7 ms·

That tax deduction does get smaller every year (as the interest/principal balance changes). The biggest issue I found with owning is that the equity doesn't bu

by derekp7 11y ago

That tax deduction does get smaller every year (as the interest/principal balance changes). The biggest issue I found with owning is that the equity doesn't build up fast enough at the beginning (with a 30-year mortgage), so if you sell after 10 years the costs pile up to the point that you have almost no net proceeds (5% commission, survey/title/transfer tax/inspections, plus prorated property taxes). A 200K property could easily cost you 20K or more to sell. The best thing you could do is to put as much down as you can, on as cheap of a property as you can (condo, townhouse), then send in additional principal payments so that you could pay it off in 6 - 10 years. Then you can either put away extra savings after that, or move into a slightly more expensive place (about 60K more than your current house), and start the 6 year cycle over again.

pc86 11y ago
Actually the best thing to do is just to have a lot of money. Problem solved! Your scenario assumes a location (or person) with: - Desirable housing in the $60-100K+ range - Employment sufficient to generate high paying positions - The will to sock away a large part of your income for close to a decade, just to have a paid-off home (which is not a big enough benefits to be a means unto its own) 20% down at a minimum and a 15-year mortgage (or a 30-year paid off in 15 which is close to the same price) is a pretty bullet-proof way to secure a livable property, be able to save beyond just paying your mortgage, and have the freedom that you can get out of dodge in under a decade if you absolutely had to.
- maxerickson 11y ago
  This makes me wonder if 30 year mortgages even end up making housing more affordable. (I guess it would be a prisoners dilemma situation, where individuals benefit by taking them out but the overall situation is made worse)
  - floppydisk 11y ago
    30 year mortgages make the monthly payment smaller, which reduces the monthly cost of housing, BUT you end up paying more interest since you aren't paying principal off as fast which means the total long term cost of the asset is more due to compound interest. A 15yr mortgage takes more out per month, but it's cheaper overall since you're paying off principal faster and interesting isn't accruing or compounding as quickly. I think it's possible to "game" the system by getting a 30yr mortgage but set it up so any extra payments above and beyond the minimum amount get applied against principal - in effect reducing the amount of money they can leverage interest against. Then you make as many extra payments as possible over the life of the mortgage and pay it off ASAP.
    - danielvf 11y ago
      I don't think this works, because 30 year mortgages have a higher rate of interest than 15 year mortgages do.
      - floppydisk 11y ago
        Perhaps, I haven't fully explored that option and it would make sense since the investor's money will be tied up longer. However, paying down principal quickly reduces total cost of the asset since there's less $$ for the interest to grow/compound against.
      - matheweis 11y ago
        Pedantically true, but in practice with interest rates what they are there's only a few thousand difference between in the long term a 4% 30-year that is paid off in 15 years, and an actual 15-year at 3%. (Source; I'm doing this with mine, and ran the numbers)
        jandrese 11y ago
        Yeah, I'm doing this. The nice thing about the 30 year but pay extra every month plan is that if you get slammed by some major unexpected expense you can dial down your mortgage payments until your bank account catches back up. It gives you a buffer so you don't make yourself inadvertently house poor. The interest rate difference was like 0.15%.
      - pc86 11y ago
        Paying a 30 year note off in 15 years is only marginally more expensive than having the 15 year note to begin with, with the added benefit that if something should happen to your cash flow you have a much lower minimum payment you can fall back to. Using bankrate.com's advertised rates and mortgage calculators for my zip code and $300k mortgage (which is very nice with some land in my area since with 20% down that is about a $375k house): - 30 year fixed rate (lowest): 3.500% - 30 year fixed payment: $1,347/mo - 30 year fixed total interest paid: $184,968.26 - 15 year fixed rate (lowest): 2.750% - 15 year fixed payment: $2,036/mo - 15 year fixed total interest paid: $ 66,455.68 If you make the 15 year payment on the 30 year note you will pay the loan of 14 years early and save $92,302.71 in interest. If you make double payments based on the 30 year note you will pay the loan off in just over 11 years and pay less interest than on the 15 year note with minimum payments.
  - bradleyjg 11y ago
    >> This makes me wonder if 30 year mortgages even end up making housing more affordable. Everything the government does to subsidize home-ownership ends up getting capitalized into home prices and so acts as a naked giveaway to incumbent homeowners and either does nothing for or actively hurts non-incumbents. Interventions breed more interventions as the prior ones no longer provide the above general inflation price growth that homeowners demand from their politicians. The 30 year low fixed rate mortgage with no prepayment penalty is just one among many such interventions.
    - pc86 11y ago
      How is a 30 year loan on what is usually the largest purchase of one's life a government intervention? Plenty of banks offer these loans with no backing, support, or encouragement from the government. And what do prepayment penalties have to do with anything? As a consumer I will absolutely not sign any loan that comes with a prepayment penalty. It would be idiotic to.
      - jazzyk 11y ago
        The government subsidizes housing through: - low interest rates (reduces interest payments) - tax deductions (mortgage interest payments, etc). Low interest rates, in particular, caused prices to rise dramatically, putting a lot of people in a lot of debt and making house ownership out of reach for many others.
turar 11y ago
I would argue in the current situation of 3.5% mortgage rate, the best scenario is to invest the cash in the stock market. If your returns are anything above 3.5% over the 30 year load amount, you're good.
- irishcoffee 11y ago
  I read this counter-point a lot. Its never clear to me how you invest the mortgage payment and also pay rent to live somewhere. Am I missing something? Sincere question.
  - feverishaaron 11y ago
    Especially when rents are rising 5-10% per year.
  - JustSomeNobody 11y ago
    I have very often wondered the same. Someone somewhere said it, lots of people repeat it, nobody does it and nobody has fact checked it.
  - heywiseguy 11y ago
    people who say this are talking about markets where the spread between renting and the finance cost of a similar bought property are huge. San Francisco, New York, LA... Let's say you're a couple years out of school and you work at Snapchat. Somehow you have a lot of money saved up and you can buy a little house near your office in Venice. A small house in Venice runs about $2m. So let's say you borrow 1.8m to pay for it, your monthly payment is about $8,500 on a 30 year fixed and thats before maintenance and insurance. That same house in Venice probably rents for somewhere between $3k and $4k/mo net of everything. So what those people are saying is to live in a rental and invest _the saved money_ in the market. Remember, in both cases you are renting: in one, you are renting real estate. In the other, you are renting money. But they have different tax treatments, and renting money allows you to lever yourself into eventually owning an asset who's value you might expect to rise.
    - 11y ago
Outdoorsman 11y ago
One strategy that's been around for years to save a substantial amount of money on a 30-year mortgage is to make 13 payments a year (vs the traditional 12), or the equivalent... More info and examples here: (and elsewhere) http://www.interest.com/refinance/news/3-free-ways-to-pay-your-mortgage-faster/ http://www.interest.com/refinance/news/3-free-ways-to-pay-yo...
jkyle 11y ago
To pay off a town house in my area in 10 years, you'd have to carry a $10,000 monthly note.
onlyrealcuzzo 11y ago
Conveniently, when you're ultra wealthy and pay interest-only, real estate is essentially a tax-shelter to transfer your wealth from income (taxed at 45%) to capital gains (taxed at 15%). Am I missing something?

by derekp7 11y ago

pc86 11y ago

Actually the best thing to do is just to have a lot of money. Problem solved! Your scenario assumes a location (or person) with: - Desirable housing in the $60-100K+ range - Employment sufficient to generate high paying positions - The will to sock away a large part of your income for close to a decade, just to have a paid-off home (which is not a big enough benefits to be a means unto its own) 20% down at a minimum and a 15-year mortgage (or a 30-year paid off in 15 which is close to the same price) is a pretty bullet-proof way to secure a livable property, be able to save beyond just paying your mortgage, and have the freedom that you can get out of dodge in under a decade if you absolutely had to.

maxerickson 11y ago
This makes me wonder if 30 year mortgages even end up making housing more affordable. (I guess it would be a prisoners dilemma situation, where individuals benefit by taking them out but the overall situation is made worse)
- floppydisk 11y ago
  30 year mortgages make the monthly payment smaller, which reduces the monthly cost of housing, BUT you end up paying more interest since you aren't paying principal off as fast which means the total long term cost of the asset is more due to compound interest. A 15yr mortgage takes more out per month, but it's cheaper overall since you're paying off principal faster and interesting isn't accruing or compounding as quickly. I think it's possible to "game" the system by getting a 30yr mortgage but set it up so any extra payments above and beyond the minimum amount get applied against principal - in effect reducing the amount of money they can leverage interest against. Then you make as many extra payments as possible over the life of the mortgage and pay it off ASAP.
  - danielvf 11y ago
    I don't think this works, because 30 year mortgages have a higher rate of interest than 15 year mortgages do.
    - floppydisk 11y ago
      Perhaps, I haven't fully explored that option and it would make sense since the investor's money will be tied up longer. However, paying down principal quickly reduces total cost of the asset since there's less $$ for the interest to grow/compound against.
    - matheweis 11y ago
      Pedantically true, but in practice with interest rates what they are there's only a few thousand difference between in the long term a 4% 30-year that is paid off in 15 years, and an actual 15-year at 3%. (Source; I'm doing this with mine, and ran the numbers)
      - jandrese 11y ago
        Yeah, I'm doing this. The nice thing about the 30 year but pay extra every month plan is that if you get slammed by some major unexpected expense you can dial down your mortgage payments until your bank account catches back up. It gives you a buffer so you don't make yourself inadvertently house poor. The interest rate difference was like 0.15%.
    - pc86 11y ago
      Paying a 30 year note off in 15 years is only marginally more expensive than having the 15 year note to begin with, with the added benefit that if something should happen to your cash flow you have a much lower minimum payment you can fall back to. Using bankrate.com's advertised rates and mortgage calculators for my zip code and $300k mortgage (which is very nice with some land in my area since with 20% down that is about a $375k house): - 30 year fixed rate (lowest): 3.500% - 30 year fixed payment: $1,347/mo - 30 year fixed total interest paid: $184,968.26 - 15 year fixed rate (lowest): 2.750% - 15 year fixed payment: $2,036/mo - 15 year fixed total interest paid: $ 66,455.68 If you make the 15 year payment on the 30 year note you will pay the loan of 14 years early and save $92,302.71 in interest. If you make double payments based on the 30 year note you will pay the loan off in just over 11 years and pay less interest than on the 15 year note with minimum payments.
- bradleyjg 11y ago
  >> This makes me wonder if 30 year mortgages even end up making housing more affordable. Everything the government does to subsidize home-ownership ends up getting capitalized into home prices and so acts as a naked giveaway to incumbent homeowners and either does nothing for or actively hurts non-incumbents. Interventions breed more interventions as the prior ones no longer provide the above general inflation price growth that homeowners demand from their politicians. The 30 year low fixed rate mortgage with no prepayment penalty is just one among many such interventions.
  - pc86 11y ago
    How is a 30 year loan on what is usually the largest purchase of one's life a government intervention? Plenty of banks offer these loans with no backing, support, or encouragement from the government. And what do prepayment penalties have to do with anything? As a consumer I will absolutely not sign any loan that comes with a prepayment penalty. It would be idiotic to.
    - jazzyk 11y ago
      The government subsidizes housing through: - low interest rates (reduces interest payments) - tax deductions (mortgage interest payments, etc). Low interest rates, in particular, caused prices to rise dramatically, putting a lot of people in a lot of debt and making house ownership out of reach for many others.

turar 11y ago

I would argue in the current situation of 3.5% mortgage rate, the best scenario is to invest the cash in the stock market. If your returns are anything above 3.5% over the 30 year load amount, you're good.

irishcoffee 11y ago
I read this counter-point a lot. Its never clear to me how you invest the mortgage payment and also pay rent to live somewhere. Am I missing something? Sincere question.
- feverishaaron 11y ago
  Especially when rents are rising 5-10% per year.
- JustSomeNobody 11y ago
  I have very often wondered the same. Someone somewhere said it, lots of people repeat it, nobody does it and nobody has fact checked it.
- heywiseguy 11y ago
  people who say this are talking about markets where the spread between renting and the finance cost of a similar bought property are huge. San Francisco, New York, LA... Let's say you're a couple years out of school and you work at Snapchat. Somehow you have a lot of money saved up and you can buy a little house near your office in Venice. A small house in Venice runs about $2m. So let's say you borrow 1.8m to pay for it, your monthly payment is about $8,500 on a 30 year fixed and thats before maintenance and insurance. That same house in Venice probably rents for somewhere between $3k and $4k/mo net of everything. So what those people are saying is to live in a rental and invest _the saved money_ in the market. Remember, in both cases you are renting: in one, you are renting real estate. In the other, you are renting money. But they have different tax treatments, and renting money allows you to lever yourself into eventually owning an asset who's value you might expect to rise.
  - 11y ago

Outdoorsman 11y ago

One strategy that's been around for years to save a substantial amount of money on a 30-year mortgage is to make 13 payments a year (vs the traditional 12), or the equivalent... More info and examples here: (and elsewhere) http://www.interest.com/refinance/news/3-free-ways-to-pay-your-mortgage-faster/ http://www.interest.com/refinance/news/3-free-ways-to-pay-yo...

jkyle 11y ago

To pay off a town house in my area in 10 years, you'd have to carry a $10,000 monthly note.

onlyrealcuzzo 11y ago

Conveniently, when you're ultra wealthy and pay interest-only, real estate is essentially a tax-shelter to transfer your wealth from income (taxed at 45%) to capital gains (taxed at 15%). Am I missing something?