The Old Standby: the 30-year fixed mortgage

[jk]

Re: The Old Standby: the 30-year fixed mortgage

In no way am I contesting what you've done. I've done much the same thing. I am questioning if it can be counted on to repeat. The last 30 years were one of rising housing values and even incomes for many. Today's climate is a game changer. Something that should be taken into consideration, regardless how successful mortgage debt has been in the past.Your investment returns of 11-12% are admirable. A hearty congratulations!

i don't care if the value of my house goes down and i end up underwater on the debt. i'd still like maximum fixed rate loans so the real loan value can be inflated away while i invest the proceeds.

[c1ue]

Re: The Old Standby: the 30-year fixed mortgage

i don't care if the value of my house goes down and i end up underwater on the debt. i'd still like maximum fixed rate loans so the real loan value can be inflated away while i invest the proceeds.

The key is that you can afford to pay off the loan at any time.

You're making a pure inflation play with the only risk being the interest you pay.

This isn't the same as going 'all in' on a 30 year mortgage which you cannot pay off.

Now if you did the same for 10 investment properties, that would be much stronger a statement.

[jk]

Re: The Old Standby: the 30-year fixed mortgage

The key is that you can afford to pay off the loan at any time.

You're making a pure inflation play with the only risk being the interest you pay.

This isn't the same as going 'all in' on a 30 year mortgage which you cannot pay off.

Now if you did the same for 10 investment properties, that would be much stronger a statement.

agreed. and i like the idea of financing investment properties, but i do not have the temperament to be a landlord.
in any case, the subject of the thread, in the first post was:

the merits of cash vs today's 'historically low' interest rates in buying an abode to live in, with a time frame of 10 years.

i.e. paying cash versus financing. i think today's fixed rate financing is a great inflation play, and buying a home gives you the opportunity to make that play.

[LargoWinch]

Re: The Old Standby: the 30-year fixed mortgage

i.e. paying cash versus financing. i think today's fixed rate financing is a great inflation play, and buying a home gives you the opportunity to make that play.

Especially true when you can deduct interest rates from income.


In Canada, the maximum mortgage is 10-year, which comes at a substantial premium over the 5 year fixed mortgage (+1.25% or so). So you do take on significant re-investment rate risk if you amortize your long over a longer period (which most people do; in fact most ppl are 5/35).

The interest costs are also not deductible...

and we have a serious property bubble still (with Vancouver median house costing about $800,000 while median familly income is about $75K and in Toronto, it is not much better).

[flintlock]

Re: The Old Standby: the 30-year fixed mortgage

i don't care if the value of my house goes down and i end up underwater on the debt. i'd still like maximum fixed rate loans so the real loan value can be inflated away while i invest the proceeds.

In other words, inflation will pay off your loan for you, or at least most of it?

[aaron]

Re: The Old Standby: the 30-year fixed mortgage

I saw some ad on t.v. for a brokerage firm where you can borrow a lot of money on margin for a very low interest rate. So, if you take 100K and put it in your account and buy 300K worth of etf gold... 2% interest.. It may be a good deal. Saves the trouble from buying a house.

[c1ue]

Re: The Old Standby: the 30-year fixed mortgage

i.e. paying cash versus financing. i think today's fixed rate financing is a great inflation play, and buying a home gives you the opportunity to make that play.

The basic premise is 100% sound. However, the problem isn't as simple as is being put forward.

1) What kind of house are you buying? Were you to buy a mid-level house in a mid level neighborhood, the odds are better than if you were to buy an extreme high end house, or the best house in a bad neighborhood, or even any expensive residence in a declining economic area.

For example: I think more than likely buying a house in Manhattan is a terrible idea right now. The banksters, barring a full blown bankster republic, aren't going to get it any better than right now. Real estate in Manhattan is demonstrably driven by FIRE, and if the only way for FIRE is down then inevitably so will property prices. A similar argument would be made for buying Shanghai or pre-crash Dubai, for example.

2) What kind of expenses are you anticipating? Besides maintenance, an acceleration of inflation means either a major decline infrastructure/government.

This could be a severe drop in local school quality - a major property value downer.

This could be a massive increase in property taxes.

This could be a fall in law enforcement, hence spillover from the previously effectively segregated ghetto half a mile over.

This could be even direct infrastructure problems due to roads/bridges not being repaired, electricity delivery being compromised, water delivery, etc etc.

3) What is your financial objective? If your objective is to buy a house and die in it, frankly it is unnecessary to take any extra risks by speculating via getting a loan.

There is no true safety in taking out this loan unless the loan is fiscally irrelevant for you.

For example: let's say you take out $300K in equity and buy gold. In 3 years, your loan gets called (yes, that can happen). In the intervening time, the tax rates on gold jump to 36% (to combat speculation). Between that and the inevitable losses due to PM transactions, you could easily have to quickly come up with 5% or 10% of the loan's amount in cash.

Again none of these scenarios are guaranteed, but in a time of indisputed turmoil, none of these are outlandish fantasies either.

[Milton Kuo]

Re: The Old Standby: the 30-year fixed mortgage

I saw some ad on t.v. for a brokerage firm where you can borrow a lot of money on margin for a very low interest rate. So, if you take 100K and put it in your account and buy 300K worth of etf gold... 2% interest.. It may be a good deal. Saves the trouble from buying a house.

The problem with margin is that the interest rate is variable and you're subject to margin calls. You don't have these problems if you use money from a mortgage.

[LazyBoy]

Re: The Old Standby: the 30-year fixed mortgage

Just the opposite Steve.

It's the hidden costs of owning that can be very high. If anything goes wrong in your home, you have to repair or replace it. Washing machine breaks, damp got in somewhere, painting, roof tiles. Any maintenance whatsoever and the bill is yours.

At the end of 10 years in the rent scenario you have no property, but in the 10% decline scenario on selling, you also have no capital made so you are in the same boat.

Our mortage is paid off and I still wonder if we'd be better off renting.

HIGH property taxes, new roof, new furnace and A/C, kitchen remodel, landscaping, bathroom remodel.
We need a termite treatment and new windows.
We talked to someone about replacing our front walk and steps recently. We're on a hill and have an erosion problem that he wants to fix with terracing, etc. He wants about $20k.

I'd love to sell, move someplace cheaper, and consider renting when I get there.

I try to explain this to the "kids" in the extended family, but they're set on buying someday.

[don]

Re: The Old Standby: the 30-year fixed mortgage

Sometimes you come across a guy that could stand in as the poster boy of little-or no-thought decision making. Meet Paul Trigili . . .

Paul Trigili, an information technology professional in Las Vegas, is 65, has back problems and would like to retire at the end of the year. There's just one thing standing in his way: his house.

Trigili bought his home three years ago for $350,000. At the time, he thought it was a good deal, because the home originally was priced at $450,000. Today, it's valued at $184,000.

Trigili made a large down payment when he bought the home, so he doesn't owe more on his mortgage than the home is worth. But his plans to sell his home and use the proceeds for retirement income have been placed on indefinite hold.

"We're pretty much stuck here," Trigili says. "Now, I don't look at retirement at all. I'd like to work as long as I can."

http://www.usatoday.com/money/perfi/...e-equity_n.htm


At least you got the last part right, Paul.

[flintlock]

Re: The Old Standby: the 30-year fixed mortgage

Trigili bought his home three years ago for $350,000. At the time, he thought it was a good deal, because the home originally was priced at $450,000. Today, it's valued at $184,000.

Ah, the peril of looking at home price histories.

[Milton Kuo]

Re: The Old Standby: the 30-year fixed mortgage

Trigili bought his home three years ago for $350,000. At the time, he thought it was a good deal, because the home originally was priced at $450,000. Today, it's valued at $184,000.

Trigili made a large down payment when he bought the home, so he doesn't owe more on his mortgage than the home is worth. But his plans to sell his home and use the proceeds for retirement income have been placed on indefinite hold.

Oh, drat. It looks like the there's a sudden scarcity of suckers who, by overpaying for a house, fund someone else's retirement. They'd better hope that the big, bad Bernanke is able to huff and puff and blow the housing bubble back up.