Would you have done this?

[NotCranky]

“Can you explain what you mean by market tanks? RE market or saving market? How is that any different than someone putting 20% down and lost all the down $ and more but you’re not selling and can afford the payment comfortably.”

“Market tanks “is related to real estate, savings market stays there MAYBE, but since your house lost equity and the debt still includes those 400K Your money is gone and you are now holding the banks money in your savings.You lose your job and have to use the “savings” and you are spending other peoples money and are in trouble.

Is it any different than losing your down payment?
Losing your down payment is burning the candle at one end. Losing equity and spending “other peoples” money in an emergency is burning the candle from both ends.And if the savings market does “tank “get crisis counseling fast.I hope that makes sense? I too am getting fatigued on this one! No offense.

[taz]

I too am addicted to the blog and heading for the poorhouse!

AN – you mentioned something that was a factor I considered when I decided to put the most $$$ down I could when buying my new house (about 40%). I was thinking long term, and wanted the option of keeping the house as an investment even if I no longer wished to use it as my primary residence. By keeping the monthly obligation low, you are much more likely to be able to rent the property out and cover your entire PITI payment – in other words, have your tenants pay for your house. I consider this type of real estate investment safe and profitable over the long term…unlike the speculative, short term flipping we’ve seen so much of over the past couple of years.

[taz]

I too am addicted to the blog and heading for the poorhouse!

AN – you mentioned something that was a factor I considered when I decided to put the most $$$ down I could when buying my new house (about 40%). I was thinking long term, and wanted the option of keeping the house as an investment even if I no longer wished to use it as my primary residence. By keeping the monthly obligation low, you are much more likely to be able to rent the property out and cover your entire PITI payment – in other words, have your tenants pay for your house. I consider this type of real estate investment safe and profitable over the long term…unlike the speculative, short term flipping we’ve seen so much of over the past couple of years.

[recordsclerk]

I understand that concept of keeping money liquid, but paying $3900 a year to do so just doesn’t make since. If you could invest that money into a higher yield investment Ok, but why make a point about losing money. Also why would you pay $3900 annually just to continue to owe the 400K. If you are paying principal of that 400K it would be more like -$7000 annually for 30 years. All this wasted money just to keep money liquid. Like SDR said you could just simply open a HELOC and not draw the money and just pay the annual fee. There are also mortgage insurance programs in case of job loss or illness that are a lot cheaper. Why does everyone want to prolong paying off a home. Owning a home outright comes with many rewards. You could sell it and keep all the proceeds. You could rent it out for income. You could live rent free (minus tax, insurance, maintanence, etc). With all the money you save from not paying mortages you could invest. If it wasn’t for the fact that my home is almost paid off and actually cheaper monthly then renting, I wouldn’t have any money to invest. Owning a home and having it almost paid off allows me to save money for a down payment on a move-up home. When I decied to pull the trigger, I could sell my home and put the proceeds into the new home or just rent it out for extra income. I don’t feel like my money is in some kind of equity trap, to me I feel that my equity allows me to do things that I couldn’t do with my (very)limited income.

[recordsclerk]

I understand that concept of keeping money liquid, but paying $3900 a year to do so just doesn’t make since. If you could invest that money into a higher yield investment Ok, but why make a point about losing money. Also why would you pay $3900 annually just to continue to owe the 400K. If you are paying principal of that 400K it would be more like -$7000 annually for 30 years. All this wasted money just to keep money liquid. Like SDR said you could just simply open a HELOC and not draw the money and just pay the annual fee. There are also mortgage insurance programs in case of job loss or illness that are a lot cheaper. Why does everyone want to prolong paying off a home. Owning a home outright comes with many rewards. You could sell it and keep all the proceeds. You could rent it out for income. You could live rent free (minus tax, insurance, maintanence, etc). With all the money you save from not paying mortages you could invest. If it wasn’t for the fact that my home is almost paid off and actually cheaper monthly then renting, I wouldn’t have any money to invest. Owning a home and having it almost paid off allows me to save money for a down payment on a move-up home. When I decied to pull the trigger, I could sell my home and put the proceeds into the new home or just rent it out for extra income. I don’t feel like my money is in some kind of equity trap, to me I feel that my equity allows me to do things that I couldn’t do with my (very)limited income.

[NotCranky]

I appreciate what you are saying Records Clerk even though I am the one who wrote the thesis on the inefficiency of home equity and the dangers of owning with 0-40% equity , in times like these. Like so many other people in San Diego, I could never afford the house I live in on the income of my wife and I have. However if I sold it,750k the interest I could make on the dough at 5% would provide $3,125 for rent I would get rid of $500 month in taxes and insurance and about $583 month in maintenance & services. That’s $4208 I could use to rent. I would actually rent around $2500 so I could improve cash flow $1708 per month. Not doing that is a questionable investment choice IMHO. Especially since I am not a big earner and I anticipate a better opportunity for buying in a few short years. I know I didn’t include taxes but 5% is a very low return on 750k too. I think plenty of people have done this.I know most my friends and family would never consider it.I am not selling but have thought about it enough to come up with the explanation I have given you.In fact you might say I am still hashing it out. My wife is ready to go for it or stay by the way.
Best wishes.

[NotCranky]

I appreciate what you are saying Records Clerk even though I am the one who wrote the thesis on the inefficiency of home equity and the dangers of owning with 0-40% equity , in times like these. Like so many other people in San Diego, I could never afford the house I live in on the income of my wife and I have. However if I sold it,750k the interest I could make on the dough at 5% would provide $3,125 for rent I would get rid of $500 month in taxes and insurance and about $583 month in maintenance & services. That’s $4208 I could use to rent. I would actually rent around $2500 so I could improve cash flow $1708 per month. Not doing that is a questionable investment choice IMHO. Especially since I am not a big earner and I anticipate a better opportunity for buying in a few short years. I know I didn’t include taxes but 5% is a very low return on 750k too. I think plenty of people have done this.I know most my friends and family would never consider it.I am not selling but have thought about it enough to come up with the explanation I have given you.In fact you might say I am still hashing it out. My wife is ready to go for it or stay by the way.
Best wishes.

[temeculaguy]

Not rolling the proceeds from a primary res into the next primary res so you can invest it in stocks is the same as taking out a second mortgage from your equity and investing it if you had stayed put. If you haven’t borrowed all of your equity you can’t give advice for someone else to invest theirs just because they are in the midst of a transaction.

To add to cellar and AN’s tax deduction debate and to side with cellar, you can’t use your top tax bracket percentage to determine you tax benefit. Asianautica, it is a common misconception to think you pay 37% in income taxes, therefore you can reduce your taxes by 37% for every dollar of increased deduction, you can’t, it doesn’t work that way, they are brackets. Income tax doesn’t work like sales tax, you probably only paid 37% on the last 10k of your income and you paid 15% on the first 20k, the stuff in the middle each has it’s own rate. If sales tax worked like income tax and you wanted to buy a $10,000 item, the first 1k is taxed at 1%, the next 3k is at 2%, the next 2k is at 4%, the next 3k is 5% the last 1k is at 7% (income tax is even wackier, this is for illustration purposes). You choose to buy the item on e-bay, avoid the sales tax and think you saved $700, you didn’t. Or if you and the seller agreed to report the sale as 5k, you figure you saved $350, you didn’t do that either. So you see, the more you deduct, the smaller the percentage. If you increase your mortgage deduction by 50k by taking on a bigger mortgage, some would be 37%, some 33% and some 28%, so you have to look at the actual tax return and adjust the percentage downward, taking on more debt, lowers the the average percentage further. The only way to determine the cost/benefit analysis is to run the real numbers through your own tax software, modifying last years return will come close, using your top bracket is pure realtor/lender misconception or snake oil.

discliamer-I have used turbo tax for years so I guessed at the brackets and their percentages but the point is the same.

[temeculaguy]

Not rolling the proceeds from a primary res into the next primary res so you can invest it in stocks is the same as taking out a second mortgage from your equity and investing it if you had stayed put. If you haven’t borrowed all of your equity you can’t give advice for someone else to invest theirs just because they are in the midst of a transaction.

To add to cellar and AN’s tax deduction debate and to side with cellar, you can’t use your top tax bracket percentage to determine you tax benefit. Asianautica, it is a common misconception to think you pay 37% in income taxes, therefore you can reduce your taxes by 37% for every dollar of increased deduction, you can’t, it doesn’t work that way, they are brackets. Income tax doesn’t work like sales tax, you probably only paid 37% on the last 10k of your income and you paid 15% on the first 20k, the stuff in the middle each has it’s own rate. If sales tax worked like income tax and you wanted to buy a $10,000 item, the first 1k is taxed at 1%, the next 3k is at 2%, the next 2k is at 4%, the next 3k is 5% the last 1k is at 7% (income tax is even wackier, this is for illustration purposes). You choose to buy the item on e-bay, avoid the sales tax and think you saved $700, you didn’t. Or if you and the seller agreed to report the sale as 5k, you figure you saved $350, you didn’t do that either. So you see, the more you deduct, the smaller the percentage. If you increase your mortgage deduction by 50k by taking on a bigger mortgage, some would be 37%, some 33% and some 28%, so you have to look at the actual tax return and adjust the percentage downward, taking on more debt, lowers the the average percentage further. The only way to determine the cost/benefit analysis is to run the real numbers through your own tax software, modifying last years return will come close, using your top bracket is pure realtor/lender misconception or snake oil.

discliamer-I have used turbo tax for years so I guessed at the brackets and their percentages but the point is the same.

[an]

Thank you guys for proving to me that my idea doesn’t work with today numbers. I guess if one would have done it 2 years ago, one would be sitting pretty right now. Considering 30 year fixed back then was around low 5% and savings rate now is low to mid 5%. But obviously, past return is no guarantee for future earning, so we’ll just have to wait another 2 years to see if it would have worked or not.

[an]

Thank you guys for proving to me that my idea doesn’t work with today numbers. I guess if one would have done it 2 years ago, one would be sitting pretty right now. Considering 30 year fixed back then was around low 5% and savings rate now is low to mid 5%. But obviously, past return is no guarantee for future earning, so we’ll just have to wait another 2 years to see if it would have worked or not.

[recordsclerk]

“Thank you guys for proving to me that my idea doesn’t work with today numbers. I guess if one would have done it 2 years ago, one would be sitting pretty right now. Considering 30 year fixed back then was around low 5% and savings rate now is low to mid 5%. But obviously, past return is no guarantee for future earning, so we’ll just have to wait another 2 years to see if it would have worked or not.”
asianautica,
There’s nothing wrong with you idea. It can work, just not with the numbers you were using. We discussed this in an earlier post. I currently have loans from ’03’, ’04’ that are 3.75%(IO adj.), 4.75%(15yr fixed) and I’m currently paying the minimun and putting money aside into a CD. The 3.75% IO loan will reset in 2 years, which at that point I will put a large chunk of the CD money into the principal.

[recordsclerk]

“Thank you guys for proving to me that my idea doesn’t work with today numbers. I guess if one would have done it 2 years ago, one would be sitting pretty right now. Considering 30 year fixed back then was around low 5% and savings rate now is low to mid 5%. But obviously, past return is no guarantee for future earning, so we’ll just have to wait another 2 years to see if it would have worked or not.”
asianautica,
There’s nothing wrong with you idea. It can work, just not with the numbers you were using. We discussed this in an earlier post. I currently have loans from ’03’, ’04’ that are 3.75%(IO adj.), 4.75%(15yr fixed) and I’m currently paying the minimun and putting money aside into a CD. The 3.75% IO loan will reset in 2 years, which at that point I will put a large chunk of the CD money into the principal.

[sdrealtor]

temecula guy,
Great point about being the same as taking out a 2nd and investing it in the stock market.

Recordsclerk,
With substantial equity it is easy open a HELOC for a couple hundred grand credit line at NO COST and NO ANNUAL FEE with you regular bank.

[sdrealtor]

temecula guy,
Great point about being the same as taking out a 2nd and investing it in the stock market.

Recordsclerk,
With substantial equity it is easy open a HELOC for a couple hundred grand credit line at NO COST and NO ANNUAL FEE with you regular bank.

[Author]

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