I wonder whether, say 60% down will make a difference on the rate. After all, it's the prime rate+default rate and the latter is determined by how easily the bank can lose money. In any case:
Cash purchase <=> Buy RE, sell stocks
Mortgage purchase <=> Buy RE, sell bonds (the mortgage), keep stocks (assuming that the cash not spent would be in stocks).
Net difference: buy stocks, sell bonds. That's essentially a leveraged play with no margin requirements (and a low margin interest) and security in the house. I know that stocks are currently expensive, RE is currently cheap, and bonds are iffy (shorting Helicopter Ben). Therefore the mortgage does not sound too attractive. The alternative is sell the 30 year bond against shorter terms hoping that short term interest rates will rise. Not to sure about that one either (it's the opposite of Operation Twist). Yet another alternative would be to buy long term corporate debt. Who's more likely to default before 2042... me or Goldman Sachs? In conclusion, trying to carry trade through a mortgage sounds rather tight right now.
Jacob's other journal
Jacob, assuming you are now in a fairly high tax bracket, and the mortgage deduction stays in place, you get a government-subsidized bonus on the interest rate spread.
There's also interplay (that I don't completely understand) between interest rates and inflation, right? If rates stay very low, inflation could rise. In inflation situations, it's great to be in debt, or put another way, great to get leveraged capital appreciation with, again, tax advantages such as the capital gains exemption.
Not trying to convince you (and there is a lot of uncertainty). If you were in California or another non-recourse state, you'd also get a nice asymmetrical risk profile (housing market tanks, you could walk away).
There's also interplay (that I don't completely understand) between interest rates and inflation, right? If rates stay very low, inflation could rise. In inflation situations, it's great to be in debt, or put another way, great to get leveraged capital appreciation with, again, tax advantages such as the capital gains exemption.
Not trying to convince you (and there is a lot of uncertainty). If you were in California or another non-recourse state, you'd also get a nice asymmetrical risk profile (housing market tanks, you could walk away).
-
secretwealth
- Posts: 1948
- Joined: Mon Jun 27, 2011 3:31 am
"It would also save on fees to set up the loan right, right?"
Nowadays, mortgage fees are extortionate; I was quoted $11,000 on a $130,000 condo purchase by Chase. Community banks and credit unions will offer less fees.
About whether to get a mortgage or use the money to invest elsewhere: obviously this will vary from person to person, but in today's low interest environment it is difficult not to earn more on investments than you'd pay on interest rates.
I've decided to pay my mortgage off instead of getting higher returns elsewhere, and I do regret it sometimes. However, the feeling of knowing that I own the place where I live and no one can take it away from me (as long I keep paying for the taxes and maintenance, of course) is an enormous psychological benefit. Other people may not need that feeling as much as I do, and if they can be a bit more rational about it, I suppose just dumping that cash into VZ or T would be a much better decision than owning a house debt-free.
Nowadays, mortgage fees are extortionate; I was quoted $11,000 on a $130,000 condo purchase by Chase. Community banks and credit unions will offer less fees.
About whether to get a mortgage or use the money to invest elsewhere: obviously this will vary from person to person, but in today's low interest environment it is difficult not to earn more on investments than you'd pay on interest rates.
I've decided to pay my mortgage off instead of getting higher returns elsewhere, and I do regret it sometimes. However, the feeling of knowing that I own the place where I live and no one can take it away from me (as long I keep paying for the taxes and maintenance, of course) is an enormous psychological benefit. Other people may not need that feeling as much as I do, and if they can be a bit more rational about it, I suppose just dumping that cash into VZ or T would be a much better decision than owning a house debt-free.
"I wonder whether, say 60% down will make a difference on the rate."
It depends on your credit score, but you probably won't gain anything past 40% down. Rejection is less likely with more money down, which would help if George is right. You can see an example of how LTV affects rate here. It's a detail you can work out with the lender, and then get an official GFE to match the online GFE before you start your loan application.
We are in the process of refinancing to a 30-year mortgage with 75% LTV at 3.5% with no points, with closing costs at $2700 (plus pre-paids) through AIM Loan. Their 15-year rate is currently at 2.75%. For purchase rather than refinance, the closing costs would be higher for the inspector and lawyer, plus/minus an adjustment for difference in state laws.
It depends on your credit score, but you probably won't gain anything past 40% down. Rejection is less likely with more money down, which would help if George is right. You can see an example of how LTV affects rate here. It's a detail you can work out with the lender, and then get an official GFE to match the online GFE before you start your loan application.
We are in the process of refinancing to a 30-year mortgage with 75% LTV at 3.5% with no points, with closing costs at $2700 (plus pre-paids) through AIM Loan. Their 15-year rate is currently at 2.75%. For purchase rather than refinance, the closing costs would be higher for the inspector and lawyer, plus/minus an adjustment for difference in state laws.
Hi Jacob,
Do you mean to say that you would like to pay cash for the property and then apply for a home-equity line of credit (HELOC) on the property?
If that is the case, you would probably only need to pay for the solicitor's fee ($300) and, if required, an appraisal fee ($250).
I was able to get the solicitor's fee ($300 at my bank) waived because I am a bank employee. I didn't need to get an appraisal done because the property value that I had used in my application was based on the city's tax-assessed value of the property.
If you borrow against your home property and use it to invest, you'll get a better interest rate and I think you can write off the interest too.
The HELOC will give you more flexibility if you decide you would like to borrow to invest as the line is a revolving line.
Do you mean to say that you would like to pay cash for the property and then apply for a home-equity line of credit (HELOC) on the property?
If that is the case, you would probably only need to pay for the solicitor's fee ($300) and, if required, an appraisal fee ($250).
I was able to get the solicitor's fee ($300 at my bank) waived because I am a bank employee. I didn't need to get an appraisal done because the property value that I had used in my application was based on the city's tax-assessed value of the property.
If you borrow against your home property and use it to invest, you'll get a better interest rate and I think you can write off the interest too.
The HELOC will give you more flexibility if you decide you would like to borrow to invest as the line is a revolving line.
-
secretwealth
- Posts: 1948
- Joined: Mon Jun 27, 2011 3:31 am
-
George the original one
- Posts: 5406
- Joined: Wed Jul 28, 2010 3:28 am
- Location: Wettest corner of Orygun
With rates so low, I do not have a strong arugment for or against carrying a mortgage.
If you shop your loan through a few mortgage brokers, you can find a loan with competitive interest rates and relatively few fees. I've typically just payed for the property assessment.
You'll still pay title insurance, fund an escrow (property taxes / home owners insurance) and potentially for a real estate lawyer, but those expenses have nothing to do with the loan.
Bankrate.com has a nice table that gives a starting point for the rate you should be looking for. Jim Hobin is a good broker in the Chicagoland area, one people I know have done well with:
http://www.norkusteam.com/
The biggest overhead on the transaction is the real estate agent. I have not bought or sold enough property to have a good solution for getting rid of their cut. 6% hurts though.
If you shop your loan through a few mortgage brokers, you can find a loan with competitive interest rates and relatively few fees. I've typically just payed for the property assessment.
You'll still pay title insurance, fund an escrow (property taxes / home owners insurance) and potentially for a real estate lawyer, but those expenses have nothing to do with the loan.
Bankrate.com has a nice table that gives a starting point for the rate you should be looking for. Jim Hobin is a good broker in the Chicagoland area, one people I know have done well with:
http://www.norkusteam.com/
The biggest overhead on the transaction is the real estate agent. I have not bought or sold enough property to have a good solution for getting rid of their cut. 6% hurts though.
"The biggest overhead on the transaction is the real estate agent. I have not bought or sold enough property to have a good solution for getting rid of their cut." - Scott 2
The only ways I can think of are to buy for-sale-by-owner properties, use an agent that refunds part of their commission back to you (e.g., Redfin), or get a real estate license yourself.
The only ways I can think of are to buy for-sale-by-owner properties, use an agent that refunds part of their commission back to you (e.g., Redfin), or get a real estate license yourself.
-
George the original one
- Posts: 5406
- Joined: Wed Jul 28, 2010 3:28 am
- Location: Wettest corner of Orygun
> You'll still pay title insurance
Yes, no getting around that when getting a mortgage.
> fund an escrow (property taxes / home owners insurance)
It's possible to get a mortgage without escrow. My primary residence does not have an escrow account and I must directly pay the taxes and insurance.
> and potentially for a real estate lawyer
From what I've seen, the need for a lawyer is influenced by the state that you live in? In Oregon & Washington, I've never heard of a transaction involving a lawyer.
Yes, no getting around that when getting a mortgage.
> fund an escrow (property taxes / home owners insurance)
It's possible to get a mortgage without escrow. My primary residence does not have an escrow account and I must directly pay the taxes and insurance.
> and potentially for a real estate lawyer
From what I've seen, the need for a lawyer is influenced by the state that you live in? In Oregon & Washington, I've never heard of a transaction involving a lawyer.
-
jennypenny
- Posts: 6858
- Joined: Sun Jul 03, 2011 2:20 pm
>>From what I've seen, the need for a lawyer is influenced by the state that you live in?
Very true. In Pennsylvania, most people don't use lawyers. In NJ people always use lawyers. Escrows are not required here either. I think part of the reason it's hard to give real estate advice is because the customs and fees are so varied from state to state. Another reason is because you have to factor in all of the taxes within a state. My brother always rides me about how much I pay in real estate taxes compared to him (in NJ), but we pay MUCH lower taxes on everything else so I still think we come out ahead, but you have to factor it all into your decision.
Very true. In Pennsylvania, most people don't use lawyers. In NJ people always use lawyers. Escrows are not required here either. I think part of the reason it's hard to give real estate advice is because the customs and fees are so varied from state to state. Another reason is because you have to factor in all of the taxes within a state. My brother always rides me about how much I pay in real estate taxes compared to him (in NJ), but we pay MUCH lower taxes on everything else so I still think we come out ahead, but you have to factor it all into your decision.
-
jacob
- Site Admin
- Posts: 16002
- Joined: Fri Jun 28, 2013 8:38 pm
- Location: USA, Zone 5b, Koppen Dfa, Elev. 620ft, Walkscore 77
- Contact:
Every month those flashy ads you see in the sidebar pays me about $100 which goes to paypal. Since I'm loath to pay an n% fee to convert paypal money into real money; and since eBay is the only place I spend paypal money; and since I had some eBay bucks due to previously having spent money on eBay...I obviously "have to be" penny wise and pound foolish, so I made some acquisitions.
1) After the 10th (or so) attempt I "won" a vitamix. This was a long time want pending the previous blender giving up the ghost---which it did a couple of months ago. Wow! That's definitely a qualitative difference. No need to precut before blending and chew after blending. To preserve minimalist karma, we're getting rid of the breadmachine and the foodprocessor.
2) I also got a Kurt Road Machine (bicycle trainer). I'm not enough of a martial artist to commit 90 minutes of commuting to get to the nearest dojo (although I do do that for the job) and ditto for scheduled yacht racing (although the marina is about 1-1.5 miles away). So I've been lifting weights at home (I've been playing with the bruiser clubbell doing two-handed Gama casts) with no particular goal in mind. The last two sports I have (I seem to cycle between a bunch) are cycling and hockey. Hockey also requires a commitment, so cycling it is. I was kinda feeling that my heart rate was creeping over 60 again which is never a good feeling. Maybe later I'll do some long rides. Randonneuring might fit into the schedule.
3) The ERE book has now sold close to 7500 copies. Once again---and not entirely related to sales numbers---I'm motivated to write another one.
4) I recently discovered the GMO newsletters and Jeremy Grantham. Thanks M_. I've previously sworn off further attempts to save the world mainly because I don't believe that further education/information will make any difference(*). Finding ways to fix the problems through self-interest might work though. ERE was one way... is there another? Yes, perhaps non-judgmental investment commentary. I have a few other ways in mind as well.
(*) Ironically, JG runs a foundation where one of the stated goals is to educate.
5) ERE got a _positive_ (or at least neutral) mention in Forbes. Imagine that. Usually, there's always some snarky remark about sacrifice and suffering whenever it comes to saving, but not this time.
6) I think we've figured out the technical parts house buying issues (also helps that one of my coworkers is currently going through the process). There are two hard problems. Pulling the trigger (do we really want to stay in Chi-town?) and liquidating portfolios. After spending years finding good investments, it's tough to just sell them off to raise money. I'm still not too happy about funding the house with a mortgage.
1) After the 10th (or so) attempt I "won" a vitamix. This was a long time want pending the previous blender giving up the ghost---which it did a couple of months ago. Wow! That's definitely a qualitative difference. No need to precut before blending and chew after blending. To preserve minimalist karma, we're getting rid of the breadmachine and the foodprocessor.
2) I also got a Kurt Road Machine (bicycle trainer). I'm not enough of a martial artist to commit 90 minutes of commuting to get to the nearest dojo (although I do do that for the job) and ditto for scheduled yacht racing (although the marina is about 1-1.5 miles away). So I've been lifting weights at home (I've been playing with the bruiser clubbell doing two-handed Gama casts) with no particular goal in mind. The last two sports I have (I seem to cycle between a bunch) are cycling and hockey. Hockey also requires a commitment, so cycling it is. I was kinda feeling that my heart rate was creeping over 60 again which is never a good feeling. Maybe later I'll do some long rides. Randonneuring might fit into the schedule.
3) The ERE book has now sold close to 7500 copies. Once again---and not entirely related to sales numbers---I'm motivated to write another one.
4) I recently discovered the GMO newsletters and Jeremy Grantham. Thanks M_. I've previously sworn off further attempts to save the world mainly because I don't believe that further education/information will make any difference(*). Finding ways to fix the problems through self-interest might work though. ERE was one way... is there another? Yes, perhaps non-judgmental investment commentary. I have a few other ways in mind as well.
(*) Ironically, JG runs a foundation where one of the stated goals is to educate.
5) ERE got a _positive_ (or at least neutral) mention in Forbes. Imagine that. Usually, there's always some snarky remark about sacrifice and suffering whenever it comes to saving, but not this time.
6) I think we've figured out the technical parts house buying issues (also helps that one of my coworkers is currently going through the process). There are two hard problems. Pulling the trigger (do we really want to stay in Chi-town?) and liquidating portfolios. After spending years finding good investments, it's tough to just sell them off to raise money. I'm still not too happy about funding the house with a mortgage.
-
secretwealth
- Posts: 1948
- Joined: Mon Jun 27, 2011 3:31 am
The thing I miss most when we travel is my vita-mix. I love it. I grind up the twenty healthiest vegetables all together about once a week to make a bucketful of synergy-gruel. Doll it out in yogurt containers and eat it rather than ice cream throughout the week.
Not to burst your bubble but.... you can transfer money from paypal to your bank account for free. Or you can get a free Paypal debit mastercard and earn 1% cashback every time you use it.
Not to burst your bubble but.... you can transfer money from paypal to your bank account for free. Or you can get a free Paypal debit mastercard and earn 1% cashback every time you use it.
@secretwealth: Not sure I believe it's free money. It's also not without risk, though I'm not arguing whether it's worthwhile (it probably is). You assume inflation will stay the same, effectively making your r < 0. But deflation can occur. And you are also assuming that your investments will outperform your mortgage interest rate. All of this is plausible, but I rarely see anyone consider this without thinking of the risk involved.
-
jennypenny
- Posts: 6858
- Joined: Sun Jul 03, 2011 2:20 pm
Do you have to sell assets to fund most of the purchase? What are the tax consequences of that? Have you run the numbers both ways to see how much a cash purchase would cost you? On one hand you have the tax hit selling the assets, but no fees with a mortgage. OTOH, you have mortgage fees, but you avoid taxes on gains and you can deduct mortgage interest lowering your taxes further. This could be a lot depending on your bracket.
Maybe you could get a 10 or 15 yr mortgage. Pay off the loan over the next few years. You could use tax loss harvesting to offset gains each year. (haha, do you ever have losses?) You can also use the mortgage tax deduction to offset gains. Then you have a few years to sell off/pay off so you can time things a little.
Am I even making sense? (I'm on the road today.)
#3 makes me happy. I noticed your FB keeps climbing also.
Maybe you could get a 10 or 15 yr mortgage. Pay off the loan over the next few years. You could use tax loss harvesting to offset gains each year. (haha, do you ever have losses?) You can also use the mortgage tax deduction to offset gains. Then you have a few years to sell off/pay off so you can time things a little.
Am I even making sense? (I'm on the road today.)
#3 makes me happy. I noticed your FB keeps climbing also.
