Paying off Mello Roos

User Forum Topic
Submitted by paranoid on February 27, 2012 - 7:39pm

Interest rate is historic low now. MR in places like 4S ranch has a 40-year life, and has a rate close to 10% (my rough guestimate). MR can be increased by 2% every year. So my question is: is it worth it to pay off completely your MR now? This saves alot of money if you intend to stay for a long time. What do you guys think?

Submitted by Cube on February 28, 2012 - 12:25am.

I've been pondering the idea. I can't come up with a good model of how paying it off would translate into eventual resale value.

Given that today it is a hidden cost, I feel that paying it off will be a hidden benefit, difficult to market to future buyers. "Hey, you don't have to pay this thing that you already weren't considering as part of the purchase price... That makes this house more valuable by X much, so pay me more."

Submitted by 4slive on February 28, 2012 - 1:30am.

It'll limit your buyer's pool. But smart buyer with enough cash surely willing to buy house w/o MR. It all matters the monthly payment!

Submitted by ocrenter on February 28, 2012 - 7:45am.

Need more info, what is the payoff? Should be able to obtain the info at the county clerks office.

Submitted by paranoid on February 28, 2012 - 8:46am.

The case I am looking at: current mello Roos at about $5700 per year. It will last for about 30 years. The payoff now is about $58000. The implied rate is close to 9%. While the current 30 year mortgage is below 4%.

Submitted by ocrenter on February 28, 2012 - 11:26am.

paranoid wrote:
The case I am looking at: current mello Roos at about $5700 per year. It will last for about 30 years. The payoff now is about $58000. The implied rate is close to 9%. While the current 30 year mortgage is below 4%.

hmmm, so over 30 years you'll be looking at $171k.

meanwhile, you could do a line of credit say at 4%. let's say you pull a 15 year mortgage at 4% to pay for the MR amount, your payment would be lower, it would be deductible, and it'll be paid off at half the time or less. let's say plans change and you end up moving in 15 years, there's really no loss for you either.

Submitted by bearishgurl on February 28, 2012 - 11:45am.

Cube wrote:
I've been pondering the idea. I can't come up with a good model of how paying it off would translate into eventual resale value.

Given that today it is a hidden cost, I feel that paying it off will be a hidden benefit, difficult to market to future buyers. "Hey, you don't have to pay this thing that you already weren't considering as part of the purchase price... That makes this house more valuable by X much, so pay me more."

Future buyers who take mortgages out will be constrained by the appraisal at the time, which will reflect its value as if it still has the MR encumbrance. This is due to the vast majority of closed sales still having the encumbrance.

I don't think you could get your investment of $58K back unless you reside there ten years or more. And at that time, you may obtain the same sales price if you leave the MR in place.

I don't see a way around it that makes sense unless you are *certain* you will hang onto the property for a very long time as life can throw you many curveballs.

Submitted by bearishgurl on February 28, 2012 - 11:50am.

paranoid, let me ask you, "How long would it take you to pay $58K in MR by paying it on your tax bill semi-annually when it is due?"

That amount of years/months is the "break-even" point after which you will pay more than $58K on your MR obligation.

Are you CERTAIN you will you keep the property that long?

Submitted by all on February 28, 2012 - 1:12pm.

Did you get the numbers from PUSD, or from the builder?

Submitted by sdduuuude on February 28, 2012 - 1:22pm.

Not a bad idea. The delta between 9% and 4% is pretty compelling.

As a shopper, I would say the Mello Roos is definitely not a hidden cost. In fact, when comparing properties and estimating value/asking price I explicitly convert the monthly MR back to a loan amount just to see how much less to offer.

So, I think you would get the value back in a sale. It would distinguish your house from others explicitly, based on cash instead of canyon view or stunning decor.

This thread suggests that I should check on the MR payout amounts and explicitly deduct that from the value of houses. It's a good way to compare like houses with different MR payout amounts and different MR payoff schedules.

Does anyone know - would it be possible, when buying, to just add an MR payoff amount into the mortgage ?

Submitted by sdduuuude on February 28, 2012 - 1:23pm.

paranoid wrote:
The case I am looking at: current mello Roos at about $5700 per year. It will last for about 30 years. The payoff now is about $58000. The implied rate is close to 9%. While the current 30 year mortgage is below 4%.

Yes - where did you get the number? Who do you ask ?

Submitted by sdduuuude on February 28, 2012 - 1:28pm.

bearishgurl wrote:
Future buyers who take mortgages out will be constrained by the appraisal at the time, which will reflect its value as if it still has the MR encumbrance.

Future buyers will also be constrained by the fact that the bank will explicitly add the monthly debt/payment burden into the forumla to calculate what kind of payment you can make. Removing the $475 payment helps you take on more debt.

So, you would have a $4000 morgage payment plus $475 per month MR or you could have a $4475 mortgage payment, allowing you to borrow more.

Submitted by paranoid on February 28, 2012 - 3:25pm.

sduuuude: I called the phone number on my property tax bill, and the company in charge of the MR called back with payoff number.

Submitted by sdduuuude on February 28, 2012 - 3:30pm.

Ah, thanks.

I don't have a MR on my tax bill (Clairemont, you know).

Submitted by earlyretirement on February 28, 2012 - 10:45pm.

paranoid wrote:
sduuuude: I called the phone number on my property tax bill, and the company in charge of the MR called back with payoff number.

Paranoid,

Did you have to pay anything for this information? I was told that in my area (Santaluz) that there is a fee to get the payoff quote.

I will probably end up paying off our Mello Roos as we plan to be in the house for the long-term (15+ years) until the kids are done with school.

It does seem to make sense if you are absolutely sure you will be in the house for the long haul.

Submitted by paranoid on February 29, 2012 - 12:08am.

ER, you pay a fee but it is waived (deducted) when you pay the total payoff amount to pusd, so effectively it is free.
I'm still amazed by the huge rate they charge: total payoff is $57.5k , but current yearly MR is $5.7k until 2042(?). I believe most people don't know that they are charged at such a rate.

Submitted by ocrenter on February 29, 2012 - 8:30am.

paranoid wrote:
ER, you pay a fee but it is waived (deducted) when you pay the total payoff amount to pusd, so effectively it is free.
I'm still amazed by the huge rate they charge: total payoff is $57.5k , but current yearly MR is $5.7k until 2042(?). I believe most people don't know that they are charged at such a rate.

I back calculated from your numbers. So we are looking at 9.3%.

Assuming you take out a HELOC at 4.5%, to keep the monthly payment the same, it would take 13 years to payoff. Essentially at $480/month. If you just pay $100 more per month, you can pay it off in 10 years.

Assuming you do end up selling in 10 years, you essentially break even and I think it would make a difference with potential buyers.

Submitted by sdrealtor on February 29, 2012 - 9:01am.

I have seen homes with paid off MR on the market before. They are more desirable and that helps them sell quicker which is worth something in a declining market. From my recollection they seem to sell for a little more but not a lot more. The premium doesn't seem dollar for dollar. As a caveat I believe they were in Aviara so the MR fees were modest so the difference probably shouldn't be much. As a general statement I would recommend paying off MR early for personal benefit rather than being able to sell for more in the future. I'd look at a potentially higher sales price as a bonus but would not factor that in to the decision. Just my opinion though

Edit: thinking a bit more there has gotta be a difference when the annual
MR are 5000 vs 400 so it likely would create more value in a high MR environment. I just think it would be much less than dollar for dollar

Submitted by enron_by_the_sea on February 29, 2012 - 11:06am.

ocrenter wrote:

Assuming you take out a HELOC at 4.5%, to keep the monthly payment the same, it would take 13 years to payoff. Essentially at $480/month. If you just pay $100 more per month, you can pay it off in 10 years.

Hmm.. Aren't HELOCs these days limited to 80% CLTV? If so, a new/recent buyer can not really use it to buy a house and pay-off Mello-Roos without putting down >20% at purchase. If that is the case then won't he be better off just putting 20% down and using the rest to pay off Mello-Roos? (instead of putting 20%+50K down and then taking out a HELOC to pay-off Mello-Roos)..

On the same topic, there are slightly older areas in the city (e.g. Scripps Ranch) where houses built in the mid-90s have ~2K/year Mello-Roos which will expire in another ~5years. Once the (majority of ) Mello-Roos for the whole area expires in 2017, might they see a bump in property values? I am guessing that there is a class of buyers for whom any Mello-Roos is a turn-off (there are some on this board. LOL!!!) Suddenly in 2017, this area becomes desirable for them.

Submitted by sdrealtor on February 29, 2012 - 11:20am.

I think most MR are for 30 years but maybe some are shorter. Expiration of MR would seem to inccrease value but I doubt on a dolalr for dollar basis as calculated by sdduude (i.e. how much of a mortgage would that cover).

Submitted by zk on February 29, 2012 - 11:39am.

paranoid wrote:
ER, you pay a fee but it is waived (deducted) when you pay the total payoff amount to pusd, so effectively it is free.
I'm still amazed by the huge rate they charge: total payoff is $57.5k , but current yearly MR is $5.7k until 2042(?). I believe most people don't know that they are charged at such a rate.

So the quote is only free if you decide to pay it off?

How much is the fee for the quote? Thanks.

Submitted by briansd1 on February 29, 2012 - 12:28pm.

I was wondering the same thing zk.
Would be good to know. Is it and nominal insignificant fee, or is it substantial enough that you would not want to pay the fee if you were not serious about paying off MR.

Submitted by ocrenter on February 29, 2012 - 12:28pm.

enron_by_the_sea wrote:
ocrenter wrote:

Assuming you take out a HELOC at 4.5%, to keep the monthly payment the same, it would take 13 years to payoff. Essentially at $480/month. If you just pay $100 more per month, you can pay it off in 10 years.

Hmm.. Aren't HELOCs these days limited to 80% CLTV? If so, a new/recent buyer can not really use it to buy a house and pay-off Mello-Roos without putting down >20% at purchase. If that is the case then won't he be better off just putting 20% down and using the rest to pay off Mello-Roos? (instead of putting 20%+50K down and then taking out a HELOC to pay-off Mello-Roos)..

On the same topic, there are slightly older areas in the city (e.g. Scripps Ranch) where houses built in the mid-90s have ~2K/year Mello-Roos which will expire in another ~5years. Once the (majority of ) Mello-Roos for the whole area expires in 2017, might they see a bump in property values? I am guessing that there is a class of buyers for whom any Mello-Roos is a turn-off (there are some on this board. LOL!!!) Suddenly in 2017, this area becomes desirable for them.

true, but I think in the case of paranoid, the home is already purchased. and also, the HELOC example is just a way to look at borrowing that amount at today's interest rate, an attempt to do an apple to apple comparison.

Submitted by all on February 29, 2012 - 2:09pm.

zk wrote:

So the quote is only free if you decide to pay it off?
How much is the fee for the quote? Thanks.

The fee is not the same for all CFD's. For CFD#6 that covers 4S the fee is $100. Someone mentioned recently that another CFD (Santaluz?) charges $500.

Submitted by outtamojo on February 29, 2012 - 2:37pm.

The person I talked to about SEH CFD said a ballpark payoff estimate is free but an exact figure will require a fee that can go toward payoff.

Submitted by zk on February 29, 2012 - 5:14pm.

captcha wrote:

The fee is not the same for all CFD's. For CFD#6 that covers 4S the fee is $100. Someone mentioned recently that another CFD (Santaluz?) charges $500.

outtamojo wrote:
The person I talked to about SEH CFD said a ballpark payoff estimate is free but an exact figure will require a fee that can go toward payoff.

Thanks.

Submitted by sdnerd on February 29, 2012 - 6:58pm.

Interesting discussion.

I called today to get rough numbers for a 4S property.

4S is in the process of adding more debt to the bonds, so you can't do a payoff (they won't have exact numbers) until middle of this year.

The estimate was $60-70K payoff for something that is currently at ~$5,600/year.

Worth considering.

Submitted by paranoid on February 29, 2012 - 7:10pm.

Fee: in my case, they didn't charge me anything, because I just asked them for the ballpark number. Then I decided to pay off, and they sent me the exact number (who cares if the 100 or 200 dollar fee is charged or not).

Another point I think people need to be aware is that the MR typically increases year after year. I don't understand the mechanism why this is the case though. Paying-off the MR thus also avoids future increases.

Submitted by ocrenter on February 29, 2012 - 8:49pm.

sdnerd wrote:
Interesting discussion.

I called today to get rough numbers for a 4S property.

4S is in the process of adding more debt to the bonds, so you can't do a payoff (they won't have exact numbers) until middle of this year.

The estimate was $60-70K payoff for something that is currently at ~$5,600/year.

Worth considering.

That would make the current rate around 7.5%. Not quite as high as the 9.3% from paranoid's MR. Prob a different tract with a different CFD?

Submitted by sdnerd on February 29, 2012 - 10:23pm.

ocrenter wrote:
sdnerd wrote:
Interesting discussion.

I called today to get rough numbers for a 4S property.

4S is in the process of adding more debt to the bonds, so you can't do a payoff (they won't have exact numbers) until middle of this year.

The estimate was $60-70K payoff for something that is currently at ~$5,600/year.

Worth considering.

That would make the current rate around 7.5%. Not quite as high as the 9.3% from paranoid's MR. Prob a different tract with a different CFD?

I was under the impression everyone in 4S had the main CFD#6, and then possibly additional depending on tract/year/etc. In my case I also have the CFD#6 IAC.

Every bond that I've read has a 25 year term, starting at the last issue date. 4S probably has another 2-3 or so years before completion. So we're looking at ~28-30 years of MR.

It sounded like he was giving me a pretty rough estimate, but he did seem pretty clear that nobody in 4S could pay it off right now as debt was being added. I assume they are in the process of taking advantage of the 2% annual increase headroom.

If $60K removes $5,700/yr (+2% Annual Increases)in expenses it certainly peaks the interest. Sure beats a 1% market account. :)

Submitted by paranoid on February 29, 2012 - 11:11pm.

Sdnerd, I know somebody who just paid off his mr this week. MR payoff amount is recalculated every quarter, I.e. The current cutoff time is march 1 and the next cutoff date is june 1. A 2% increase will surely occur in the July 1 tax bill for 2012-2013 year.

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