I know we have some posters who deal with mortgage

[IDBillzFan]

If you have a prepayment penalty, I would definitely refi with "citi" unless their rates were a lot higher than others.  I would assume that their mortgage rates would be within  .25% of everyone else.

 

Prepayment penalties are legal and usually if you take one for 3 years, they will shave .25% off of your rate.  Sometimes, they don't make it too clear that the rate you are offered has a prepayment penalty but it is always clearly written in your mortgage contract.

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Also, people look at refinancing and say "Oh, I'm going to save $xxx/month," but refis always cost money, so you need to find out how quickly you recoup your refi costs. For example, if it costs you $3500 to refi, and you cut your mortgage payment by $150/month, it'll take almost two years of mortgage payments before you realize the savings of the refi. Now, add the $3700 penalty to that number and it's almost FOUR YEARS before you recoup your refi costs.

 

So first, the penalty IS painful, even in the grand scope of things, so stick with Citi and ask THEM who are Citi sponsored lenders.

 

Second, you'll save much more than $150/month when you refi from 8.5% to 5.5% so you'll get your return faster. If your mortgage is $180K at 8.5%, your mortgage payment is just under $1400. Refi that to 5.5%, your payment drops $360 per month. If your refi costs you $3500, you recoup your refi costs in 10 months, and while I am no expert I recall that being pretty damn good.

[Crap Throwing Monkey]

"If you sell"....  Ummmm, that's the whole point.  That money is useless in times of need.  Why would you want to be forced to sell your home to access your wealth?  That $105k+ could be in a liquid investment somewhere.

That is like Ralph saying he is a billionaire because he owns the Bills.  Well, Ralph needs to sell the team (or borrow against it) to realize that wealth.

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It's called a "home equity line of credit". You can realize the built-up equity in your home in a liquad format. The interest on which, as far as I know, is tax deductable.

[Crap Throwing Monkey]

Also, people look at refinancing and say "Oh, I'm going to save $xxx/month," but refis always cost money, so you need to find out how quickly you recoup your refi costs. For example, if it costs you $3500 to refi, and you cut your mortgage payment by $150/month, it'll take almost two years of mortgage payments before you realize the savings of the refi. Now, add the $3700 penalty to that number and it's almost FOUR YEARS  before you recoup your refi costs.

 

So first, the penalty IS painful, even in the grand scope of things, so stick with Citi and ask THEM who are Citi sponsored lenders.

 

Second, you'll save much more than $150/month when you refi from 8.5% to 5.5% so you'll get your return faster. If your mortgage is $180K at 8.5%, your mortgage payment is just under $1400. Refi that to 5.5%, your payment drops $360 per month. If your refi costs you $3500, you recoup your refi costs in 10 months, and while I am no expert I recall that being pretty damn good.

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Don't forget the tax deduction, too. Generally, at 8.5%, you're getting more back from the IRS than you would at 5.5%.

 

Probably doesn't have much of an impact...but what impact it does have probably isn't negligable either.

[Alaska Darin]

Without the if I sell part, I get an extra $885/mo in my pocket when I need it by investing an extra $340 /mo when I can afford it.

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If you put the extra $340 in an S&P 500 Index fund that averaged 10%, in 15 years you'd have over $140,000.00. That's an awful lot of $885 mortgage payments.

[Alaska Darin]

It's called a "home equity line of credit".  You can realize the built-up equity in your home in a liquad format.  The interest on which, as far as I know, is tax deductable.

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In most cases - however, to qualify generally you must have a means to pay it back. That's not easy if you're wanting to retire. I fail to see the savvy in borrowing more money against a house you've paid extra on for the chance to pay EVEN MORE MONEY at an even worse rate - especially when my advice is so much more sound.

[GG]

I don't know where I can get a certain, zero risk 6.76% per year ROI.  However I do know that by spending that extra $4,250 I'm not investing, I've assured myself of an extra $885/month or an extra $105,000 (rounded) in my pocket if I sell.  By paying my mortgage with a 15 year loan @ $1,225/mo instead of a 30 year loan @ $885/mo, I am building wealth-I've got a present value of $105,000 in 15 years by "investing" an extra $340/mo into my mortgage.  ...and that extra $885/mo (or $105,000 in my pocket)  certainly will go a long way towards paying my bills.

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Sure you're not mixing the after tax return with pre-tax? If you're comparing it to a risk free rate, then you should look at the after tax rate of the 6.76% (unless you're still paying a 9.7% mortgage rate and shouldn't offer advice on financial prudence

[GG]

It's called a "home equity line of credit".  You can realize the built-up equity in your home in a liquad format.  The interest on which, as far as I know, is tax deductable.

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It depends...

[Albany,n.y.]

Sure you're not mixing the after tax return with pre-tax?  If you're comparing it to a risk free rate, then you should look at the after tax rate of the 6.76% (unless you're still paying a 9.7% mortgage rate and shouldn't offer advice on financial prudence

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I don't quite understand your statement. Here's what I calculated. I took the 1st year's interest (to keep the calculation simple) on a $147,600 loan at 5.75% 15 years & a $147,600 loan at 6% for 30 years. The difference in interest x 30% (rounded for fed & NYS taxes) tax break ended up being around $170/year. I added the $170 to the $4,080 to equal the $4,250. I referred to this $4,250 as the after tax difference since $4,080 is before extra tax breaks. I'm not an accountant, so if an accountant would call it something different so be it.

Edit-I forgot to add the last step.

I then took the FV of $105,000, payment of $4,250, plugged in 15 years, hit i on HP12C & got 6.76% on the non rounded #s. It's 6.78% using the rounded #s.

[GG]

I don't quite understand your statement.  Here's what I calculated. I took the 1st year's interest (to keep the calculation simple) on a $147,600 loan at 5.75% 15 years & a $147,600 loan at 6% for 30 years.  The difference in interest x 30% (rounded for fed & NYS taxes) tax break ended up being around $170/year.  I added the $170 to the $4,080 to equal the $4,250.  I referred to this $4,250 as the after tax difference since $4,080 is before extra tax breaks.  I'm not an accountant, so if an accountant would call it something different so be it.

Edit-I forgot to add the last step. 

I then took the FV of $105,000, payment of $4,250, plugged in 15 years, hit i on HP12C & got 6.76% on the non rounded #s. It's 6.78% using the rounded #s.

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You're double counting the savings, because the $105K is already a PV calculation. I also don't understand how you arrived at the $105K number. The raw difference in interest is $97K. How can the PV be greater than the raw number?

 

Impirically, by paying the mortgage off in 15 years vs 30 years, assuming the same interest rate, your investment rate is the same as the rate on the mortage (which is a pre-tax number)

 

I don't disagree with the rationale of your analysis, just the concluding numbers.

[John from Riverside]

OK....just an update on the situation.

 

- I called Citicorp back to find out exactly who the lenders are that I could use without prepayment penalty......I filtered through them until I got to Citymortgage.

 

- When I called Citimortage I was going through info with them until they found out I payed my taxes and insurance with a "Smith and Barney fund"

 

- They then sent me on to ANOTHER rep.....I guess the gist of it is that as a Smith and Barney customer I am entitled to a even better rate then what the initial Citimortage customer rep could do for me.....

 

- The Smith an Barney rep quoted my 5.75 percent....now next question.

 

I owe roughly 17.5 on a HELOC through my credit union ad an adjustable rate of 8 percent.....

 

Given that I earn more of a tax rightoff on on the high interest rate....should I combine them or keep them separate.

 

 

One more question (this one for Alaska...thanks to both Gant and Alaska for the PM's)

 

Say my total savings from rolling in monthly expenses is roughly $500 but for now I only wanted to invest $200 a month into something 8 percent or 10 percent or whatever.....

 

What would my total amount be in 20 years?.....and what would the amount I owe on my house be at that time on a 30 year fixed mortage?

[Alaska Darin]

I owe roughly 17.5 on a HELOC through my credit union ad an adjustable rate of 8 percent.....

 

Given that I earn more of a tax rightoff on on the high interest rate....should I combine them or keep them separate.

One more question (this one for Alaska...thanks to both Gant and Alaska for the PM's)

 

Say my total savings from rolling in monthly expenses is roughly $500 but for now I only wanted to invest $200 a month into something 8 percent or 10 percent or whatever.....

 

What would my total amount be in 20 years?.....and what would the amount I owe on my house be at that time on a 30 year fixed mortage?

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Round numbers:

 

A $200K mortgage (assuming you roll your existing HELOC into your current - I'm guessing what you owe on your mortgage) at 5.75% will cost you about $1170 a month principle + interest. If you're paying $125 a month in taxes and insurance, that makes your monthly payment about $1300.

 

Assuming your new loan starts September 1st, In 20 years you'd owe about $106K on your mortgage (linked here is the amortization schedule).

 

$200 a month at 8% return nets you $113K in 20 years. $200 a month at 10% return nets you about $143K.

 

There's no rational reason to keep your HELOC at the higher rate.

[John from Riverside]

The thing is....I could afford to pay much more then that into an investment on the average.......

 

I just need the FREEDOM to not pay it in months where I have expenses I didn't count on.

[Alaska Darin]

The thing is....I could afford to pay much more then that into an investment on the average.......

 

I just need the FREEDOM to not pay it in months where I have expenses I didn't count on.

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Which just means you'll have even more money later on.

[Albany,n.y.]

You're double counting the savings, because the $105K is already a PV calculation.  I also don't understand how you arrived at the $105K number.  The raw difference in interest is $97K.  How can the PV be greater than the raw number?

 

Impirically, by paying the mortgage off in 15 years vs 30 years, assuming the same interest rate, your investment rate is the same as the rate on the mortage (which is a pre-tax number)

 

I don't disagree with the rationale of your analysis, just the concluding numbers.

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The interest rate is different because a 30 year loan gets a higher rate (more risk)

I used a .25% difference, even though it's really around .50% different at my credit union. I ran a 30 year mortgage at 6% for $147,600. The money still owed after 15 years of payments is $104,868. I rounded this #. 15 years from the start of the mortgage, when my mortgage is paid, I'd still owe $104,868-it is not my savings on the loan , it's the added equity I have on my home by having a completely paid mortgage. Likewise the present value of paying $885 for 15 years @ 6% is $104,868.

The $104,868 difference using 6% interest rate is a sure thing. I do not have to speculate on anything-zero risk unless my home is worth less than $104,868 in 15 years-which wouldn't mean a bubble burst but an outright depression. Meanwhile, any "investment" regardless of its past performance has some risk. Also-I don't know the answer to this-I'm $104,868 ahead and I don't have to pay 1 cent in income tax on the money. Is that true with the other investments that would yield me more than $105,000, or would my profits be taxable, possibly causing the $140,000 that AD quoted to fall below $105k?

[Alaska Darin]

The interest rate is different because a 30 year loan gets a higher rate (more risk)

I used a .25% difference, even though it's really around .50% different at my credit union.  I ran a 30 year mortgage at 6% for $147,600.  The money still owed after 15 years of payments is $104,868.  I rounded this #.  15 years from the start of the mortgage, when my mortgage is paid, I'd still owe $104,868-it is not my savings on the loan , it's the added equity I have on my home by having a completely paid mortgage.  Likewise the present value of paying $885 for 15 years @ 6% is $104,868. 

The $104,868 difference using 6% interest rate is a sure thing.  I do not have to speculate on anything-zero risk unless my home is worth less than $104,868 in 15 years-which wouldn't mean a bubble burst but an outright depression.  Meanwhile, any "investment" regardless of its past performance has some risk.  Also-I don't know the answer to this-I'm $104,868 ahead and I don't have to pay 1 cent in income tax on the money.  Is that true with the other investments that would yield me more than $105,000, or would my profits be taxable, possibly causing the $140,000 that AD quoted to fall below $105k?

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First, there is no such thing as zero risk. The real estate market is going to crash eventually just like the stock market did (though it's not likely it will happen everywhere). It probably won't effect you personally because of your locale and price point, but alot of people will be affected.

 

Second, there is no income tax on investment income. There are capital gains, which are generally taxed at a significantly lower rate than your income. As has been stated numerous times before, just because you have equity in your home doesn't mean you have money. You'd have to sell your house or (worse) take out a loan against what you paid in.

 

Since we're talking about retirement and how paying off your house is an important goal, it makes bringing the Roth IRA into the discussion even more pertinent. With a Roth, the earnings on your contributions are TAX FREE. Meaning the extra money you're putting on your house would be of FAR BETTER use to you being placed in a ROTH, as you'd not only enjoy the full tax benefit of your mortgage, but would also not have to pay taxes on your retirement distribution.

[Crap Throwing Monkey]

You'd have to sell your house or (worse) take out a loan against what you paid in.

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"Worse" is pretty damned arguable. If it's your residence and you need the money, a line of credit is hardly "worse" than selling and being homeless...

[GG]

The interest rate is different because a 30 year loan gets a higher rate (more risk)

I used a .25% difference, even though it's really around .50% different at my credit union.  I ran a 30 year mortgage at 6% for $147,600.  The money still owed after 15 years of payments is $104,868.  I rounded this #.  15 years from the start of the mortgage, when my mortgage is paid, I'd still owe $104,868-it is not my savings on the loan , it's the added equity I have on my home by having a completely paid mortgage.  Likewise the present value of paying $885 for 15 years @ 6% is $104,868. 

The $104,868 difference using 6% interest rate is a sure thing.  I do not have to speculate on anything-zero risk unless my home is worth less than $104,868 in 15 years-which wouldn't mean a bubble burst but an outright depression.  Meanwhile, any "investment" regardless of its past performance has some risk.  Also-I don't know the answer to this-I'm $104,868 ahead and I don't have to pay 1 cent in income tax on the money.  Is that true with the other investments that would yield me more than $105,000, or would my profits be taxable, possibly causing the $140,000 that AD quoted to fall below $105k?

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Whoa, Nellie. You're way off in your calculation.

 

Yes, in a 30-yr mortgage, you'd still have a $105K balance, but you neglected to factor the value of where your investment assets would be if you invested the $340 savings in monthly payments from the 15-yr mortgage.

 

I'm "guessing" off the top of my head, if you invest that $340/mo at the same rate as your mortgage payment, the future value of those payments will be the same as the principal balance on the 30-yr mortgage. Try it. (I'm using the same interest rate to simplify the comparison)

 

That's why you always look to beat the after tax rate of your mortgage. It's really that simple.

[BEAST MODE BABY!]

Terrible advice.  Go back and read the thread.

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Umm...it's not terrible advice. I wrote that assuming he refinanced into a better situation. Go read up on bi-monthly payments (50% on the 1st, 50% on the 15th), it's sound advice.

[BEAST MODE BABY!]

Great article.

 

The only caution I have is that he didn't take PMI in to account and the example of Ed would decrease the amount of savings he would have if he was only putting 5% down, and PMI isn't tax deductible if you pay it on a monthly basis.That brings his net "savings" down to about 113 per month.  That's where the borrower would have been better putting 10% down on a 30 year term and getting single premium PMI, financing it and having the write off on both your mortgage and your PMI. Freddie will not allow you to exceed a LTV of 95% with your MI policy so therefore you have to put at least 7-10% down in order to finance your PMI That would be the most effective use of down payment money while being able to invest wisely.

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There are some lenders that can get around PMI with some funky financing. In some cases, they'll take a 15% HELOC. I advise at least a 10% down payment, but there are always creative financing methods.

[BEAST MODE BABY!]

This was exactly what I was TRYING to get into......2 payments a month that added up to the same as one payment at the first of the month....

 

The problem is that it really isnt biweekly....its every 2 weeks which means more payments.  And the interest rate sucks.....

 

Are you talking about a different kind of loan?

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No, I'm talking about a standard mortgage with good rates that you pay down twice a month. It reduces the amount that they can charge interest on, and over time it really adds up.