I just cannot understand the business of everyone refinancing over the
past few years. Sure, it makes sense to refi. at a better rate, but
it just doesn't make sense to refi. at a better rate 5-10 years into a
mortgage only to refi for another 30 years, unless, one refis for a
shorter term -or- puts the savings from the reduced mortgage into the
payments. Sure, many people used equity to pay off debts. That's ok
once. I prefer to keep my mortgage seperate from my debts and
actually own my house someday.
The way I see it, If the value of my home goes up, it means that the
value of the home I may want to live in when I retire has also gone
up. Personally, I don't want a mortgage when I retire and I am not
going to pay for someone else's either.
======================================= MODERATOR'S COMMENT:
Please trim the post to which you are responding. "Trim" means that except for
a FEW lines to add context, the previous post is deleted.
Let's suppose I'm 15 years into an 8% 30-year mortgage, and I have the
opportunity to refinance at 6% for 30 years. Fixed rate in both cases.
Then my options include the following:
1) Keep making the payments I've been making, in which case the new
mortgage will be retired in less than 15 years.
2) Make the minimum payments and invest the difference somewhere else,
in which case I will be ahead for the long term if my investment makes 6% or
If I were in that situation, I would be willing to gamble that I can make
more than 6% per year over a 30-year period, in which case option (2) would
have made more sense.
How old would you be 15 years into that refinanced 30 year mortgage? (e.g.,
did you originally purchase the house at age 30, only to refinance at age
45?)Would you be retired, or almost? If yes, would you have saved enough to
make the mortgage payment? Why would you now want to pay income taxes on
the income that now just goes to pay the mortgage? Wouldn't it have been
more prudent to have just paid it off in the first place?
Well, yes; that's the point. You can view a mortgage as an investment that
pays a guaranteed rate that is equal to the mortgage's interest rate,
because every time you make a prepayment, you avoid having to pay future
interest on the part of the principal that the prepayment retired. So
prepaying a 6% mortgage is like investing money in a vehicle that pays 6%.
I don't understand the question. As long as I'm paying the mortgage, I can
deduct that interest from my taxes.
Here's an example. Suppose I have a mortgage, and I come into possession of
a sum of money that is exactly sufficient to pay it off. Suppose further
that if I wish, I can invest that money in a way that is guaranteed to pay
the same amount of interest as the mortgage rate.
Now, let's compare two scenarios:
1) I use the money to pay off the mortgage. Clearly I have no more
mortgage payments after that.
2) I hang on to the mortgage, withdrawing money from my investment as
needed to make each payment.
It should be clear that in scenario (2), the interest each month will be
equal to the interest due on the mofrtage for that month. So if I want, I
can make the entire payment by withdrawing enough from my investment to
cover it, and doing so will decrease my investment by exactly the same
amount as my mortgage payment decreases the remaining balance due on the
mortgage. Moreover, although the interest from the investment account is
taxable, the interest I pay on the mortgage -- which is the same amount! --
is tax deductible.
So under these assumptions, it's a wash. Whether I pay off the mortgage
immediately or invest the money and pay it off over time, I wind up with the
same amount of money in the end. It should therefore be clear that if my
investment makes *more* than the mortgage interest rate, I am better off by
keeping the mortgage, and if it makes *less* than the mortgage interest
rate, I am better off paying off the mortgage.
Now, we started out by talking about a 6% mortgage, so the question is how
likely it is to find an investment vehicle that will make 6% or more per
year over a 30-year period.
I claim that the odds are pretty good. For example, if you look at
you will find a strategy for a diversified portfolio, including 40% bonds,
that returned 13.1%/year over the period between January, 1970 and December,
Now of course, as they say, past performance is no promise of future
results. Nevertheless, there is quite a gulf between 6% and 13.1%, which is
why I say that it's a pretty good bet that one can make more than 6%/year,
on average, over the next 30 years. It's not guaranteed, but I like the
Ah, but you're not paying the mortgage - you refinanced. If you had been
paying the mortgage, then, when you retired, you're not paying any mortgage.
When you're retired and not paying the mortgage, you're not taking that
money out of your tax-deferred savings and you're not paying taxes on an
extra distribution - a distribution for which you've had to save above and
beyond your needs if you'd just paid the mortgage in the first place instead
of refinancing. And, remember, your tax-deductibility on the mortgage isn't
really giving you anything except the privilege of not paying money that's
going out the door to the bank and, for which, you're getting little
I agree with your summation, but you have changed the scenario. How
about this instead, suppose you did not come into possession of that sum
Assume you are 15 years into a 30 year mortgage, $300K at 8%
The choices are:
A) Continue making payments of $2201.
B) Refinance into another 30 year at 6% and continue to make $2201
C) Refinance as above but make $1381 payments and invest $820 in a
vehicle that earns a 6% return.
[To make this easy, assume that the 6% on the refi and the investment
are after taking taxes into account. Is that reasonable?]
With option (a) you pay off the house in 15 years (b) you end up paying
off the house in about 12.5 years (149 months,) with option (c) you pay
off the house in 30 years and have a $824K nest egg.
Options (b) and (c) are obviously both better than option (a), but is
one of them better than the other? What if, for example ones income
decreases sharply 10, 15, or 20 years down the road?
If I'm doing the numbers right, someone who chooses option (c) will have
enough in his investment to pay off the house in only 8 years, is that
right? If that is the case, then I'd say that option (c) is still the
best solution for future proofing ones life.
If one can invest at the same rate as borrowing, as in (C), it's a wash.
There would be no advantage to paying the mortgage instead, and the
investment built can help in the low-income scenario. But right now the
risk free rate is just over 5%, and we are back to the 'pay the mortgage
early' vs 'invest the cash' dialog which has been tossed around here a
few times already. I've moved to the Elizabeth camp on this, that one
should target to have no mortgage in retirement. The wealthy over-saver
is the exception, but a statistical outlier, who isn't reading this NG
Here's a contra contra view: The media has reported amply on
how way too many middle and lower income Americans are in
staggering debt. Frequently it seems to be due to getting
swept up into the madness of the housing bubble, going
hand-in-hand with creative, suspect financing schemes that
now have Congress's attention as well. Ultimately of course
the debt is due to ignorance: Of numbers and financial
IMO this group should try to speak mostly to the masses.
Large down payments and fixed rate mortgages lasting no more
than 30 years would have prevented many of the disasters
about which we are reading today (including now insolvent
lending companies) and which has seized much of the nation's
attention. Rightfully so, because who is going to pay for
the welfare of these families out on the streets? Heck,
strike "welfare" and just consider the Medicaid costs the
children will incur because they were not given preventive
health care as their parents plunged into poverty. And when
companies all hire people based on anticipated health
insurance costs, what happens to the labor pool? More
unemployment occurs, more welfare, my company dividends
decline, and we spiral into chaos as a society.
On financial planning, speak to the masses first. Qualify
for extreme cases subsequently.
If that is the case, then I did my numbers wrong... OK so I redid the
numbers and see that you are right. Assuming nothing goes wrong with
one's income, both B and C are the same.
However, if something happened to one's income, say 8 years down the
road then the person who takes option B and can no longer make even a
$1381 payment is in deep trouble, while the person who did option C can
draw on the $101K he has invested which can make the house payment for
So AFAICT, the risk in option C is that the return on investment isn't
guaranteed, while the risk in option B is that the investment isn't as
liquid so can't handle emergencies as easily.
wrote:>> If one can invest at the same rate as borrowing, as in (C), it's a wash.> If that is the case, then I did my numbers wrong... OK so I redid the
We were assuming that the return was guaranteed, though I don't know where
you can get guaranteed 6% these days. In practice, the return isn't
guaranteed, but the expectation is larger than 6%, which makes the decision
Some folks in this newsgroup have been arguing that C is an inferior option
because it opens the possibility of spending the money frivolously. I
concede that point, but think it should be part of analyzing the psychology,
not the investment.
wrote:> Assume you are 15 years into a 30 year mortgage, $300K at 8%
It is reasonable, but I don't think it's necessary.
Yes, that's what I'm saying too. I believe that (b) and (c) are equivalent
if you can afford to make $2201 payments through the entire period, and they
both beat (a) handily. But (c) has the added advantage that if something
goes wrong, you are sitting on a wad of cash that otherwise you would have
used to pay down the mortgage principal and cannot recover.
Ah, but in option (c) you are retired in the last 15 years of paying the
mortgage. Where did you get the income to make the payment? Was it from that
"nest egg", in which case it isn't as much of a nest egg at the end of the
mortgage period because you've had to drawn down in order to make the
payment. I don't think you can make that comparison.
There is a third choice that explains why Foobar has a problem with
these refis. That is to make the minimum payments on the new mortgage
and spend the difference on consumables. In that case, you will not be
ahead, yet that is by far the most common choice made.
Well, sure. But one can forestall that choice by setting up an automatic
investment plan, which automatically transfers the difference between the
old and new mortgage payments into your investment account :-)
More seriously, I don't think it's quite far to respond to a claim of the
form "A is better than B" by saying "Yeah, but C is even worse than A or B,
and B leaves open the possibility of C where A doesn't." That response may
well be true, but it doesn't affect the truth of the original claim.
However, I don't think that Foobar was claiming that B was better than
A. I think that Foobar was saying that B was better than C, then you
piped in with "but A is even better!" I was simply saying that I think
Foobar was comparing different choices than you were.
And Kotlikoff ("Mr. Consumption Smoothing") might just approve of this.
30 yr mortgage starting at $250/8% is $1834/mo, down to $192K after 15
years, new mortgage at 6% is $1150.
I don't endorse or discredit this scenario without knowing the rest of
the client's situation. My issue is with those who refi into a new $300K
mortgage and blow the $50K they had in equity. This 'fourth choice' is
probably more common than the one you describe, unfortunately.
These are the same people that will be whining about how unfair it is
that they still have 20 years on a mortgage while you don't.
1). They will also be the first ones to tell you that John will be a
major league pitcher someday and that is a good thing.
2). They will explain that the cars in the street (against HO bylaws)
is a good thing, since John will be a major leaguer someday.
3). They will try to convince you that the weeds in the lawn are
really grass. After all, my lawn looked really good 3 years ago when
I moved in and your lawn looks great. I must have bad dirt.
4). They will try to tell you that the broken windows are not there
fault as kids will be kids and after all, John will be a major leaguer
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