cost to the mortgage rate.   

There is only marginal value in not paying down the $60k of PMI versus investing at 7%, infact, I would say that you need to be getting 9% or better in your investments, over 30 years, to make it worth the risk differential to keep the PMI.   AND, there is also the risk that arises with having very high mortgage payments and employment that is not guaranteed for 30 years at the current income levels.

So, if the goal is to keep yourself fully invested in the market, while reducing your mortgage rate to as low as possible, should not that also include getting rid of PMI as quickly as possible?   Doesn't adding $7k of origination fees to one's mortgage work against that?


Why not instead..
Pay down the mortgage to 50% equity, and borrow at low (tax deductible) rates against the property to invest.    Depends on the rate you can get, and your current income tax bracket, but is even more flexible than keeping all the borrowing as one fixed mortgage investment, because you could theoretically pay off the investment loan on a moment's notice by selling your investments if you lose your job.  Many mortgages do not accept very large single year pay offs.


At the end of the day, all of the above is trumped by the significantly lower mortgage rate over 30 years. 

I can't help thinking that the poster did not shop around for the best rate originally and now is making a solid good decision to fix that... but still being lazy by not taking the opportunity to pay it down a bit to accelerate PMI elimination.
Wow... A lot of assumptions there lol. I'll try to get a detailed response together when I have time over the next day or two.

Sent from my moto g(6) using Tapatalk


Gardo

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Re: DONT Payoff your Mortgage Club
« Reply #1335 on: April 01, 2019, 11:46:18 AM »
Every time y'all post your current rates, I get happy thinking about our 2.75% rate for the next dozen years.  :)

Mine is 2.6% for all years of payment.

FIreDrill

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Re: DONT Payoff your Mortgage Club
« Reply #1336 on: April 01, 2019, 06:33:00 PM »
@Goldielocks

That is a very good point you make, they are fees. So if you pay the interest of 3.875% for 30 years on that 7k wouldn't you still be better off rolling that 7k into the loan so that you could use your 7k to be invested for 30 years at an average of 7% a year?

I'm really interested in this scenario especially since I may be refinancing myself soon.

I am struggling to put a pin on the precise reason this move to refinance doesn't sit all that well with me as a "great move".  The finances work out.  Shedding 1% interest on a 30 year loan is a huge benefit.

I think that it is the practice of paying more origination fees to get a new mortgage, when the current one is less than a year old.   I have a solid dislike for paying fees, especially when they are more than $1000.   

I definitely feel for the need to not pay fees but you have to realize that you are still paying fees with a "no fee" mortgage refi.  It's called an interest rate premium.  So my option was 4.18% with 3k in fees vs 3.875% with 8k in fees.  I probably could have gotten a 4.325% with absolutely "no fees".  After running the break even in all scenarios I decided to go with the lower rate at an 18 mo break even. 

If the point made above, that the new lower rate is a combination of dilligent paying off other debts, and a reduction in going rates.  (which is fantastic), then why not wait to save up enough, or perhaps borrow enough (that you would quickly pay off) to get rid of the PMI before you refinance?  Many people get about 5-8 years into their mortgage and work very hard to try to get the PMI removed...  why not take the opportunity to remove it now? 

$122 PMI x 360 payments = $43,920  (Is that right?  that the PMI payment is only for the insurance, and not part principal)
Plus approx $7k origination fees.... which ok, are better invested, IF you can get 7% guaranteed returns, and IF you actually put another $7k into investments and could not save the cash.. but reupping the amount, especially for such a small amount, seems to be a bit of a lazy financial habit, rather than a diligent decision?

Oh man.......

First,  Rates have taken a 1% dive in the last 6 months from the previous peak... Just look at Zillows rate history chart.

Second, the first rate was with a specific, well known, local lender that could pre-underwrite us and accommodate a 15 day closing.  This made our offers much stronger.  We still got lost out on 3 homes and some went for 100k over asking.  All of them were all-cash offers so it was important to make our offers as attractive as possible.  Having a reputable local lender, being pre-underwritten, and accommodating a closing as quick as 15 days was our strategy.  Our rate was probably .25% higher than the best rate I could find from an out of state known by nobody lender.

Third, and most importantly,  PMI with conventional loans automatically drops off after the loan reaches 78-80% LTV.  Which mean your PMI calculation of 122x360 is way off(my PMI is scheduled to drop off after 8 years or 96 payments).  This also means I could make a principal payment tomorrow and get rid of PMI if I wanted to.  In order to get rid of PMI you need 20% LTV.  It would take an additional 96k to drop PMI off of the loan.  If that 96K is invested in VTSAX, the dividends alone will exceed the cost of PMI.  If you calculate the PMI charges against the 96k it is a 1.525% interest rate increase over the base interest rate of 3.875%.  So I am basically keeping that money in the market at a cost of 5.4%.

Here is where things get interesting though regarding PMI.  It is a fixed cost and does not decrease until you hit that 20% LTV number.  So if you are 5 years in on the mortgage and 85% LTV your PMI cost is greater because now the only thing that is keeping you away from dropping that PMI is 5% LTV and not 15% LTV.  This is when it can be enticing to refinance, put some extra money in, and drop PMI off.  However,  I would only do a refi in this scenario if you are taking a drastically lower interest rate or if you for some horrible reason have an FHA loan where the PMI last the life of the loan.  In general, FHA loans suck compared to conventional loans because of the high closing costs and high PMI rates.


Contrast to:
Refiance at $601k  -- > save $7k in origination fees, but lose 7k that could have gone to other investments.  Yeah, I understand the math that this is better invested, except they are paying PMI on this $7k.

Alright, so when you refi your PMI costs are calculated based on your credit score, income, and LTV of the new mortgage.  In almost every case that I have seen your PMI only decreases after key LTV values are reached. Usually 95% 90% 85% and 80%, 80% LTV being no PMI at all of course.

So when you talk about paying 7k into the refi in order to lower PMI it will ONLY lower PMI if it results in the LTV of the loan breaking these key points.  Going from 95% LTV to 94% LTV results in the same exact PMI,  the only saving you will get is from the loan rate which was 3.875% in my case.

Refinance at $545k (Amount with no PMI, guess, approximate) --> save the $43,920 in PMI costs,   Therefore the amount of borrowed money that PMI is needed for (I assume $60k) is actually borrowed at just under 7% interest, when you add the insurance cost to the mortgage rate.   

See above.  5.4% total interest rate on the 15% LTV or 96k in this case.

There is only marginal value in not paying down the $60k of PMI versus investing at 7%, infact, I would say that you need to be getting 9% or better in your investments, over 30 years, to make it worth the risk differential to keep the PMI.   AND, there is also the risk that arises with having very high mortgage payments and employment that is not guaranteed for 30 years at the current income levels.

So, if the goal is to keep yourself fully invested in the market, while reducing your mortgage rate to as low as possible, should not that also include getting rid of PMI as quickly as possible?   Doesn't adding $7k of origination fees to one's mortgage work against that?

In the case of a job loss, I would much rather have the money liquid and in the market in order to continue paying the mortgage than tied up in the house with no access to it.  This greatly increases your options and the period of time you have to land a new job before you start missing payments.

Why not instead..
Pay down the mortgage to 50% equity, and borrow at low (tax deductible) rates against the property to invest.    Depends on the rate you can get, and your current income tax bracket, but is even more flexible than keeping all the borrowing as one fixed mortgage investment, because you could theoretically pay off the investment loan on a moment's notice by selling your investments if you lose your job.  Many mortgages do not accept very large single year pay offs.

Woah woah woah... The whole purpose of this thread is to divert money to investments instead of paying off the low-interest rate mortgage.  This is not the Mortgage Payoff Club so I see no point in accelerating payoff until 50% LTV,  80% LTV is definitely debatable depending on PMI costs which are unique to each person...  That being said, you should still only finance what you feel comfortable paying for on a monthly basis(aka mortgage payment).

I'm not sure why you think "Many mortgages do not accept very large single year pay offs."  They may not like it but they don't have a choice if your mortgage has a "no pre-payment penalty" clause.  Which almost all conventional mortgages have.  If you are trying to refi and the new mortgage has pre-payment penalties then you need to RUNNNNN.

At the end of the day, all of the above is trumped by the significantly lower mortgage rate over 30 years. 

I can't help thinking that the poster did not shop around for the best rate originally and now is making a solid good decision to fix that... but still being lazy by not taking the opportunity to pay it down a bit to accelerate PMI elimination.

Well, that's kind of insulting.... I'm a lot of things... But when it comes to finances, the last thing I am is lazy.

In regards to PMI though, for many people, it is definitely better to pay it off as quick as possible.  High income, great credit, and shopping around got me some great PMI rates.  In some cases, I was quoted 2x the amount of PMI. If my credit was in the high 600's or low 700's PMI could have easily been 250-300mo.


For what it's worth, our savings rate with automated investments is 40%.  After bonuses and stock, it will be about 50% projected for 2019.  We are also in a good position for career growth so the goal is to get our savings rate to 60-75% within the next 3 years or so.





Goldielocks

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Re: DONT Payoff your Mortgage Club
« Reply #1337 on: April 04, 2019, 01:00:36 AM »
Hey, thanks for the detailed response.  It is more than I was expecting and very complete.   I can see now where some of my errors are, and that is because of the differences in how mortgages work in the USA versus Canada.  Yep. This is despite having heavily shopped for a mortgage when I lived in California, so I know, in theory, how it works.    But knowing something doesn't mean that it is instinct.

Three areas that I was completely off (and why).

1)  We have no fee mortgages -- zero points to buy, ever.  Sometimes legal fees are added, but often not.  This means that the only times a person ups the mortgage amount owing is usually when they are taking money out of the property, which is a significantly bad habit, even for many money savvy people that intend to invest it (because often not all the money ends up getting invested).

Lenders write up the paperwork this way automatically to make your monthly mortgage look smaller than before so you need to be attentive to it, to ensure they retract it back out.  (they make the mortgage out for more than you wanted them to).

My instinct was that upping a mortgage for $7k when the person clearly has the money is not great.     That is not the case here.

2)  We have sometimes HUGE penalties to break the mortgage -- because there are no upfront penalties.  The bank ensures that it gets it money back over the 5 year mortgage contract before you renew with them or another lender.    This means large penalties to prepay more than 10-20% of your mortgage.   
Not the case with your mortgage.

3)  PMI is not flat rate, here.  You only pay it as long as you carry it, and can remove it with that 10% prepayment...  it gets expensive, fast.  I have never had PMI because it costs so damn much, although those california lenders were certainly pushing it.  I do know that it can be hard to prove the LTV to your lender, based on increased home prices, and they can be slow to process the 80% point even on conventional mortgages, but YMMV.

4)  There are a few other older threads that do the math on PMI versus investments.   It is often a difficult one to justify keeping the PMI on conventional rates, not versus higher second mortgage or credit card rates.

One area that can still make sense, if you can get a loan at a decent rate, within 1-2% of your mortgage rate, and have a higher personal income tax rate, is using the "Smith Maneouver" to invest.    Especially if you no longer get the extremely nice mortgage deduction because of tax law changes.   We have never had a mortgage rate tax write off, so borrowing against home values to invest is actually the way to go when you intend to keep a high mortgage, and max out investments instead.

Smith Maneouver:

"The funds in the line of credit [money borrowed] are invested, presumably at a higher rate of return than the interest rate paid on the line of credit. However, the advantage here is that the interest payments on the line of credit are tax-deductible and should result in a tax refund when the borrower files taxes. This tax refund can be used to pay down the mortgage, thus accelerating the mortgage repayment schedule."


If you pay down $200k on your mortgage, and can borrow on a HELOC at 4%, and your mortgage rate is not tax deductible at 3%, and your marginal tax rate is 50% (all typical numbers here for someone at $200k/yr income),

Then you are borrowing at net 2% interest to earn your 7% return on the stock market. 
That $200k would cost you $4k a year to borrow instead of $6k/yr for the mortgage; and generate net profit of $10k.
Keep saving that $10k/yr and then pay off your home in one lump instead of renewing the mortgage, and FIRE in 15 years (or whatever the magic number is).


FIreDrill

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Re: DONT Payoff your Mortgage Club
« Reply #1338 on: April 04, 2019, 08:47:11 AM »
Hey, thanks for the detailed response.  It is more than I was expecting and very complete.   I can see now where some of my errors are, and that is because of the differences in how mortgages work in the USA versus Canada.  Yep. This is despite having heavily shopped for a mortgage when I lived in California, so I know, in theory, how it works.    But knowing something doesn't mean that it is instinct.

Three areas that I was completely off (and why).

1)  We have no fee mortgages -- zero points to buy, ever.  Sometimes legal fees are added, but often not.  This means that the only times a person ups the mortgage amount owing is usually when they are taking money out of the property, which is a significantly bad habit, even for many money savvy people that intend to invest it (because often not all the money ends up getting invested).

Lenders write up the paperwork this way automatically to make your monthly mortgage look smaller than before so you need to be attentive to it, to ensure they retract it back out.  (they make the mortgage out for more than you wanted them to).

My instinct was that upping a mortgage for $7k when the person clearly has the money is not great.     That is not the case here.

2)  We have sometimes HUGE penalties to break the mortgage -- because there are no upfront penalties.  The bank ensures that it gets it money back over the 5 year mortgage contract before you renew with them or another lender.    This means large penalties to prepay more than 10-20% of your mortgage.   
Not the case with your mortgage.

3)  PMI is not flat rate, here.  You only pay it as long as you carry it, and can remove it with that 10% prepayment...  it gets expensive, fast.  I have never had PMI because it costs so damn much, although those california lenders were certainly pushing it.  I do know that it can be hard to prove the LTV to your lender, based on increased home prices, and they can be slow to process the 80% point even on conventional mortgages, but YMMV.

4)  There are a few other older threads that do the math on PMI versus investments.   It is often a difficult one to justify keeping the PMI on conventional rates, not versus higher second mortgage or credit card rates.

One area that can still make sense, if you can get a loan at a decent rate, within 1-2% of your mortgage rate, and have a higher personal income tax rate, is using the "Smith Maneouver" to invest.    Especially if you no longer get the extremely nice mortgage deduction because of tax law changes.   We have never had a mortgage rate tax write off, so borrowing against home values to invest is actually the way to go when you intend to keep a high mortgage, and max out investments instead.

Smith Maneouver:

"The funds in the line of credit [money borrowed] are invested, presumably at a higher rate of return than the interest rate paid on the line of credit. However, the advantage here is that the interest payments on the line of credit are tax-deductible and should result in a tax refund when the borrower files taxes. This tax refund can be used to pay down the mortgage, thus accelerating the mortgage repayment schedule."


If you pay down $200k on your mortgage, and can borrow on a HELOC at 4%, and your mortgage rate is not tax deductible at 3%, and your marginal tax rate is 50% (all typical numbers here for someone at $200k/yr income),

Then you are borrowing at net 2% interest to earn your 7% return on the stock market. 
That $200k would cost you $4k a year to borrow instead of $6k/yr for the mortgage; and generate net profit of $10k.
Keep saving that $10k/yr and then pay off your home in one lump instead of renewing the mortgage, and FIRE in 15 years (or whatever the magic number is).
Yeah I still don't fully understand Canadian mortgages but it's probably because I have no reason to research them at the moment. Lol

Our mortgage interest/taxes puts us at the amount where we are able to take itemized deductions.  In no way did we purchase the house because of this put it is a nice perk at the moment because we do a decent amount of charitable contributions that increase our itemized deductions.

Also, I'd like to make clear that we do not view this home in any way as an investment.  It would be a horrible investment lol.  This was really a "quality of life" purchase for us and this ment sacrificing some future investments by increasing monthly expenses.  We could probably have increase our total savings rate 10-20% by renting an apartment but to us the decrease in savings rate was worth the house. 

As long as we live in this area, we will live in this house, so there is a good chance this will be our primary residence for 10-30 years.  I know some people that buy an entry level house in HCOL area with the plan of selling in 5 years.  I personally hate this idea because you have to rely on market appreciation over a short period of time in order to break even after sales fees in 5 years.  Much better to save a bit more and buy a home with the prospects of lifetime ownership.  Totally different if you are talking about live in flips.  That idea I love.

Alright, I'm starting to get off topic.  Anyways, I guess it really just comes down to each refi scenario is unique especially if you consider pmi and US vs Canadian mortgages.  Maybe a "rate my refi" template is more complex than I originally thought.  Although, it's always fun analyzing numbers and helping people out if they have questions.  I was hoping it may be something that could drive more posts to this thread as rates have been on a downturn lately.

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jps

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Re: DONT Payoff your Mortgage Club
« Reply #1339 on: April 04, 2019, 10:08:50 AM »
Hey there DPYMC, I'm looking for some help w/r/t our mortgage and understanding the costs/benefits of whether or not to pay it off. We have had a mortgage for a few months and have been paying about $500 extra per month.

Mortgage: $75K remaining out of $85K. 15 year note, 4.5%.

Savings: Currently investing $1650/month into 401k and Roth IRAs.

Life situation: Young DINKs, making low six figures. Working to cash flow some necessary projects, which will be fully funded by the end of the year. Once those are funded, will have at least an extra $2-3K/month while both of us are working.

Kicker: would love to start a family in 3-5 years time. If we did, DW would stop working and we would go down to just my income, which is $56K/year. Current PITI is ~$650/mo.

Question: In my head, it makes sense to allocate the extra $ after we save up for necessary projects to paying off our mortgage, rather than to investment accounts, so that we could have an extra $650 in cash flow each month once we go down to one income. I am familiar with the 15/30 year return charts that people post here, but I would love second opinions on how this applies to a situation where income might be dropping significantly in a few years.

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Re: DONT Payoff your Mortgage Club
« Reply #1340 on: April 04, 2019, 11:14:04 AM »
Hey there DPYMC, I'm looking for some help w/r/t our mortgage and understanding the costs/benefits of whether or not to pay it off. We have had a mortgage for a few months and have been paying about $500 extra per month.

Mortgage: $75K remaining out of $85K. 15 year note, 4.5%.

Savings: Currently investing $1650/month into 401k and Roth IRAs.

Life situation: Young DINKs, making low six figures. Working to cash flow some necessary projects, which will be fully funded by the end of the year. Once those are funded, will have at least an extra $2-3K/month while both of us are working.

Kicker: would love to start a family in 3-5 years time. If we did, DW would stop working and we would go down to just my income, which is $56K/year. Current PITI is ~$650/mo.

Question: In my head, it makes sense to allocate the extra $ after we save up for necessary projects to paying off our mortgage, rather than to investment accounts, so that we could have an extra $650 in cash flow each month once we go down to one income. I am familiar with the 15/30 year return charts that people post here, but I would love second opinions on how this applies to a situation where income might be dropping significantly in a few years.

Having liquid assets is better than cash flow. If you needed to you could sell $650 per month from your liquid assets and the remaining balance will continue to compound.

jps

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Re: DONT Payoff your Mortgage Club
« Reply #1341 on: April 04, 2019, 11:33:47 AM »
Hey there DPYMC, I'm looking for some help w/r/t our mortgage and understanding the costs/benefits of whether or not to pay it off. We have had a mortgage for a few months and have been paying about $500 extra per month.

Mortgage: $75K remaining out of $85K. 15 year note, 4.5%.

Savings: Currently investing $1650/month into 401k and Roth IRAs.

Life situation: Young DINKs, making low six figures. Working to cash flow some necessary projects, which will be fully funded by the end of the year. Once those are funded, will have at least an extra $2-3K/month while both of us are working.

Kicker: would love to start a family in 3-5 years time. If we did, DW would stop working and we would go down to just my income, which is $56K/year. Current PITI is ~$650/mo.

Question: In my head, it makes sense to allocate the extra $ after we save up for necessary projects to paying off our mortgage, rather than to investment accounts, so that we could have an extra $650 in cash flow each month once we go down to one income. I am familiar with the 15/30 year return charts that people post here, but I would love second opinions on how this applies to a situation where income might be dropping significantly in a few years.

Having liquid assets is better than cash flow. If you needed to you could sell $650 per month from your liquid assets and the remaining balance will continue to compound.

If we were going to invest the difference though, it would be in tax-advantaged 401ks - which is not liquid until I'm 59 1/2, yeah?

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #1342 on: April 04, 2019, 11:37:22 AM »
Hey there DPYMC, I'm looking for some help w/r/t our mortgage and understanding the costs/benefits of whether or not to pay it off. We have had a mortgage for a few months and have been paying about $500 extra per month.

Mortgage: $75K remaining out of $85K. 15 year note, 4.5%.

Savings: Currently investing $1650/month into 401k and Roth IRAs.

Life situation: Young DINKs, making low six figures. Working to cash flow some necessary projects, which will be fully funded by the end of the year. Once those are funded, will have at least an extra $2-3K/month while both of us are working.

Kicker: would love to start a family in 3-5 years time. If we did, DW would stop working and we would go down to just my income, which is $56K/year. Current PITI is ~$650/mo.

Question: In my head, it makes sense to allocate the extra $ after we save up for necessary projects to paying off our mortgage, rather than to investment accounts, so that we could have an extra $650 in cash flow each month once we go down to one income. I am familiar with the 15/30 year return charts that people post here, but I would love second opinions on how this applies to a situation where income might be dropping significantly in a few years.

Having liquid assets is better than cash flow. If you needed to you could sell $650 per month from your liquid assets and the remaining balance will continue to compound.

If we were going to invest the difference though, it would be in tax-advantaged 401ks - which is not liquid until I'm 59 1/2, yeah?

You're comparing to tax-advantaged accounts? You really don't want to forgo maxing those out to pay extra on the mortgage, they are too valuable (and you only get so much space per year). Also, there are ways to access them before 59.5:
https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

jps

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Re: DONT Payoff your Mortgage Club
« Reply #1343 on: April 04, 2019, 11:46:25 AM »
Hey there DPYMC, I'm looking for some help w/r/t our mortgage and understanding the costs/benefits of whether or not to pay it off. We have had a mortgage for a few months and have been paying about $500 extra per month.

Mortgage: $75K remaining out of $85K. 15 year note, 4.5%.

Savings: Currently investing $1650/month into 401k and Roth IRAs.

Life situation: Young DINKs, making low six figures. Working to cash flow some necessary projects, which will be fully funded by the end of the year. Once those are funded, will have at least an extra $2-3K/month while both of us are working.

Kicker: would love to start a family in 3-5 years time. If we did, DW would stop working and we would go down to just my income, which is $56K/year. Current PITI is ~$650/mo.

Question: In my head, it makes sense to allocate the extra $ after we save up for necessary projects to paying off our mortgage, rather than to investment accounts, so that we could have an extra $650 in cash flow each month once we go down to one income. I am familiar with the 15/30 year return charts that people post here, but I would love second opinions on how this applies to a situation where income might be dropping significantly in a few years.

Having liquid assets is better than cash flow. If you needed to you could sell $650 per month from your liquid assets and the remaining balance will continue to compound.

If we were going to invest the difference though, it would be in tax-advantaged 401ks - which is not liquid until I'm 59 1/2, yeah?

You're comparing to tax-advantaged accounts? You really don't want to forgo maxing those out to pay extra on the mortgage, they are too valuable (and you only get so much space per year). Also, there are ways to access them before 59.5:
https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

Setting up a 5-year roth pipeline to get $ out of a 401k doesn't seem like it supports the idea of "having liquid assets is better than cashflow". And as far as forgoing tax-advantaged accounts to pay extra on the mortgage- that's the crux of my question. In my head, it seems better to be able to contribute a medium amount for the long haul w/ less risk at lower income, than it does to max for a few years and then much less in perpetuity after that once my wife stops working and we still have a mortgage.

nereo

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Re: DONT Payoff your Mortgage Club
« Reply #1344 on: April 04, 2019, 11:57:30 AM »

Setting up a 5-year roth pipeline to get $ out of a 401k doesn't seem like it supports the idea of "having liquid assets is better than cashflow". And as far as forgoing tax-advantaged accounts to pay extra on the mortgage- that's the crux of my question. In my head, it seems better to be able to contribute a medium amount for the long haul w/ less risk at lower income, than it does to max for a few years and then much less in perpetuity after that once my wife stops working and we still have a mortgage.

What does the rest of your investment picture look like?
I certainly wouldn't put extra into a mortgage if you lack a basic e-fund and some money in taxable accounts.

The advantage of putting more into your tax-advantaged accounts is that you lower your taxable burden today while getting tax-free growth.  As high earners that could be considerable savings -- you are likely in the 22% or 24% bracket depending on your deductions.

jps

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Re: DONT Payoff your Mortgage Club
« Reply #1345 on: April 04, 2019, 12:01:36 PM »

Setting up a 5-year roth pipeline to get $ out of a 401k doesn't seem like it supports the idea of "having liquid assets is better than cashflow". And as far as forgoing tax-advantaged accounts to pay extra on the mortgage- that's the crux of my question. In my head, it seems better to be able to contribute a medium amount for the long haul w/ less risk at lower income, than it does to max for a few years and then much less in perpetuity after that once my wife stops working and we still have a mortgage.

What does the rest of your investment picture look like?
I certainly wouldn't put extra into a mortgage if you lack a basic e-fund and some money in taxable accounts.

The advantage of putting more into your tax-advantaged accounts is that you lower your taxable burden today while getting tax-free growth.  As high earners that could be considerable savings -- you are likely in the 22% or 24% bracket depending on your deductions.

Have e-fund. Contributing to 401ks and IRAs at rate of $1650/mo plus some match.

We are just barely in the 22% tax bracket. Our effective tax rate for 2018 was something like 9.9%.

I am working on the math, and it looks like if I play out the difference of $650/month for 20 years after paying off the mortgage, VS maxing tax-advantaged and then having $650 less each month after DW stops working, the difference is $100K over 20 years. That's big $$, but, how do I assess the risk of having $650 less each and every month for another 10 years after we have a kid without the extra liquidity that would come from investing in taxable?

I really don't want to come across as combative, I guess I could just use some help in understanding this math. If I haven't provided enough clarity on my situation please let me know.
« Last Edit: April 04, 2019, 12:08:10 PM by jps »

nereo

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Re: DONT Payoff your Mortgage Club
« Reply #1346 on: April 04, 2019, 12:09:21 PM »

Setting up a 5-year roth pipeline to get $ out of a 401k doesn't seem like it supports the idea of "having liquid assets is better than cashflow". And as far as forgoing tax-advantaged accounts to pay extra on the mortgage- that's the crux of my question. In my head, it seems better to be able to contribute a medium amount for the long haul w/ less risk at lower income, than it does to max for a few years and then much less in perpetuity after that once my wife stops working and we still have a mortgage.

What does the rest of your investment picture look like?
I certainly wouldn't put extra into a mortgage if you lack a basic e-fund and some money in taxable accounts.

The advantage of putting more into your tax-advantaged accounts is that you lower your taxable burden today while getting tax-free growth.  As high earners that could be considerable savings -- you are likely in the 22% or 24% bracket depending on your deductions.

Have e-fund. Contributing to 401ks and IRAs at rate of $1650/mo plus some match.

We are just barely in the 22% tax bracket. Our effective tax rate for 2018 was something like 9.9%.

I am working on the math, and it looks like if I play out the difference of $650/month for 20 years after paying off the mortgage, VS maxing tax-advantaged and then having $650 less each month after DW stops working, the difference is $100K over 20 years. That's big $$, but, how do I assess the risk of having $650 less each and every month for another 10 years after we have a kid without the extra liquidity that would come from investing in taxable?

I'm not sure I understand what 'risk' you are worried about.
Are you concerned that you won't be able to pay your mortgage if/when DW stops working?

jps

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Re: DONT Payoff your Mortgage Club
« Reply #1347 on: April 04, 2019, 12:14:32 PM »

Setting up a 5-year roth pipeline to get $ out of a 401k doesn't seem like it supports the idea of "having liquid assets is better than cashflow". And as far as forgoing tax-advantaged accounts to pay extra on the mortgage- that's the crux of my question. In my head, it seems better to be able to contribute a medium amount for the long haul w/ less risk at lower income, than it does to max for a few years and then much less in perpetuity after that once my wife stops working and we still have a mortgage.

What does the rest of your investment picture look like?
I certainly wouldn't put extra into a mortgage if you lack a basic e-fund and some money in taxable accounts.

The advantage of putting more into your tax-advantaged accounts is that you lower your taxable burden today while getting tax-free growth.  As high earners that could be considerable savings -- you are likely in the 22% or 24% bracket depending on your deductions.

Have e-fund. Contributing to 401ks and IRAs at rate of $1650/mo plus some match.

We are just barely in the 22% tax bracket. Our effective tax rate for 2018 was something like 9.9%.

I am working on the math, and it looks like if I play out the difference of $650/month for 20 years after paying off the mortgage, VS maxing tax-advantaged and then having $650 less each month after DW stops working, the difference is $100K over 20 years. That's big $$, but, how do I assess the risk of having $650 less each and every month for another 10 years after we have a kid without the extra liquidity that would come from investing in taxable?

I'm not sure I understand what 'risk' you are worried about.
Are you concerned that you won't be able to pay your mortgage if/when DW stops working?

Not that I won't be able to mortgage - but just worried in general about the tighter cash flow. I've done a speculative budget and it is enough to live on, it's just tighter than I'm used to (obviously with double the income right now). So, wanting to pay off my mortgage would be for a little more breathing room each month, either to just pay for something that comes up, or to invest more each month. It would totally be a comfort thing. Does that make sense?

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #1348 on: April 04, 2019, 12:21:49 PM »
If you want to ensure more breathing room in the future then you may want to consider investing some in a taxable account and maybe also increase the size of your emergency fund. That way you'll know that you can absorb any unexpected things that might come up. Now is a good time to do that while you have a higher income to work with. Long term I don't expect you will run into any issues with a single $56k income as long as you manage your expenses and have that taxable/e-fund buffer.

nereo

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Re: DONT Payoff your Mortgage Club
« Reply #1349 on: April 04, 2019, 12:25:15 PM »
Not that I won't be able to mortgage - but just worried in general about the tighter cash flow. I've done a speculative budget and it is enough to live on, it's just tighter than I'm used to (obviously with double the income right now). So, wanting to pay off my mortgage would be for a little more breathing room each month, either to just pay for something that comes up, or to invest more each month. It would totally be a comfort thing. Does that make sense?

It does.  But what you seem to be concerned with is that if you invest that money now you won't be able to invest as much in the future when your income is less.  That's exactly backwards - you want to maximize both time in the market as well as the tax benefits.

You should always be able to just pay for something that 'comes up' (i.e. emergency expenses) - otherwise you are on too precarious a financial path.

Again you mentioned tax-advantaged accounts, but not taxable ones. What does that picture look like?