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| 5/17 |
| 2005/8/29-30 [Reference/RealEstate] UID:39331 Activity:high |
8/29 "If you paid your mortgage off, it means you probably did not manage
your funds efficiently over the year."
-David Lereah (chief economist, National Assocn of Realtors)
"If you own your own home free and clear, people will often refer to
you as a fool. All that money sitting there, doing nothing."
-Anthony Hsieh (chief executive, LendingTree Loans)
http://csua.org/u/d6q (LA Times)
\_ Indeed, I suppose it's better to pay interest and have the
possibility of losing your home if you ever lost your job
by being unable to pay off the debt than the alternative.
Unless you plan to utilize the debt in some sort of constructive
method, taking out a loan for a loan's sake (especially with
the rather wonky instruments utilized today) isn't necessarily
smart.
\_ Actually, it's better to have money for your monthly
payment than to have spent it all paying off the house.
Also, carrying a mortgage has tax benefits, and someone noted
investments below too.
\_ You don't spend it ALL paying off the mortgage. Like
an investment, you can spend a small portion of what
you earn toward the mortgage, paying off principles.
The tax advantage you get by paying mortgage cancels
out the tax you pay on investments, so paying off
your 30 year 6% mortgage is like making a guaranteed
6% investment (for 30 years). If you are sure your
money will earn more than that, then by all means put
it to good use. If it's just sitting at your band
account earning 1% or doing nothing useful (ie, you
already have enough emergency reserves), then you are
wasting your money. Unfortunately the majority of
people waste their money this way.
\_ I read that too. If the economy gets totally fucked at least
you'll still have your house to live in ... If your goal in life
is maximum consumption with no safety net, then the advice in that
article is very good.
\_ Queue Prop 13 argument. Without it you might not have a
house to live in even if it's paid for.
\_ I agree with Mr. Lereah and Mr. Hsieh. Mortgage interest after
tax savings for a 30 year fixed is like 4%. It's not hard to
beat that with some smart investing. I've been getting like
35% return per year the last 3 years. Mortgage interest is
ridiculously low, and you get the rate for 30 years, then add
a big tax break .. it's a no brainer. Of course, paying off
your mortgage is a safe (guaranteed) return, so if you are
35% return per year the last 3 years. Of course, paying off
your mortgage is a safe and guaranteed return, so if you are
close to retirement ...
\_ What investment options have better return than 4% and carry low
risk these days? I only made the required mortgage payment for
the first year or two, thinking that I would invest the extra
money somewhere and get better returns. After a while I changed
my mind and started making extra payments towards the principal
instead. I'm 34 and have a wife and a kid.
\_ You choose wisely!
\_ also, guy was saying: doing better than losing 4% per year
due to mortgage interest
\_ I bonds are paying 4.8% currently. Granted your earnings
will be taxed, but your mortgage interest rate stays the
same for 30 years, and it won't surprise me at all if
one year down the road, you'll be getting say 5.5% from
two years down the road, you'll be getting say 6% from
I bonds, and pocketing the spread. The bigger question,
however, is why you are so risk averse. At 34, I presume
you are far from retirement and your kid far from college.
you need to grow your money to prepare for those.
(note that I bonds interest earnings are exempt from
state and local income taxes, and if used to finance
education, may be exempt from federal taxes too.)
\_ I am 32 and I think there's some benefit to having a
mortgage and keeping cash. I know a woman with
millions in cash who still has an $800,000 mortgage
on her $2M house. Why drop $1.2M for something that is
costing only $4K/month? On the other hand, I am paying
on her $2M house. Why drop $800K more for something that
is costing only $4K/month? On the other hand, I am paying
extra on my mortgage because I want it paid in 15-20
years instead of 30. It would be great to be 50 and
have no mortgage. Not only would retirement be better,
but those 15 years before then could be great (e.g.
travel) without that big monthly expense. So I see
myself as a compromise. My mortgage (principal) is one
investment I make, but not close to my only one.
\_ yes, but if (granted, a big if) you invest well,
you would have plenty of liquid asset on hand,
that you could use to pay off your mortgage anytime
you want. that's my goal and strategy.
\_ Of course, which is why I say it's not my only
investment. However, by cutting years off of my
mortgage and saving lots of money in interest I
am doing myself a favor. I invest more OUTSIDE
of my mortgage. People putting every available
extra dollar towards their house are misguided,
I think. I knew a girl who was a performance
artist/exotic dancer. When she retired (at a young
age by necessity) she had saved $500K cash. She
bought a $500K house with it. I am not sure
that's the wisest use of money. I personally
would have taken a small mortgage out on the
place and kept some cash for something else. Same
ideas at work.
\_ You are not the target of Messrs. Lereah and Hsieh ire.
People who have paid off their houses are their objects of
scorn. The concept is that these people should risk some
small percentage of their home equity for a chance to make
more than the rate of a home equity loan. Since you do not
actually own your house or are close to paying it off, you
can and should ignore their taunts.
\_ Actually, anyone with equity is the target. That
equity could be working for you, right?
\_ If you reread the quotes, they are referring directly
to people who have finished off paying their mortgages.
The article itself implies more the "any equity" crowd.
\_ But, really, what's the difference if I owe
$20K or nothing on a, say, $300K house?
\_ Not much. The better question is $100K vs. $20K.
Of course, it's your house. How much you want to
risk is up to you.
\_ I'm just saying the 'finished paying off
their mortgages' distinction seems
unnecessary. Anyone with equity is the
target.
\_ Their word choice is VERY telling. They are
aiming to get those people with a high
amount of equity, not those who are just
5-10 years into their 30 year mortgage.
I'd guess they are looking at older, lower
risk homeowners as their target audience.
\_ If you're 5-10 years into your mortgage
in the Bay Area, you have an enormous
amount of equity. -tom
\_ You need to think of the difference in
terms of years. ie, 50k now = 10 years of
mortgage free living. Whether it's
something you want, it's up to you.
\_ Where does the $50K number come from?
\_ translation: there are not enough naive individual investors
to take risks and shelter our instititutional investment
models to provide steady revenue for our capital investors
who are not willing to take those high-risk investments
themselves.
\_ real translation: we need more idiots to buy houses they
can't afford, and more idiots to refinance their loans
to extract the equity to spend on new cars.
\- why do you hate idio^D^D^D^DAmericans?
\_ yea, naive american investors should learn from the
japanese and put all their money in 0% savings accounts
- real safe!
\_ you should fix that backspace key
\_ The ^D's were meant to be a joke.
Welcome to the net.
\_ Real Sodans use "^H". |
| 5/17 |
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| csua.org/u/d6q -> news.yahoo.com/news?tmpl=story&u=/latimests/20050828/ts_latimes/equityisalteringspendinghabitsandviewofdebt Los Angeles Times Equity Is Altering Spending Habits and View of Debt By David Streitfeld Times Staff Writer Sun Aug 28, 7:55 AM ET As they happily watch their houses swell in value, Americans are changing their attitudes toward mortgage debt. Increasingly, a home is no longer a nest egg whose equity should never be touched, but a seemingly magica l ATM enabling the owner to live it up or just live. Click Here Homeowners took $59 billion in cash out of their houses in the second qua rter, double the amount in the 2004 quarter and 16 times the average rat e of the mid-1990s, according to data released this month by mortgage gi ant Freddie Mac People are cashing out so quickly that the term "homeowner" may soon be i naccurate. Fifty years ago, Americans owned, on average, three-quarters of their house and the lender owned the rest. This spend-now-rather-than-save-for-later phenomenon has produced undenia ble benefits. Experts attribute much of the nation's economic growth to cash-out refinancings, home equity loans and other methods of tapping ri sing home values. And additional real estate investments financed by hom e equity have contributed to the rising home prices that bring owners su ch pleasure. With the savings rate at zero, consum ers' eagerness to tap home equity is only worsening their retirement out look, financial advisors say. If mortgage rates rise sharply or home prices fall, many homeowners could be in financial turmoil. They may be unable to service their loans, or could even find that their homes are worth less than their mortgages. Such a prospect seems unimaginably distant to Doug Levy, a university adm inistrator in San Francisco. When his two-bedroom condominium rose in value by 10% which took nine m onths in the hot Bay Area real estate market Levy refinanced. That inc reased the size of his mortgage but gave him $25,000 to pay bills and ta ke a modest skiing vacation in British Columbia. He's considering tappin g his equity again if his condo continues to appreciate. "It's like I'm sleeping in my piggy bank," said Levy, 44. Bill and Barbara Brockmann have a different view of their house. The reti red Huntington Beach couple is sitting on half a million dollars of equi ty, but they're ignoring it. They aren't drawing on it to buy a new car or invest in a condo in Miami. What was once considered undesi rable taking on large debt is now seen as smart. And what used to be smart becoming debt-free is described as imprudent. "If you paid your mortgage off, it means you probably did not manage your funds efficiently over the years," said David Lereah, chief economist o f the National Association of Realtors and author of "Are You Missing th e Real Estate Boom?" "It's as if you had 500,000 dollar bills stuffed in your mattress." Anthony Hsieh, chief executive of LendingTree Loans, an Internet-based mo rtgage company, used a more disparaging term. "If you own your own home free and clear, people will often refer to you as a fool. The financial services industry is doing all it can to avoid letting cons umers be foolish. com touts home loans as a way to pay off credit cards, and Morgan Stanley says they're a good way to fund education exp enses. Wells Fargo suggests taking a chunk out of your house to finance "a dream wedding." One obvious reason for the 69% rise in mortgage debt over the last five y ears is the exploding cost of homes, which has far outstripped wage grow th. That's led many buyers to interest-only loans and skimpy down paymen ts, both of which minimize their equity. In California, housing prices have increased so much relative to incomes that buyers must stretch all they can. Federal guidelines recommend homeowners devote less than $30 of every $10 0 in pretax income to housing. But 40% of Californians exceed that, acco rding to a new report by the Public Policy Institute of California. That's higher than in 1990, when the previous real estate boom was cresti ng after several years in which housing-price rises outpaced salary gain s The figure then was 36%. Some Californians devote much more than a third of their incomes to housi ng. The report estimates that about one in seven homeowners in the state are using at least half of their income to pay for their house. Many of these are first-time home buyers, and many of them are relatively young. The report calculates that the greatest increase in homeownershi p rates between 2000 and 2003 came in the 30-to-34 age group. "I think what's happening is that a lot of younger renters feel the ship is passing them by," said Hans P Johnson, one of the authors of the rep ort, titled "California's Newest Homeowners: Affording the Unaffordable. " "If they don't buy a house now, they think, they never will." If their incomes expand as they age, these new homeowners may pay down th eir mortgage debt. On the other hand, they might devote their additional spending power to toys, trips and other fun things, carrying their inde btedness forever. For Levy, the university administrator, cashing in so quickly made sense. He bought his condo in expensive Marin County, north of San Francisco, for $510,000 in April 2004. The bank offered to finance the whole thing, but he decided to be a little conservative and put 5% down. By January, the condo was worth $555,000, and Levy refinanced. He took ou t $25,000 in cash, less than the bank offered to give him. The money pai d off what he describes as "really ugly" credit card debt. The interest rate on the credit card had been more than double the rate o n his mortgage, so he saved about $600 a month. "It used to be that all debt was created equal and all debt was evil," Le vy said. "But the tax breaks alone make a pretty compelling case to use home equity to finance just about everything." He's tempted to dip in to his condo again especially considering it is now worth about $600,000. "There is no longer an incentive to paying off your mortgage," said Levy. "The only way I'll ever pay mine off is if I win the lottery." That's probably the only way he'll ever be able to stop working, too. "I' m never going to be able to retire, because I'll never have enough money in the bank." Because once you get down to a certain l evel, you start feeling good, and then you splurge," said Richard Target t, a research analyst with Ernst & Young. "So when your home goes up in value, you take that cruise. You figure, I got money in my house, I didn 't earn it, let me spend some." But he warned that if home prices stopped their rapid ascent which migh t be happening this summer Doug Levy won't be the only one who has to have a job for the rest of his life. "If you're not working, where would you get the two grand you need every month for your mortgage?" "We're living longer, retiring y ounger, and don't want to give up our lifestyles. Something's got to giv e" The old way had much less built-in risk. For the Brockmanns and many others who bought their homes in the two deca des after World War II, a mortgage was something that started off big an d slowly shrank. Maki ng that last payment was a welcome milestone for those who knew they now had to live without a weekly paycheck. In 1997, the median length of time remaining on an older homeowner's mortgage was a decade, according to Census figures. During that time, the number of older ho meowners who owed more than $300,000 on their home went up tenfold. New products give homeowners increasing leeway as to how much equity they can tap and how fast they can tap it. Credit cards that allow consumers to draw on their home equity loans are one such device. It works like this: Your paycheck is deposited into your account and imme diately applied to your mortgage principal. Over the course of the month , as you spend money on food, gas and other necessities, the principal c reeps back up. But the result is that your mortgage debt gets paid off m ore quickly. Of course, if you're indulgent, you can pay much less of your mortgage like none. "This loan gives you a lot of power," said CMG's vice president of market ing, Doug Nesbit. In the old days, retirees who were house-rich and cash-poor generally dow nsized, ... |