Debt. Good, bad, or whatever?

[BuddyLee]

Originally Posted by Silver14

You may want to read up on amortization schedules.

https://www.bankrate.com/calculators...alculator.aspx
"Initially, most of your payment goes toward the interest rather than the principal. The loan amortization schedule will show as the term of your loan progresses, a larger share of your payment goes toward paying down the principal until the loan is paid in full at the end of your term."




What happens to most does not happen to all. I agree with the general idea of your post but not the absolutes. Statistically there will be outliers that will not spend the extra money.

That was my point and I may not have said it well. One begins with a 30 year 5% mortgage paying mostly interest at the beginning. Then after 10 years refinances at 30 years at 3%. Now back to paying almost interest only in the beginning, is there really any overall gain? In effect you have a 40 year loan. Thirty years at 5% and a new 30 year at 3% and all of the time you have paid mostly interest and not much toward the principle.

[Silver14]

Originally Posted by BuddyLee

That was my point and I may not have said it well. One begins with a 30 year 5% mortgage paying mostly interest at the beginning. Then after 10 years refinances at 30 years at 3%. Now back to paying almost interest only in the beginning, is there really any overall gain? In effect you have a 40 year loan. Thirty years at 5% and a new 30 year at 3% and all of the time you have paid mostly interest and not much toward the principle.

I think you said it just fine, I got the gist of it. One of the great things about the internet is all the financial calculators available. Anyone interested in seeing the difference has all the tools available to them to crunch the numbers to see what makes the most financial sense for them

[pyroguy]

Originally Posted by Silver14

You may want to read up on amortization schedules.

https://www.bankrate.com/calculators...alculator.aspx
"Initially, most of your payment goes toward the interest rather than the principal. The loan amortization schedule will show as the term of your loan progresses, a larger share of your payment goes toward paying down the principal until the loan is paid in full at the end of your term."




What happens to most does not happen to all. I agree with the general idea of your post but not the absolutes. Statistically there will be outliers that will not spend the extra money.

My wife has a long history in the mortgage industry and I have done my research. Interest appears front loaded because there is a larger amount of principle due. The fact is that they give you a payment to pay back and the lower the principle gets the lower the interest will impact your payment.

As for the absolutes, I’m trying to speak as a statistical statement. Yes there are outliers. Those that do “beat the system” are so minimal that it is fair to speak pretty absolute though. What I’ve been fortunate to find is a method explained by someone who is fabulously wealthy now and has become so by trying to teach others how to do what he did to become so wealthy so they can be to. From research done from him and others on how to become rich, the fastest, most stable way to do so is to eliminate debt, live within your means, and save money in good investment platforms. Most millionaires did not inherit their money or win it in a lottery, they earned it.

Also, a millionaire by dictionary definition and not politician definition, is someone who has a net worth of one million or more dollars. Without going into politics, the whole class warfare stuff is quite sad.

[Silver14]

Originally Posted by pyroguy

My wife has a long history in the mortgage industry and I have done my research. Interest appears front loaded because there is a larger amount of principle due. The fact is that they give you a payment to pay back and the lower the principle gets the lower the interest will impact your payment.

As for the absolutes, I’m trying to speak as a statistical statement. Yes there are outliers. Those that do “beat the system” are so minimal that it is fair to speak pretty absolute though. What I’ve been fortunate to find is a method explained by someone who is fabulously wealthy now and has become so by trying to teach others how to do what he did to become so wealthy so they can be to. From research done from him and others on how to become rich, the fastest, most stable way to do so is to eliminate debt, live within your means, and save money in good investment platforms. Most millionaires did not inherit their money or win it in a lottery, they earned it.

That's cool, so do I! Lots of interesting stuff about mortgages.

"A mortgage doesn’t pay interest first and then principle later. A mortgage is the same amount of interest no matter what part of the term you’re in."

Maybe we're having a semantic miscommunication, but the wording of this made it sound like each payment has the same $ amount of interest. I don't think there's any disagreement about how a fixed rate mortgage is calculated.

Will you share the statistics you are referencing? Sounds like interesting stuff to read.

[KenKat]

Originally Posted by pyroguy

KenKat, I will politely disagree that a big 401k and mortgage beats paid for house and small 401k. If you became strapped and needed money you could always sell your house and rent or move down in house. Is it easy or quick to do? No. However, if you pulled money out of a 401k you would be taxed at your tax rate PLUS a 10% early withdrawal penalty. Besides, with a paid for house you can put your house payment (minus taxes and insurance) into your 401k, Roth IRA, or other investment to build up a large investment account.

We never bought more house than we thought we could afford. We bought our first house in 1992 and put 25% down. We sold that house for a decent profit and bought our second house in 1998 with about 40% down. We stretched a little on that one but ended up ok and are still in that house today. We always had an emergency fund and some taxable investments we could tap that would carry us through if needed (which we have so far not).

I started putting money into a 401k in 1988 and have never pulled any out. I rolled everything over to an IRA if I left a job.

Originally Posted by pyroguy

Investing in general is a risk. You risk whether your investment will go up or go down. However, if you have a paid for house you have a good idea of your upcoming expenses and the things you don’t anticipate you have an emergency fund for.

Putting all your money into a house is also a risk. Houses don’t always go up in value; housing in my area took a hit in the Great Recession of 08-09 and has been pretty slow to bounce back until recently. My house has been a great place to live but has only increased by a relatively modest amount overall.

I will leave you with this - don’t put too much in your house at the expense of not saving in a 401k, IRA or even taxable account:

https://www.portfoliovisualizer.com/...ocation1_1=100

$10,000 a year put into a balanced investment fund like Vanguard Wellington, starting in 1994, becomes $1.1 million today - a 9.4% per year return.

If you are able to both invest and maybe pay down the mortgage a little, great. But take advantage of investment opportunities like a 401k or IRA’s first before paying extra on the mortgage.

[trm2]

Originally Posted by pyroguy

trm2 why do you still carry a mortgage? Why not pay the house off and put the mortgage payment into your investments? Imagine what you could do if you had that mortgage payment (minus taxes and insurance) going into a retirement account.

Because I understand finance (undergrad and grad degrees in finance)

Originally Posted by pyroguy

I will 100% give you credit for brining up the point about people who switch jobs cashing out their 401k’s as a bad idea. It is a good idea to do a direct transfer to your own IRA/Roth IRA so you have better control over your money, but cashing it out is a HORRIBLE idea.

Here it depends also. I will be leaving a job shortly and in essence, cashing out my 401(k). I will be doing a back door Roth IRA conversion, paying tax today and then letting my money grow forever tax-free. Also, a Roth IRA isn’t subject to required minimum distributions in retirement.

[Iron Lung Jimmy]

Originally Posted by trm2

Why have an escrow account if you don’t need it? Once a year I pay my property taxes and insurance. I get to keep my money and earn on it vs having an escrow account earning zero. It is kind of like getting a tax refund from the fed, that is one of the last things you want.
.

If you have a mortgage you are required to have an escrow account. At least at my bank you are.

My mortgage is somewhere around $15k and exists only to maintain some payment history and to make the bank deal with insurance and taxes. So for maybe $300-400/year (pre tax) in lost interest I keep a payment history and make the bank handle things I don't like doing. Way worth it to me.

[BuddyLee]

Originally Posted by pyroguy

My wife has a long history in the mortgage industry and I have done my research. Interest appears front loaded because there is a larger amount of principle due. The fact is that they give you a payment to pay back and the lower the principle gets the lower the interest will impact your payment.

As for the absolutes, I’m trying to speak as a statistical statement. Yes there are outliers. Those that do “beat the system” are so minimal that it is fair to speak pretty absolute though. What I’ve been fortunate to find is a method explained by someone who is fabulously wealthy now and has become so by trying to teach others how to do what he did to become so wealthy so they can be to. From research done from him and others on how to become rich, the fastest, most stable way to do so is to eliminate debt, live within your means, and save money in good investment platforms. Most millionaires did not inherit their money or win it in a lottery, they earned it.

Also, a millionaire by dictionary definition and not politician definition, is someone who has a net worth of one million or more dollars. Without going into politics, the whole class warfare stuff is quite sad.

Interesting. I Googled Dave Ramsey on refinance. He said, "No, it’s smart to refinance a house to have a lower interest rate, thereby paying off the home quicker. Today, on a 15-year fixed rate with one point paid, you can get under a 4% rate. Oh, my goodness, that’s awesome! Some of you sitting there with a 6% rate, if you have a $300,000 mortgage, that saves you 2%. A 2% savings is $6,000 a year. That’s $500 a month in interest saved. That’s worth doing. Refinancing does make a ton of sense in those cases if you’re going to stay in the home and if you’re going to save on the interest rate. Those would be the reasons that you refi. There’s no other real reason to refi."

[BuddyLee]

Originally Posted by KenKat

We never bought more house than we thought we could afford. We bought our first house in 1992 and put 25% down. We sold that house for a decent profit and bought our second house in 1998 with about 40% down. We stretched a little on that one but ended up ok and are still in that house today. We always had an emergency fund and some taxable investments we could tap that would carry us through if needed (which we have so far not).

I started putting money into a 401k in 1988 and have never pulled any out. I rolled everything over to an IRA if I left a job.



Putting all your money into a house is also a risk. Houses don’t always go up in value; housing in my area took a hit in the Great Recession of 08-09 and has been pretty slow to bounce back until recently. My house has been a great place to live but has only increased by a relatively modest amount overall.

I will leave you with this - don’t put too much in your house at the expense of not saving in a 401k, IRA or even taxable account:

https://www.portfoliovisualizer.com/...ocation1_1=100

$10,000 a year put into a balanced investment fund like Vanguard Wellington, starting in 1994, becomes $1.1 million today - a 9.4% per year return.

If you are able to both invest and maybe pay down the mortgage a little, great. But take advantage of investment opportunities like a 401k or IRA’s first before paying extra on the mortgage.

Example of this. My partner and I, she is a financial advisor and I am the banker in our team, had a guy come in who had just retired after 30 years at a local aircraft manufacturing company. His plan was to use his 600K 401k to pay off his home which he owed 300K on. After the meeting he left with a 600K rollover into a managed retirement account. It just does not make sense to use a retirement fund to pay off a home and then not have liquidity. A home can have all of the equity in the world but that equity is not liquid if needed for any reason. It is better to be liquid then to have no or almost no house payment.

[KenKat]

Originally Posted by trm2

Here it depends also. I will be leaving a job shortly and in essence, cashing out my 401(k). I will be doing a back door Roth IRA conversion, paying tax today and then letting my money grow forever tax-free. Also, a Roth IRA isn’t subject to required minimum distributions in retirement.

Sorry, you don’t ge to count a back door Roth conversion as “cashing out” that’s like advanced investing 304 not intro to investing 101

[KenKat]

Originally Posted by BuddyLee

Example of this. My partner and I, she is a financial advisor and I am the banker in our team, had a guy come in who had just retired after 30 years at a local aircraft manufacturing company. His plan was to use his 600K 401k to pay off his home which he owed 300K on. After the meeting he left with a 600K rollover into a managed retirement account. It just does not make sense to use a retirement fund to pay off a home and then not have liquidity. A home can have all of the equity in the world but that equity is not liquid if needed for any reason. It is better to be liquid then to have no or almost no house payment.

Yup, completely agree with that.

In my scenario above, if instead of investing that $10,000 a year starting in 1994 you spent that money paying on a mortgage for five years, THEN started investing $10,000 a year starting instead in 1999, you accumulate around $650k - so $450k LESS.

[BuddyLee]

Originally Posted by KenKat

Yup, completely agree with that.

In my scenario above, if instead of investing that $10,000 a year starting in 1994 you spent that money paying on a mortgage for five years, THEN started investing $10,000 a year starting instead in 1999, you accumulate around $650k - so $450k LESS.

Using the rule of 72 a 10k investment at a modest annual 5% will double in 14 years. Let it ride for another 14 years it will double again 10K becomes 4oK.

[trm2]

Originally Posted by Iron Lung Jimmy

If you have a mortgage you are required to have an escrow account. At least at my bank you are.

My mortgage is somewhere around $15k and exists only to maintain some payment history and to make the bank deal with insurance and taxes. So for maybe $300-400/year (pre tax) in lost interest I keep a payment history and make the bank handle things I don't like doing. Way worth it to me.

At least here, once you have 30% equity you no longer need escrow.

Originally Posted by KenKat

Sorry, you don’t ge to count a back door Roth conversion as “cashing out” that’s like advanced investing 304 not intro to investing 101

Well, it is similar in that I have to pay tax on the money now.

Originally Posted by BuddyLee

Using the rule of 72 a 10k investment at a modest annual 5% will double in 14 years. Let it ride for another 14 years it will double again 10K becomes 4oK.

Yeah, but he did say invest 10k a year.

[pyroguy]

Originally Posted by Silver14

That's cool, so do I! Lots of interesting stuff about mortgages.

"A mortgage doesn’t pay interest first and then principle later. A mortgage is the same amount of interest no matter what part of the term you’re in."

Maybe we're having a semantic miscommunication, but the wording of this made it sound like each payment has the same $ amount of interest. I don't think there's any disagreement about how a fixed rate mortgage is calculated.

Will you share the statistics you are referencing? Sounds like interesting stuff to read.

I think we may be saying the same thing in different ways. $ amount, the interest is more of the payment at the beginning of the loan because of a higher principle. The rate, on a fixed rate mortgage, is the same throughout the life of the loan, but as the principle gets lower the amount of your payment that is interest is less. Mortgage companies aren’t front loading the loan, there’s just more principle to charge interest to in the beginning.

As for some of the statistics, there’s so many I could quote but here’s a few good ones:
78% of households are living paycheck to paycheck
89% of people with credit cards do not pay them off every month
57% of people die without a will
42% of people who paid cash at fast food restaurants spent less than those who used credit.
Vending machine spending increased 178% with the addition of card readers.
100% of houses that are foreclosed on have a mortgage

Originally Posted by KenKat

Putting all your money into a house is also a risk. Houses don’t always go up in value; housing in my area took a hit in the Great Recession of 08-09 and has been pretty slow to bounce back until recently. My house has been a great place to live but has only increased by a relatively modest amount overall.

I agree that houses or real estate in general aren’t guaranteed to go up. As you referenced, the 08/09 recession took a real hit on real estate. I had a co-worker who took a financial bath when he moved and sold his house. He just bought another house for the first time since selling in 2012 this year. However, in the long term most real estate is a good investment. If you’re going to move quickly it probably isn’t the best idea to purchase as you’ll get hit with capital gains tax if you lived there less than 2 years and like you suggested, a housing slump could have driven prices down, but more than 2 years it’s a fairly safe investment to venture into provided you pick a good location to purchase in.

Originally Posted by trm2

Here it depends also. I will be leaving a job shortly and in essence, cashing out my 401(k). I will be doing a back door Roth IRA conversion, paying tax today and then letting my money grow forever tax-free. Also, a Roth IRA isn’t subject to required minimum distributions in retirement.

PLEASE DO NOT CASH OUT YOUR 401k! You can do a direct transfer and roll it into a back door Roth, but please do not cash it out! If you cash it out you’ll be hit with a tax penalty of your bracket PLUS a 10% penalty. If you do a direct transfer you will be taxed, but you will not have the penalty.

I do Roth contributions as like you said they’re great to grow tax free. The younger you are the better the Roth will benefit you. When I retire in 29 years, I plan to use what I have in a traditional 401k that hasn’t been rolled over because I cannot afford the taxes right now and let my Roth continue to grow. I recently learned that I can roll my company match at the end of the year and pay the taxes. So I’ll probably do that moving forward because like you said, let as much grow tax free as possible. Hopefully politicians don’t get greedy as one currently is trying to be and tax Roth retirement investments. (There’s a proposed 3% tax on Roth accounts which is double taxing and total bull crap!)

Originally Posted by BuddyLee

Interesting. I Googled Dave Ramsey on refinance. He said, "No, it’s smart to refinance a house to have a lower interest rate, thereby paying off the home quicker. Today, on a 15-year fixed rate with one point paid, you can get under a 4% rate. Oh, my goodness, that’s awesome! Some of you sitting there with a 6% rate, if you have a $300,000 mortgage, that saves you 2%. A 2% savings is $6,000 a year. That’s $500 a month in interest saved. That’s worth doing. Refinancing does make a ton of sense in those cases if you’re going to stay in the home and if you’re going to save on the interest rate. Those would be the reasons that you refi. There’s no other real reason to refi."

Dave Ramsey has great information and I’ll agree with his point about being able to lower your interest rate. However, the rest of Dave’s comments is to lower your interest rate, but not extend your term. Don’t refinance a 30 year loan that you’re 10 years into back to a 30 year loan. Yes you’ll pay less interest, but you’re also lengthening your time to pay it back. If you’re 10 years into a 30 year loan and can get a better interest rate, refinance to a 20 year loan or better yet a 15 year and cut years off of your payments. With our recent move we got a 2% 15 year fixed rate mortgage and I saw it dip to 1.75% after we closed. Before you get bent out of shape about being contradictory about debt, I do not like having a mortgage. I’m working to pay it off ASAP. I almost canceled my contract because the couple days between selling my last house and closing on my new one felt so great to not owe anyone anything. It truly is an uplifting feeling that I can’t wait to make a permanent feeling.

Originally Posted by BuddyLee

Example of this. My partner and I, she is a financial advisor and I am the banker in our team, had a guy come in who had just retired after 30 years at a local aircraft manufacturing company. His plan was to use his 600K 401k to pay off his home which he owed 300K on. After the meeting he left with a 600K rollover into a managed retirement account. It just does not make sense to use a retirement fund to pay off a home and then not have liquidity. A home can have all of the equity in the world but that equity is not liquid if needed for any reason. It is better to be liquid then to have no or almost no house payment.

Two things here, first a person should be working to pay off their home AND invest. Living within their means will help them do that which most people do not do. A paid for house AND 600K+ in that guy’s retirement account would have helped him out substantially.

Secondly, be careful with a partner. This isn’t a morality statement, but a financial statement. You two may be madly in love and will never split because you both love each other which is very similar to being married. However, legally speaking, neither one of you has any protection from the other in the event that one of you would pack up leave and drain the bank account on the way out the door and can legally get away with it. Legally speaking the government sees you as roommates unless you’re married. If you’re married there’s many laws that vary by state protecting the spouse from the other spouse doing just that. Again, not a moral judgement, just a friendly disclaimer for those who had no idea that could happen.