With all this "Mortgage Equity Withdrawal" and "Cash-Out Refi" stuff going on, when exactly did it become smart or fashionable to simply rent your house from the bank, versus actually trying to OWN it one day?
December 14, 2006
HousingPanic Stupid Question of the Day
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It worked great while the prices were going up. ;-)
Growing up, retired people taught me that the two keys to retirement were to save money each month and have your home paid off. I guess both of these have been thrown out the window.
Soup kitchens for Realtors?
BTW, I got that link from the comments section over at Bloodhound Blog. Bwahaha!
I HOPE that any Potential Buyers and Realtors hold their Spring Convention in a Telephone Booth !
My place is paid for and I save $1K per month.
I've been visiting bubble blogs for several years. Ideally I was hoping to wait till spring 2007 to sell as we have a child graduating high school and going off to college. Sensing the downturn was at the doorway we put the house on the market Aug 2006. Minimal showings and one lowball offer later we decided to refi.
Here's the logic. We were about 25% LTV. We had good retiement and decent equity but little cash. We both have good jobs and are getting killed on taxes. And we had a daughter who needs help with college costs.
We were planning on renting for a few years anyway so we decided to rent from ourselves. Essentially we refi'd to 60% LTV and took out a 100K. Most of it's on it's way to CD's at 5.25. Loan fixed at 6 for 30 years. Monthly payment dropped $100.
So, I was paying about 15K to service the original loan with the majority going to principle. I'll pocket about $1500 cash from the difference in the 2 payments. Add in the return on the CD's and the tax deduction and it doesn't seem to bad a deal.
Still praying for a buyer though.
The late 90's
To anon who decided to re-up his mortgage for another 30 years and put the money in a CD and thinks he did something smart...
You did a bad thing.
That CD may make you 5% interest, but that interest will be taxed as income.
Moreover, if you add up the total amount of interest you would have paid over the life of your previous loan and then added up the total amount of interest you will now pay over the life of your new loan you will find that you probably just tossed $100,000 out the window.
Sign.
Thinker,
I don't think it was that bad of an idea. His mortgage interest is deductable, so it will offset the taxable interest on his CD's. Also, if long term interest rates ever go back up to reasonable levels, he will be able to make a profit on his borrowed money, since his mortgage is fixed for 30.
things started changing because patrick.net told the world to "invest the difference" between renting an apartment and renting money for a house because you can retire on it!
I get strange stares when I tell people: "I'll buy a home someday, but in cash."
That's the power of living in a cheap place, so you can save your money for important things like a glorious retirement.
One more point on interest rates. When you borrow money (e.g. take out a mortgage), rates are usually quoted in terms of A.P.R. When you lend money (buy a C.D.) rates are usually quoted in terms of A.P.Y.
This difference is important to understand. Lets forget about taxes for a moment, if you borrow $100,000 at 5% APR and then buy a $100,000 CD with a 5% APY, you will be loosing money.
This is because APR represents the true interest rate while APY factors in the effects of compounding. By quoting CD rates in terms of APY rather than APR, banks make their interest rates look higher than they are.
My dear readers, capitalism lays many traps for the unwary. Be careful out there!
Anon
Im the first to say in most cases the owner will be better off long term then most renter (in fixed cash flow, paying down the asset over time, not having rent increases but only taxes and maintenance which you have to pay as a renter too as landlord passes on these costs, tax deductions etc)
BUT would agree 100% that if you are renting below your means to save for a house with cash,, thats toatlly ok and cool way to retire
remeber though that you cand do the same thing if you buy a house BELOW your means and invest the difference in retirement account this way you are hopefully gaining equity as well over time or not having to pay more later for the home( in a fairly priced house of course OVER TIME not some bubble thing)--=
either way is cooll
When Banks and Mortgage companies realized they could make money on it. Remember, once the loan is paid off, no interest is paid.
Heck, I'll never own my house. Why bother to put equity into something when I can take the cash out and put it into investments and my payment that I now use for investment purposes is 6% and becomes tax deductible?
If the government is basically willing to allow 0% equity and effectively transfer the risk of owning a house on the market, I'll just keep skimming the appreciation and maximizing my tax deductions every year. Just good business sense. I didn't create the rules of the game, but I'm more than happy to play by them.
Twib, you are correct to a point. If you rolled over your higher debt into that low interest rate you'd save money on the up end and if you don't pay the savings back on the principal to pay the note off quicker you'd be paying more down the road. Still you don't factor in inflation.
I only say that because I look at my parent's who bought a house in 1962 and had a 5% loan for 30 years. Their payment as $116 PITI, which in 1962 was steep for them. Do you think it was still as expensive in 1972? What about in 1980 when interest rates were 15% or higher? What do you think the value of their house was vs their mortgage amount or what their rent would be in 1982? More than $116 a month.
There are idiots out there who wouldn't leverage a loan like that to their advantage, but many who might so as in every financial decision it is local and personal and what works for one might not be smart for another. Still, as long as I didn't buy some house at some ridiculous price like in California I'd take that 5% loan on any house up to $250,000 and let inflation and maybe some home appreciation reduce my true cost.
Urban drug dealers use that stuff. They don't own anything so when they get a case put on them, no biggie. Besides, who is going to come collect it from them????
One point that you're missing is that I have no intent (unless forced) to occupy the home long term. My old payments were 80% eguity. My goal is to rent for 3 or 4 years and then relocate. In my mind I'm renting whether it's to the bank or to a landlord. To the bank it's deductible.
Secondly, the college loan rates I've been seeing are 7-8% with little or no deductibiity. Why wouldn't I loan my daughter the money at 6% deductible vs borrowing money at 8% non-deduc?
Original refi'ing anon
And we had a daughter who needs help with college costs.
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Here's some advice: (1) make sure she does 4 and out. (2) don't give her any credit cards. (3) don't let her study useless crap like Sociology (me) or psychology (my wife) just to become cops like the both of us......
remeber though that you cand do the same thing if you buy a house BELOW your means and invest the difference in retirement account
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Too bad, that leaves you living in either the back woods or more violant urban areas.
ANON 1:50
So you did the ATM house refi thing and took out 100k...AND..your payment DROPPED??? Damn..you must have had a high ass interest rate before.
I wouldn't be surprised. Lots of people bought when rates were above 8% and never refi. I had a friend in Phoenix who bought in 1982 and had a rate of 11.5% and still owns the house, a rental since 2001, almost paid now. When rates had fallen I couldn't get him to refi to a lower rate. At one point he had a pool loan that was 15% and the mortgage was 11.5% and after owning for ten years still owed what he paid in 1982 (with the remaining balance of the pool loan). I finally got him to refi the house but he kept the 15% pool loan since he felt it better to pay it off in three years (what was left on the loan) than refi into his first.
Personally I didn't understand his logic not to refi when rates had fallen way below 11.5% on his first. Had he just refied to a 15 year loan at the lower rate his payments would have been the same as his 30 year with the higher rate and the house would be paid off by now (he has five years left if he doesn't accelerate pay off now that he owes what most people pay for a new car).
So not surprised that some had higher rates.
This says it all-from today's USA Today...
"In California, I saw a billboard that said, 'Own the home you want, not the one you can afford,' " says Thomas DiMercurio, a Denver real estate broker who specializes in bank-held foreclosures.
To last 2 regarding high rate. You didn't read my earlier posts carefully enough. I am 20% LTV and 80% of my payment is principle.
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