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post #10291 of 11202
facepalm.gif
post #10292 of 11202
Quote:
Originally Posted by idfnl View Post

If your expenses make that big of a difference, you bought more house than you can really afford. Alternatively, people generally don't save enough and thus don't put a substantive enough amount down to make a monthly payment more palatable in the face of income variance.

Quote:
Originally Posted by Piobaire View Post

It's kind of cool that whenever someone disagrees with you your immediate answer is to insinuate they're poor or making unwise financial decisions.
post #10293 of 11202
Quote:
Originally Posted by idfnl View Post


A CD at 1.5% will never net you as much as you'd get prepaying on a 4% mortgage.

1m at 4% = $3333 in interest. You pay that down by $1000 and you've saved $4 in interest. A CD would net you $1.50, whose compounding is less than the carryforward in interest savings over time.

It comes down to government intervention making the bad math above palatable with tax deductions. In any event, there is an inflection point where the paydown overrides the tax savings.
If your expenses make that big of a difference, you bought more house than you can really afford. Alternatively, people generally don't save enough and thus don't put a substantive enough amount down to make a monthly payment more palatable in the face of income variance.

An all cash purchase is the way to go. It's a tangible asset you can get an equity loan from in a desperate situation. And the tax deduction will never outweigh the money siphoned off in interest.

Again, not sure why anyone would ever want to be beholden to a bank by choice.

You're missing two things here:

 

1. On my point your missing the logic puzzle for the math.

 

I'm not suggesting not prepaying. I'm simply saying in structuring the prepayment it would make sense to:

 

           a. Pay the amount you owe

           b. Putting the excess you want to pay above what you owe into a CD

Why? Because putting in excess and giving to the bank provides you no financial cushion and no interest, you just shorten the term. You can achieve the same thing AND earn interest on the overpayment by keeping the money in a CD and then when you have enough paying off the entire loan. 

 

 

2.As the points others are making:

Leverage. 

 

There are two reasons to employ leverage. One is if you are in a situation where your income will greatly increase, like a doctor or lawyer, or having a mortgage is cheaper than renting.

 

The other is if buying a larger home is more efficient. In Austin, TX ,for example, it is only 1.3x the cost to buy a 2 bedroom versus a 1 bedroom. It can be a solid financial decision to buy the 2 bedroom and rent the second room, thereby reducing the monthly cost to the owner. Given that you may have periods where the 2nd room is not rented it makes sense to have financial cushion. 

post #10294 of 11202
Quote:
Originally Posted by MSchapiro View Post
 

You're missing two things here:

 

1. On my point your missing the logic puzzle for the math.

 

I'm not suggesting not prepaying. I'm simply saying in structuring the prepayment it would make sense to:

 

           a. Pay the amount you owe

           b. Putting the excess you want to pay above what you owe into a CD

Why? Because putting in excess and giving to the bank provides you no financial cushion and no interest, you just shorten the term. You can achieve the same thing AND earn interest on the overpayment by keeping the money in a CD and then when you have enough paying off the entire loan. 

 

 

2.As the points others are making:

Leverage. 

 

There are two reasons to employ leverage. One is if you are in a situation where your income will greatly increase, like a doctor or lawyer, or having a mortgage is cheaper than renting.

 

The other is if buying a larger home is more efficient. In Austin, TX ,for example, it is only 1.3x the cost to buy a 2 bedroom versus a 1 bedroom. It can be a solid financial decision to buy the 2 bedroom and rent the second room, thereby reducing the monthly cost to the owner. Given that you may have periods where the 2nd room is not rented it makes sense to have financial cushion. 

 

There are obviously more examples too.  IDFNL isn't wrong that the income tax credit creates a perverse incentive, but I look at it this way.  If I'm paying 4%, and my tax rate is 36% (federal plus state), I'm effectively paying 2.56%.  Even if I assume my house won't appreciate, there's a good reason to borrow money on a house and not prepay. 

1. Paying off student loans or other high interest debt paid first. 

2. Putting more into a retirement or investment account, where I sure should average 2.56% or better.

 

But then again, I'm poor and probably suck managing money.

post #10295 of 11202
Quote:
Originally Posted by idfnl View Post

A CD at 1.5% will never net you as much as you'd get prepaying on a 4% mortgage.

1m at 4% = $3333 in interest. You pay that down by $1000 and you've saved $4 in interest. A CD would net you $1.50, whose compounding is less than the carryforward in interest savings over time.

It comes down to government intervention making the bad math above palatable with tax deductions. In any event, there is an inflection point where the paydown overrides the tax savings.

If your expenses make that big of a difference, you bought more house than you can really afford. Alternatively, people generally don't save enough and thus don't put a substantive enough amount down to make a monthly payment more palatable in the face of income variance.

An all cash purchase is the way to go. It's a tangible asset you can get an equity loan from in a desperate situation. And the tax deduction will never outweigh the money siphoned off in interest.

Again, not sure why anyone would ever want to be beholden to a bank by choice.

This is a theoretical discussion (at least on my end). You say taking on leverage for illogical reasons is bad ( I agree) and I say that not taking on leverage for similarly illogical reasons is also a strange approach.

I like to take a purely logical approach; if you are earning more than your mortgage rate with income generating assets then why would you sell those assets to exit or avoid a mortgage simply because you do not like banks.....meanwhile investing in those same banks that you dislike. It's similarly illogical to choose to take advantage of a tax break simply because it's a tax break.

I do feel that it is logical to take advantage of a tax break when every realistic scenario includes having a mortgage and paying taxes.

Frankly I think you may well be 'beholden to a bank' if you cannot pay outright, but if you can and chose not to for reasons mentioned above then you are simply utilizing a financial product.
post #10296 of 11202
I think the conversation boils down to the fact that the micro-economics of personal finances are just that, personal. There are many choices that can be rationally justified, and if my choice doesn't match yours, it doesn't de facto mean I'm poor or stupid it just means my situation and life experience has led me to make my own choices for my own reasons. Yes, some (many?) make bad choices, but it is possible to have an array of choices that are "good."
post #10297 of 11202
idfnl the type of poasta to pre-pay a 100 year 0.01% interest loan in full up front to avoid being beholden to dat evil bank.
post #10298 of 11202
Quote:
Originally Posted by SkinnyGoomba View Post

This is a theoretical discussion (at least on my end). You say taking on leverage for illogical reasons is bad ( I agree) and I say that not taking on leverage for similarly illogical reasons is also a strange approach.

I like to take a purely logical approach; if you are earning more than your mortgage rate with income generating assets then why would you sell those assets to exit or avoid a mortgage simply because you do not like banks.....meanwhile investing in those same banks that you dislike. It's similarly illogical to choose to take advantage of a tax break simply because it's a tax break.

I do feel that it is logical to take advantage of a tax break when every realistic scenario includes having a mortgage and paying taxes.

Frankly I think you may well be 'beholden to a bank' if you cannot pay outright, but if you can and chose not to for reasons mentioned above then you are simply utilizing a financial product.

I know a guy that recently emigrated here from sw Europe. He said it used to be that mortgages didn't really exist, you waited until you had the cash saved. Mortgages became easy in his country, and everyone who has one is in the shit as mortgages caused a bubble.

If you're trying to be logical, the approach would be to seek the lowest cost of living possible while saving money at the highest possible return.

Many would end up in you're parents basement while saving money to purchase a property outright. That might seem alien to most people in the US, but it's common in most of the rest of the world (maybe not the basement part).

And if you're worried about the time spent missing property appreciation, then renting the property while living somewhere else as cheaply as possible would also be viable. Otherwise the housing market has shown us enough dips in value over time to allow for entry points.
post #10299 of 11202
Quote:
Originally Posted by idfnl View Post


I know a guy that recently emigrated here from sw Europe. He said it used to be that mortgages didn't really exist, you waited until you had the cash saved. Mortgages became easy in his country, and everyone who has one is in the shit as mortgages caused a bubble.

If you're trying to be logical, the approach would be to seek the lowest cost of living possible while saving money at the highest possible return.

Many would end up in you're parents basement while saving money to purchase a property outright. That might seem alien to most people in the US, but it's common in most of the rest of the world (maybe not the basement part).

And if you're worried about the time spent missing property appreciation, then renting the property while living somewhere else as cheaply as possible would also be viable. Otherwise the housing market has shown us enough dips in value over time to allow for entry points.

 

Two dips in 100 years is enough (three if you count the 2009 dip after the homebuyer credit ended)?

http://3.bp.blogspot.com/-ynrQyoAUzgM/UKvzBPEFGMI/AAAAAAAABg4/yLQ6jXe0q3w/s1600/U.S.+Housing+Price+Index+Since+1900.jpg

 


Now, you could make the more persuasive argument around inflation house prices dipping, but my gut is that has more to do with housing lagging changes in inflation (such as the Carter years).

 

http://4.bp.blogspot.com/-kjOHoEKbH7A/ULQgiAZ45RI/AAAAAAAABh4/8U-RJx1-pGg/s1600/Inflation-Adjusted+U.S.+Home+Prices+Since+1900.jpg

post #10300 of 11202
So we're to take an anecdote concerning sw Europe (?) as demonstrative of why there's only apparently one correct view? Makes sense to me.
post #10301 of 11202
Quote:
Originally Posted by brokencycle View Post

Two dips in 100 years is enough (three if you count the 2009 dip after the homebuyer credit ended)?

Now, you could make the more persuasive argument around inflation house prices dipping, but my gut is that has more to do with housing lagging changes in inflation (such as the Carter years).

I don't see why you wouldn't adjust for inflation since it exists. The other thing left untouched so far is the impact property taxes have on all this math we've been discussing.

Also, there are regional peaks and dips happening all the time. Take a look at the wide variances state to state, this is also happening locality to locality.



post #10302 of 11202
Is not the usual holding period for a home historically long enough not to have to worry about market timing except for the great Black Swan event of recent times?
post #10303 of 11202
Quote:
Originally Posted by idfnl View Post


I don't see why you wouldn't adjust for inflation since it exists. The other thing left untouched so far is the impact property taxes have on all this math we've been discussing.

Also, there are regional peaks and dips happening all the time. Take a look at the wide variances state to state, this is also happening locality to locality.



 

Yes, there is seasonal and regional variances.  If you look at the numbers, regardless if the state is among those that are growing the fastest, such as Washington, or among the average states, such as Minnesota, you'll find that if you had bought at the top in 2007, you would be back to even today, so a 10 year holding period seems to be relatively safe.

 

The ones with the more rapid increases in price also had the most rapid drops.  Turns out some markets are more volatile than others.  It doesn't mean because there are regional differences that the long-term ownership isn't a pretty safe bet.

 

 

 

http://www.fhfa.gov/DataTools/Downloads/Pages/House-Price-Index-Datasets.aspx#qpo

Quote:
Originally Posted by Piobaire View Post

Is not the usual holding period for a home historically long enough not to have to worry about market timing except for the great Black Swan event of recent times?


I would say so.  Look at the inflation adjusted graph I posted.  About the only time you would have lost money on a 10 year ownership is 1910-1920.  Maybe if you bought in 2000 or 2001 too.

post #10304 of 11202
Quote:
Originally Posted by brokencycle View Post


I would say so.  Look at the inflation adjusted graph I posted.  About the only time you would have lost money on a 10 year ownership is 1910-1920.  Maybe if you bought in 2000 or 2001 too.

Or if you were poor and bought more house than you could really afford. wink.gif
post #10305 of 11202
I knew a guy whose uncle was buying properties cash left and right. This guy decided to be like uncle, except he had no cash on hand so was getting mortgages left and right. This was in 2006 or 7. Needless to say, he defaulted on a bunch after 2008. So I guess if you wheel and deal in houses, market timing can be everything teacha.gif
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