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(Time)   Fannie and Freddie may reconcile in an effort to kill the thirty-year mortgage   (business.time.com) divider line 79
    More: Scary, Freddie Mac, Fannie and Freddie, FHA, guarantors, savings and loan crisis, fixed rate, total return, BPC  
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4688 clicks; posted to Business » on 04 Mar 2013 at 12:10 PM (1 year ago)   |  Favorite    |   share:  Share on Twitter share via Email Share on Facebook   more»



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2013-03-04 12:23:18 PM
FTA:

The BPC framework would also require issuers of mortgage-backed securities to purchase private insurance, so that the government guarantor would only have to step in in the case of a total real estate market meltdown, similar to the one we experienced in 2008.


That sounds like a great idea, Credit Default Swaps for all!  Let's require it and create another few AIGs
 
2013-03-04 12:25:54 PM
Forgive me, but why is this scary?
 
2013-03-04 12:30:03 PM
Meaningless column is without meaningfulness.
 
2013-03-04 12:31:59 PM
Because Barney Frank and the Community Reinvestment Act and booga booga government caused the financial crisis. Also, greedy homeowners and not the towering derivatives market that bet against them.
 
2013-03-04 12:34:24 PM
FTA:  On top of that, lenders have to deal with prepayment risk, the risk that a borrower will pay back the mortgage before its due, reducing the total return of the investment.

True story, my dad went to the bank and asked what the payoff price was for his mortgage, they gave him the number and how much it was going to cost to prepay (a percentage of the 68k balance). He wrote out a check for $100 less then the pay off figure, then went back the next day and paid the $100 and the prepayment was based on the $100 instead of the 68k.
 
2013-03-04 12:54:10 PM
I know the article compares this to Canada, but I do wonder if the average property value and wage level in Canada is higher?

\currently looking for a house
\\in our medium-sized city, houses that are crappy start at 200k
\\\four miles outside city limits, houses that are spectacular start at 190k
\\\\guess what we can't find
 
2013-03-04 12:55:57 PM

cig-mkr: FTA:  On top of that, lenders have to deal with prepayment risk, the risk that a borrower will pay back the mortgage before its due, reducing the total return of the investment.

True story, my dad went to the bank and asked what the payoff price was for his mortgage, they gave him the number and how much it was going to cost to prepay (a percentage of the 68k balance). He wrote out a check for $100 less then the pay off figure, then went back the next day and paid the $100 and the prepayment was based on the $100 instead of the 68k.


If they didnt have the ability to conjur money out of thin air they wouldnt CARE if you paid it back early, they'd just reloan the money to someone else - heck they might even encourage the behavior so they could get all those loan initiation fees going again.  As things stand now they're loaning out several orders of magnitude more money than they have securities against so when you cut their gravy train a bit short they want to insure they get still get that money.

Personally (assuming the option existed - as it does now) I would never sign a loan with a prepayment penalty.  Or barring that, do what your dad did ;)
 
2013-03-04 01:01:29 PM
Because they know people will never see the ends of these mortgages.
And they want to steal as much money as quickly as possible, not over the long term.
 
2013-03-04 01:09:46 PM

Fizpez: If they didnt have the ability to conjur money out of thin air they wouldnt CARE if you paid it back early, they'd just reloan the money to someone else - heck they might even encourage the behavior so they could get all those loan initiation fees going again. As things stand now they're loaning out several orders of magnitude more money than they have securities against so when you cut their gravy train a bit short they want to insure they get still get that money.


They do care because even though they tack on all the fees to the closing costs, the interest on a loan is free money to them.  They don't like it when anything gets in the way of free money.  Second, most banks don't hold onto the mortgages they create, so when someone pays off a loan early the loss has to come from somewhere.  A bunch of people paying off loans can be just as damaging to a security's risk assessment as a bunch of people defaulting unless the bank backs the security -- except it doesn't.  The mortgage backs the security; hence, mortgage-backed security.  This guy is pissing his pants over early payoffs because some consumers are savvy enough NOT to be assraped by mortgages for 30 years.  Here's where it's time to give the banks the effin' finger and author needs to STFU.  It's not "risk" in the sense that the banks can potentially lose money.  They charge all the servicing fees up front.  Once the deal is signed and the mortgage sold, there's no risk.  The only risk is within the mortgage-backed security market and pardon the fruity farts from my hairy white ass if I don't care what happens to that.

Honestly, people are still trying to muster sympathy for assholes who want to eliminate risk from a risk-based pricing system?  They want their 15% annual returns AND they want others to bear the brunt of the risk?  Fark you.
 
2013-03-04 01:11:31 PM

dragonchild: Second, most banks don't hold onto the mortgages they create, so when someone pays off a loan early the loss has to come from somewhere.


Er, so my point is that if people pay off their mortgages early, that makes the mortgages "risky" to investors and thus the banks can't sell them off at a premium.  Boo effin' hoo.
 
2013-03-04 01:43:21 PM
Didn't bundling and selling off the mortgages to another bank kind of bit them in the ass? I remember reading about a woman being foreclosed on, asked for the original paperwork, and the banks couldn't come up with it, so they couldn't foreclose?
 
2013-03-04 01:54:05 PM
To be fair, 30 year mortgages are retarded.
 
2013-03-04 01:54:22 PM
I have a question, in the scenario based of the Canadian model and the insurance backing, would that allow more people to get loans, even higher risk since there is allowance for adjustments every 5 years? Wouldn't this spur the market?

To me, this does not sound like such a bad idea, but this is not an area I have any expertise or have ever really thought too much about.
 
2013-03-04 01:58:17 PM

cig-mkr: Didn't bundling and selling off the mortgages to another bank kind of bit them in the ass? I remember reading about a woman being foreclosed on, asked for the original paperwork, and the banks couldn't come up with it, so they couldn't foreclose?


There probably needs to be some stricter standards as far as what you can do with debt, if not an outright ban on the loan originator being able to sell it in the first place. "Debt as an asset" is poisonous thinking.
 
2013-03-04 02:05:53 PM
For all the reasons listed above, banks just don't like to make such long commitments without being able to adjust the interest rates they charge customers, or prohibiting prepayment.
Aren't government and business bonds similar in that the rates don't change over time, but are also on the 20-30 year time frame?

/we have a 30 year fixed, paying biweekly.
//will pay it off a few years early
 
2013-03-04 02:15:34 PM

jigger: To be fair, 30 year mortgages are retarded.


Why?
 
2013-03-04 02:36:53 PM

Sergeant Grumbles: cig-mkr: Didn't bundling and selling off the mortgages to another bank kind of bit them in the ass? I remember reading about a woman being foreclosed on, asked for the original paperwork, and the banks couldn't come up with it, so they couldn't foreclose?

There probably needs to be some stricter standards as far as what you can do with debt, if not an outright ban on the loan originator being able to sell it in the first place. "Debt as an asset" is poisonous thinking.


Debt to you is an asset to someone else.  How else would you account for it?
 
2013-03-04 03:00:28 PM

whizbangthedirtfarmer: I know the article compares this to Canada, but I do wonder if the average property value and wage level in Canada is higher?

\currently looking for a house
\\in our medium-sized city, houses that are crappy start at 200k
\\\four miles outside city limits, houses that are spectacular start at 190k
\\\\guess what we can't find


Lots of people in Canada head south of the border for a higher salary.  Having said that, we have a minimum wage just over $10 per hour.  Unsurprisingly, then, wages in Canada are probably best described as flatter.

I'm always floored when I read about people in the States earning ~$2/hour, even for unskilled work, or waitressing etc. Yeah, I know, we probably pay more taxes etc etc.

I can tell you, though, that whatever wages in Canada are like they haven't stopped home prices from rising a ridiculous amount (doubled or more since 2000).
 
2013-03-04 03:09:19 PM

dragonchild: They charge all the servicing fees up front.


One of which is the 'points'. If you pay-off early, that's free money to the bank.
 
Ant
2013-03-04 03:22:26 PM
If home prices weren't still so over inflated, getting rid of the 30 year mortgage wouldn't be so bad.
 
2013-03-04 03:24:52 PM

Muta: jigger: To be fair, 30 year mortgages are retarded.

Why?


Because if you have to, a 15 is where it's at.


All transactions in one's life should be cash. F' being a slave to the lenders.
 
2013-03-04 03:31:52 PM

Ant: If home prices weren't still so over inflated, getting rid of the 30 year mortgage wouldn't be so bad.


Isn't that the motivation to get rid of it?  To lower prices that are too high?

We had 40 year mortgages for a short period a few years ago....unbelievable.
 
2013-03-04 03:41:14 PM

TheAlgebraist: whizbangthedirtfarmer: I know the article compares this to Canada, but I do wonder if the average property value and wage level in Canada is higher?

\currently looking for a house
\\in our medium-sized city, houses that are crappy start at 200k
\\\four miles outside city limits, houses that are spectacular start at 190k
\\\\guess what we can't find

Lots of people in Canada head south of the border for a higher salary.  Having said that, we have a minimum wage just over $10 per hour.  Unsurprisingly, then, wages in Canada are probably best described as flatter.

I'm always floored when I read about people in the States earning ~$2/hour, even for unskilled work, or waitressing etc. Yeah, I know, we probably pay more taxes etc etc.

I can tell you, though, that whatever wages in Canada are like they haven't stopped home prices from rising a ridiculous amount (doubled or more since 2000).


The Canadian market has reached the peak of the bubble and it's only now starting to swing the other way.  http://www.greaterfool.ca/

It's similar to the US, artificially low interest rates and some relaxing of mortgage rules caused the bubble. I don't think it's going to be as bad as the US but it's screwing with a lot of people my age who want to buy their first home.

The condo markets are going to die a horrible death however.
 
2013-03-04 04:06:26 PM

Muta: jigger: To be fair, 30 year mortgages are retarded.

Why?


Even calculate the amount repaid over the life of a mortgage going for 15 years vs one going for 30?  Its astronomical how much more you're paying for the privilege of borrowing money from the bank.  Now there's some people who really must buy that high-end house right off the bat and are willing to pay the banks a very heavy premium over a long period of time to do so, but we come back to the original statement:  That's retarded :)

If I can I'm aiming to have one no more then 10 years myself but I know that sort of setup is rare so I'd be willing to do 15 or even start with a 20 if they allow for over-payments.  Seriously though if you've never calculated the total cost of mortgages and played with the amount of years involved you really outta, it certainly changed my perception to see the raw numbers splayed out like that.

/Probably the most useful thing I took away from a grade 12 math course I had to take a few years back
//yes, I have a GED in financing :P
///not really
 
2013-03-04 04:09:04 PM

cig-mkr: Didn't bundling and selling off the mortgages to another bank kind of bit them in the ass? I remember reading about a woman being foreclosed on, asked for the original paperwork, and the banks couldn't come up with it, so they couldn't foreclose?


It didn't bite the company that sold the mortgage. As a matter of fact, in that scenario, it makes sense to bundle and sell the mortgage as quickly as possible before the paperwork gets lost.
 
2013-03-04 04:41:26 PM
It's my understanding that most mortgages around San Francisco are about 70 years in length.  Basically, they never expect to actually pay off the house.

If only shorter-term mortgages are considered, then what will that Bay Area bursting bubble sound like?
 
2013-03-04 04:49:01 PM
Let's break down the logic here and see why "banking" as it exists now is based on lies and sham-math.

"A bank that makes such a loan has not only to deal with the risk that a borrower may not re-pay in full, but also the risk that interest rate fluctuations impose on the investment."

1) When interest rates rise, a bank can't pass that cost on to borrowers because the rate is fixed."  This is crap logic because although it's true, it relies on a false assumption - that they ever should be able to do this.  You lend me x at y% today because that is today's rate - that is all you are ever entitled to.  Plus since the bank is borrowing that money from other lendors at a fixed rate why should they be entitled to earn more later on?

2) "On top of that, lenders have to deal with prepayment risk, the risk that a borrower will pay back the mortgage before its due, reducing the total return of the investment."  More crap logic relying on the assumption that this is something they are entitled to.  The only reason interest exists is because it's the bank's money you are using, not your own.  They get the annual % as a fee for use, but as soon as you pay it back, they have it to lend to someone else - and it ELIMINATES THEIR RISK OF LOSS.  If a bank sees early repayment as anything but GOOD thing, then you know they are up to shady hijinks and aren't to be trusted.
 
2013-03-04 04:52:13 PM

cefm: 1) When interest rates rise, a bank can't pass that cost on to borrowers because the rate is fixed." This is crap logic because although it's true, it relies on a false assumption - that they ever should be able to do this.


Not to mention interest rates can also go DOWN, in which case it's the borrower that gets screwed.  These people really are oblivious to any sense of fairness, aren't they?
 
2013-03-04 05:00:49 PM

dragonchild: cefm: 1) When interest rates rise, a bank can't pass that cost on to borrowers because the rate is fixed." This is crap logic because although it's true, it relies on a false assumption - that they ever should be able to do this.

Not to mention interest rates can also go DOWN, in which case it's the borrower that gets screwed.  These people really are oblivious to any sense of fairness, aren't they?


A borrower has the option to refinance the loan if rates go down. The lender does not have the option of refinancing the loan as rates go up. While there are costs associated with refinancing, it's an advantage the borrower has that the lender does not.
 
2013-03-04 05:01:53 PM

hogans: It's my understanding that most mortgages around San Francisco are about 70 years in length.  Basically, they never expect to actually pay off the house.

If only shorter-term mortgages are considered, then what will that Bay Area bursting bubble sound like?


70 years? Where did you hear this?
 
2013-03-04 05:04:25 PM

BumpInTheNight: Muta: jigger: To be fair, 30 year mortgages are retarded.

Why?

Even calculate the amount repaid over the life of a mortgage going for 15 years vs one going for 30?  Its astronomical how much more you're paying for the privilege of borrowing money from the bank.  Now there's some people who really must buy that high-end house right off the bat and are willing to pay the banks a very heavy premium over a long period of time to do so, but we come back to the original statement:  That's retarded :)

If I can I'm aiming to have one no more then 10 years myself but I know that sort of setup is rare so I'd be willing to do 15 or even start with a 20 if they allow for over-payments.  Seriously though if you've never calculated the total cost of mortgages and played with the amount of years involved you really outta, it certainly changed my perception to see the raw numbers splayed out like that.

/Probably the most useful thing I took away from a grade 12 math course I had to take a few years back
//yes, I have a GED in financing :P
///not really


The trick is to get a 30 year mortgage and pay it off at the rate of the 15 year mortgage, with every other payment going towards the principle.
 
2013-03-04 05:05:49 PM

WhiskeySticks: Muta: jigger: To be fair, 30 year mortgages are retarded.

Why?

Because if you have to, a 15 is where it's at.


All transactions in one's life should be cash. F' being a slave to the lenders.


Wow. I wish I had your job.
 
2013-03-04 05:12:48 PM

BumpInTheNight: Muta: jigger: To be fair, 30 year mortgages are retarded.

Why?

Even calculate the amount repaid over the life of a mortgage going for 15 years vs one going for 30?  Its astronomical how much more you're paying for the privilege of borrowing money from the bank.  Now there's some people who really must buy that high-end house right off the bat and are willing to pay the banks a very heavy premium over a long period of time to do so, but we come back to the original statement:  That's retarded :)

If I can I'm aiming to have one no more then 10 years myself but I know that sort of setup is rare so I'd be willing to do 15 or even start with a 20 if they allow for over-payments.  Seriously though if you've never calculated the total cost of mortgages and played with the amount of years involved you really outta, it certainly changed my perception to see the raw numbers splayed out like that.

/Probably the most useful thing I took away from a grade 12 math course I had to take a few years back
//yes, I have a GED in financing :P
///not really


Look up time value of money, find out why you are dumb. The NPV of paying off a mortgage early is almost certainly negative. I will borrow all the money I can at a 3% rate
 
2013-03-04 05:13:36 PM
On top of that, lenders have to deal with prepayment risk, the risk that a borrower will pay back the mortgage before its due, reducing the total return of the investment.

Banks ought to love when that happens. Every time I make an extra payment, I'm decreasing their potential loss, and increasing the profit they would make if I were to foreclose. What would you rather have, a guy foreclose on his house after making minimum payments for five years, and he still owes 90% of the balance, or a guy who made a double payment every three months and owes 60%? You can still sell the house for full market value. In the second case, you're keeping all those double payments and making a huge profit. I have never understood why banks don't love foreclosures on houses that have paid down most of the balance. They would get paid twice for the same house. I'm actually terrified that my bank is going to wait until I have paid 95% of my mortgage off, and then try to zip in and steal my house from me if I am one day late on a single payment. "YOU HAVE BROKEN THE TERMS OF THE MORTGAGE CONTRACT. FORECLOSE NOW!!! WE SELL YOUR HOUSE AND YOU LOSE EVERYTHING!"
 
2013-03-04 05:21:51 PM
You're the jerk... jerk:

Look up time value of money, find out why you are dumb. The NPV of paying off a mortgage early is almost certainly negative. I will borrow all the money I can at a 3% rate

No, the 15 year is usually the better choice.  This guy seems to have a handle on things (and deals with your objection pretty well).

http://michaelbluejay.com/house/15vs30.html
 
2013-03-04 05:24:26 PM

dovebreast: Wow. I wish I had your job.


It's not that hard. Set up a budget and stick to it. You'll be amazed at how fast you can
A) pay off your current debt
B) save cash
C) buy things you want without having banks go in your backdoor dry

Do what you need to do in the mean time...work 2 jobs. Deliver pizza, tend bar, wait tables...second jobs with cash in hand situations are a big bonus. It sucks busting your hump in the present (been doing the 2 jobs thing for 10 years now, 7 of those were when I was in college), but in the future when you're living in a house that's paid off, driving a pre-owned car that's paid off and taking vacations that paid in cash, you'll thank yourself while your neighbor is paying just for the privilege of borrowing money for a house he can't really afford.

Don't live beyond your means and stick to a budget. Look up Dave Ramsey. His way of thinking can really help a person get sh*t turned around if you can get past his occasional Jesus mumbo jumbo.

Not buying a house a few years ago was the smartest move I could have made.
 
2013-03-04 05:29:17 PM

You're the jerk... jerk: Look up time value of money, find out why you are dumb. The NPV of paying off a mortgage early is almost certainly negative. I will borrow all the money I can at a 3% rate


I think you'll have to explain yourself a little better then dropping the official term for calculating the final worth of an investment or cost of a loan while simultaneously denouncing efforts to reduce the net cost of a loan.  Unless you know how to make money grow fast then 3%/year, one that doesn't involve investing it in things that are due to be heavily devalued in the near future (housing market in Canada).  I am all ears though, this is big cash and I'm genuinely interested in making the best move when I do.
 
2013-03-04 05:32:50 PM

blorpen: hogans: It's my understanding that most mortgages around San Francisco are about 70 years in length.  Basically, they never expect to actually pay off the house.

If only shorter-term mortgages are considered, then what will that Bay Area bursting bubble sound like?

70 years? Where did you hear this?


I can't speak for hogans, but I've lived in the Bay Area my whole life, and this thread is the first I've heard of a 70-year mortgage.  So I'm going to guess that it's some kind of stupid hoax.
 
2013-03-04 05:35:12 PM
All I know is that my mortgage is almost double when you add on property taxes and all the other crap.
 
2013-03-04 05:46:09 PM

BumpInTheNight: You're the jerk... jerk: Look up time value of money, find out why you are dumb. The NPV of paying off a mortgage early is almost certainly negative. I will borrow all the money I can at a 3% rate

I think you'll have to explain yourself a little better then dropping the official term for calculating the final worth of an investment or cost of a loan while simultaneously denouncing efforts to reduce the net cost of a loan.  Unless you know how to make money grow fast then 3%/year, one that doesn't involve investing it in things that are due to be heavily devalued in the near future (housing market in Canada).  I am all ears though, this is big cash and I'm genuinely interested in making the best move when I do.


The simple math of adding up all the payments of a 10 year note and a 30 year note and seeing the 10 year is a smaller number does not tell the whole story. Inflation means that those dollars paid over the 10 and 30 year terms are not of the same value.

When you take a fixed rate mortgage, the principle plus interest payment is locked in. If your principle plus interest payment is $1000, it will be $1000 for all 360 payments on a 30 year note. In 10 years, that $1000 will only be approximately worth $740 in future value dollars assuming 3% inflation. In twenty years that $1000 payment will be valued at around $550, and only about $400 when you make the last payment. Being able to pay back a loan with money that is less valuable is a big advantage for the borrower.
 
2013-03-04 05:52:55 PM
Can I threadjack and say that Mortgage Insurance is the big scam? $104/mo. I pay to ensure that the bank gets at least 20% repayment in the case of default, until I get equity of 20% of the price of the loan. A 20% threshold I could get to a lot faster if I wasn't paying $104/mo.
 
2013-03-04 05:56:20 PM

astro716: A 20% threshold I could get to a lot faster if I wasn't paying $104/mo.


You could have gotten to it even faster by saving the 20% before buying the house in the first place....
 
2013-03-04 05:58:22 PM

max_pooper: The simple math of adding up all the payments of a 10 year note and a 30 year note and seeing the 10 year is a smaller number does not tell the whole story. Inflation means that those dollars paid over the 10 and 30 year terms are not of the same value.

When you take a fixed rate mortgage, the principle plus interest payment is locked in. If your principle plus interest payment is $1000, it will be $1000 for all 360 payments on a 30 year note. In 10 years, that $1000 will only be approximately worth $740 in future value dollars assuming 3% inflation. In twenty years that $1000 payment will be valued at around $550, and only about $400 when you make the last payment. Being able to pay back a loan with money that is less valuable is a big advantage for the borrower.


Very solid points, but there's still two outstanders though which I'm thinking sway it back in favour:  360K over 30 years sounds like a loan on 240K at this magic %3.0 fixed rate, that'd mean I'm agreeing to pay a %50 premium on that loan, that's a heavy hit and I've just devalued my net worth quite a bit in the process.  Meanwhile on a 15 year loan for 240K the total cost is 300K, I've saved 60K by paying it off quicker.  Now, what if that 60K saved is invested in something snazzy like an RSSP or RESP (gonna have kids too right?), how much can I fight the offset of inflation using those two strategies in tandem and is that wiser then spending 120K to borrow 240K in the first place.
 
2013-03-04 06:01:36 PM

Freudian_slipknot: astro716: A 20% threshold I could get to a lot faster if I wasn't paying $104/mo.

You could have gotten to it even faster by saving the 20% before buying the house in the first place....


It's true, and I wouldn't have to pay any interest if I had just saved up 100%.

Look, I had a choice to keep renting and save less on average because rent adjusts each year, and put 20% down with future mystery rates, or buy with 10% down at low rates and deal with PMI. On the whole, I think I made the right call. Doesn't make PMI any less of a scam.
 
2013-03-04 06:03:16 PM

BumpInTheNight: max_pooper: The simple math of adding up all the payments of a 10 year note and a 30 year note and seeing the 10 year is a smaller number does not tell the whole story. Inflation means that those dollars paid over the 10 and 30 year terms are not of the same value.

When you take a fixed rate mortgage, the principle plus interest payment is locked in. If your principle plus interest payment is $1000, it will be $1000 for all 360 payments on a 30 year note. In 10 years, that $1000 will only be approximately worth $740 in future value dollars assuming 3% inflation. In twenty years that $1000 payment will be valued at around $550, and only about $400 when you make the last payment. Being able to pay back a loan with money that is less valuable is a big advantage for the borrower.

Very solid points, but there's still two outstanders though which I'm thinking sway it back in favour:  360K over 30 years sounds like a loan on 240K at this magic %3.0 fixed rate, that'd mean I'm agreeing to pay a %50 premium on that loan, that's a heavy hit and I've just devalued my net worth quite a bit in the process.  Meanwhile on a 15 year loan for 240K the total cost is 300K, I've saved 60K by paying it off quicker.  Now, what if that 60K saved is invested in something snazzy like an RSSP or RESP (gonna have kids too right?), how much can I fight the offset of inflation using those two strategies in tandem and is that wiser then spending 120K to borrow 240K in the first place.


Except that a 10 year note and a 30 year note will not have the same monthly payments. A $100,000 10 year mortgage at 3% interest will be around $1010 per month. The same amount on a 30 year note at 4% will be around $480 per month.

\Interest rates on those loans were just guessed, I don't know what the current rate is for those two terms.
 
2013-03-04 06:06:20 PM

Roc Brasiliano: You're the jerk... jerk:

Look up time value of money, find out why you are dumb. The NPV of paying off a mortgage early is almost certainly negative. I will borrow all the money I can at a 3% rate

No, the 15 year is usually the better choice.  This guy seems to have a handle on things (and deals with your objection pretty well).

http://michaelbluejay.com/house/15vs30.html


This calculation assumes a ridiculously low return on investment (5.25%) and a very high interest rate (5.75%) of course it is going to come out on the wrong end. The long term average return on a investments is about 10%, interest rates in the US right now are under 4%. If for some reason you expect the return to get about half the long term average and you pay 40% more than the average person for your mortgage it makes sense. He also says "you have to be diligent about investing" this assumes the time value of money only applies to investing, not to other activities. An incorrect assumption


BumpInTheNight: You're the jerk... jerk: Look up time value of money, find out why you are dumb. The NPV of paying off a mortgage early is almost certainly negative. I will borrow all the money I can at a 3% rate

I think you'll have to explain yourself a little better then dropping the official term for calculating the final worth of an investment or cost of a loan while simultaneously denouncing efforts to reduce the net cost of a loan.  Unless you know how to make money grow fast then 3%/year, one that doesn't involve investing it in things that are due to be heavily devalued in the near future (housing market in Canada).  I am all ears though, this is big cash and I'm genuinely interested in making the best move when I do.


Your mortgage is 15 (or 30) years. Why would you consider short term solutions? Just invest in a diversified portfolio (ETFs or no load mortgages).
 
2013-03-04 06:07:59 PM

BumpInTheNight: max_pooper: The simple math of adding up all the payments of a 10 year note and a 30 year note and seeing the 10 year is a smaller number does not tell the whole story. Inflation means that those dollars paid over the 10 and 30 year terms are not of the same value.

When you take a fixed rate mortgage, the principle plus interest payment is locked in. If your principle plus interest payment is $1000, it will be $1000 for all 360 payments on a 30 year note. In 10 years, that $1000 will only be approximately worth $740 in future value dollars assuming 3% inflation. In twenty years that $1000 payment will be valued at around $550, and only about $400 when you make the last payment. Being able to pay back a loan with money that is less valuable is a big advantage for the borrower.

Very solid points, but there's still two outstanders though which I'm thinking sway it back in favour:  360K over 30 years sounds like a loan on 240K at this magic %3.0 fixed rate, that'd mean I'm agreeing to pay a %50 premium on that loan, that's a heavy hit and I've just devalued my net worth quite a bit in the process.  Meanwhile on a 15 year loan for 240K the total cost is 300K, I've saved 60K by paying it off quicker.  Now, what if that 60K saved is invested in something snazzy like an RSSP or RESP (gonna have kids too right?), how much can I fight the offset of inflation using those two strategies in tandem and is that wiser then spending 120K to borrow 240K in the first place.



60k thirty years from now is not the same as 60k today. You have to discount the value of the money in the future to account for this difference. It is typical for people to use a 9-10% rate for personal finances to account for long term stock market gains, but you can use shorter terms if you want.
 
2013-03-04 06:08:21 PM

astro716: Freudian_slipknot: astro716: A 20% threshold I could get to a lot faster if I wasn't paying $104/mo.

You could have gotten to it even faster by saving the 20% before buying the house in the first place....

It's true, and I wouldn't have to pay any interest if I had just saved up 100%.

Look, I had a choice to keep renting and save less on average because rent adjusts each year, and put 20% down with future mystery rates, or buy with 10% down at low rates and deal with PMI. On the whole, I think I made the right call. Doesn't make PMI any less of a scam.


It's not a scam. It's not always the most advantageous to the borrower since it is paid by the borrower to protect the lender. It's the price you pay to get a loan when you don't have enough down payment to generate the necessary equity to mitigate the risk of the loan. It's really no different than a bank requiring a full coverage for a car loan.
 
2013-03-04 06:10:01 PM

max_pooper: Except that a 10 year note and a 30 year note will not have the same monthly payments. A $100,000 10 year mortgage at 3% interest will be around $1010 per month. The same amount on a 30 year note at 4% will be around $480 per month.

\Interest rates on those loans were just guessed, I don't know what the current rate is for those two terms.


The monthly payments don't concern me and I can foot the higher $1700/month on a 15 year loan against 240K at 3%, especially once my sig-other is done school and we're both contributing to it rather then me paying for both it and her schooling.  My job is about as stable as they get so I'm not worried about protecting myself from trouble like that (but I'm aware that I'm very lucky in that regard).  I'm just interested in coming out ahead and I've got the means to take either choice.

(Btw that link a few posts above had a handy interest vs loan size calculator that pits the 15 against the 30, useful for getting some quick numbers on things)
 
2013-03-04 06:12:53 PM

You're the jerk... jerk: Your mortgage is 15 (or 30) years. Why would you consider short term solutions? Just invest in a diversified portfolio (ETFs or no load mortgages).


I'm not touching stocks with a ten foot pole, clearly people haven't learned from the last time :P  Now stocks with dividends though are a little different but even then I'm not a gambler and I don't want to feed into that system at all.  I know you could make out well, but no, the system isn't what it was even 5 years ago and it will never be good for the little guy except by sheer luck ever again.
 
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