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Old 02-16-2011, 05:46 PM   #41
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I'm on my 2nd house. My wife and I purchased our first home when we were 23.

I still regret the decision to buy our first house.

We should have rented a house.
It sounds like you got in a rush and settled on what was there instead of waiting for the right house to pop up. Renting might have been better in your case. Granted, I've had a good experience with my house and I had a pretty good idea of what I wanted when I started looking. Yes, a lot of **** could've gone wrong. But that's the risk you take.

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Renting gives you the experience to learn what it is in a house that you want and don't want.
Perhaps, but I got tired of pissing money away into my landlord's bank account without building any equity. Plus, I got tired of dealing with weirdo neighbors along with not having a garage and a yard. When I got tired of the condo, I looked at rent houses. I decided I didn't like the idea of renting a POS house for more money than I was paying at the condo, so I ran the numbers and decided it was better just buy the house I wanted.

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That 1 acre lawn sounds nice on paper. The time spent keeping it sucks, and is expensive. Renting gives the maintenance responsibility to someone else.
Starter home <> 1 acre lawn. I've got a pretty good-sized lot and it's not much trouble to keep. I bought a decent used lawn mower for $50 and a really nice used edger/weed-eater for $125. Craigslist is your friend.

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...upgrades are expensive. i.e. My current home; Windows 6k, doors 1.5k, fence for dogs 3k, New Hvac system 8k.
This is true. My house came a nearly-new HVAC system, a new roof, a new deck out back, a fence for the dog, and fresh paint on all the walls. Eventually I do want new windows, but at this point my utility bills are very, very reasonable.

OH, one more thing I did before I closed the deal on my house... I asked the sellers for copies of all their utility bills from the previous year. That way I was able to really pin down my budget for Year One.

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Must haves in a house in your situation (I'm gathering that you do not have tons of expendable income). Energy efficient windows, doors, and a HVAC unit that is less than 5 yrs old. Attic insulation is cheap to blow in.
Agree completely. These should be must-haves in any home. Don't get suckered in by a low purchase price. Take stock of all the crap the house needs for you to move into it. I thought about buying the house next door to mine until I tallied up all the **** it needed to be truly livable. It was going to need all of the above, plus a redo on the kitchen. So I spent $15K more on a house that was ready to go, and it didn't make a huge difference in my payments. It's kinda like spending a little more to get a used car with new tires, new timing belt, and a good service history. It always costs more when you get stuck with doing it.

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When you get tired of the first house you rent, then try to find one that is closer to what you want, and then rent that house for a little while. Owning a home can be a money pit. You save a lot of money renting.

RENT until you know exactly what you want, and save money for a down payment while renting. DON'T rent a slum while trying to save. That defeats the point.
Rent cheap and save your money for a down payment. I stuck it out, saved my money, paid off all my debt, saved more money, and bought my house. Now my entire house payment (including taxes and insurance) is less than rent on the condo. Just sayin.

Yes, a house can be a money pit, but if you do your due diligence it doesn't have to be. Sorry for rambling again...
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Old 02-16-2011, 05:54 PM   #42
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Robert, I know you are very well schooled in finance but how can paying a 30y loan at double payments and a 30y loan at the full 30y be even close in interest fees?
It all has to do with the amortiuzation schedule of the loan. The bulk of all interest is in the begining of the loan and not spread evenly through the loan. In doing so your effective rate at the begining is much higher than at the end. If you were to pay double the payments on say a 5.5% loan, then you would pay it off in roughly 11 years. Assuming the loan amount is $150,000 then you will have saved a little over $100,000 in interest.

That sounds really good, but your money is now sunk into that house and is no longer liquid. the subjective oportunity cost now comes into play with it as well. You could pull out a home equity line if you are in dire need of it, but that defeats the purpose. Assuming you took the extra $10,000 a year that you are paying in to the mortgage and got even a below market average return of 8%, you would yield $166,000 from that. It would also still be (for the most part) completely liquid. You are now able to cover other expenses that may come up.

I am not saying that at if you pay off your house early, you won't save any money. What I am saying is that the vast majority is front loaded and at 10 years you will be left with an effective loan rate of 2-3% for the remander of the loan. I know that I wouldn't want to tie up my money in something illiquid like that for that kind of rate.

If I could borrow money for 2-3% for 20 years, I would do it in a heartbeat. That is the loan that you are giving up by paying it off early.

Again, this is not for everyone, but it is a decision you can't take back. Make sure you really examine all consequences of payin it off early. If it makes sense for you, then defeinately go for it. I spend A LOT of time undertsanding researching finance, but by no means do I know it all.
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Old 02-16-2011, 06:19 PM   #43
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...got even a below market average return of 8%
Finance noob asking for more specific info:

My 30 yr fixed rate mortgage is locked in a 5.25%...what sort of (relatively) accessible investments would yield an after-tax return of more than that 5.25%? How much risk would I be taking on?
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Old 02-16-2011, 06:21 PM   #44
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TrickyRix: Yes I would definitly say we rushed into buying a house when we shouldn't have. It was during the "give money to anyone with a pulse" days. My wife and I both workign part time, going to school, and taking out student loans (some of which ended up paying the mortgage for a little while ) The bank should have never given us a loan, but a friend of the company we worked for "pulled some strings" to get us approved. We should have been told to take a hike.

I bought the house I am in now with a different goal. I bought well within my means at a point when my means were significantly less than they would be within 3yrs. I'm glad I did. Now I would be shopping houses that are 2 - 2.5 times the price. We love our area, plan on renovating this house for a fraction of the cost to buy an equivalent house that we liked, and staying in it for the long term.

rharris19

This debate is a tough one. On paper it makes sense, but people have to have the discipline to save that extra money. If you don't have the discipline, then it's better to put the extra money on the house. Personally, I don't like having debt. I have no CC debt, car payments, and I'm paying off my student loans with vegence. Once that is complete I will start paying my house off early. I like to think about how little money I actually need if I don't have bills.

OP:

Sorry for the tangent. I think there is a lot of good advice here on how to do it right, and in my case, things to avoid. Now is the time to take control of your future. Be smart with your choices. Soem times the smart choices don't feel al that awesome.

My wife has a theory about relationships. You have to go through the **** together,and come out the other side together in order to appreciate all of the good things you have. Then you know what you have together is solid. Our cockroach infested trailer that we rented in undergrad was one of those trying times. It was so bad that the cockroaches shorted out small appliances by trying to keep wam on the circuit boards in winter. Good times! Seventy feet of paradise!
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Old 02-16-2011, 09:03 PM   #45
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Originally Posted by mgeoffriau View Post
Finance noob asking for more specific info:

My 30 yr fixed rate mortgage is locked in a 5.25%...what sort of (relatively) accessible investments would yield an after-tax return of more than that 5.25%? How much risk would I be taking on?
An iShares ETF that follows the S&P (Ticker: IVV) held long term should yield 10-11%. The average return in the market is in the 11-12% range. If you hold long term and tax rates stay the same you will loose 15% of your gains. If you hold short term then it will be taxed at your tax bracket, so say 25-28%. Either way you look to have a 7-9% return after taxes and fees.
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Old 02-17-2011, 02:46 AM   #46
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An iShares ETF that follows the S&P (Ticker: IVV) held long term should yield 10-11%. The average return in the market is in the 11-12% range.
BZZZZZTTT!!!

Study this:
http://www.nytimes.com/interactive/2...s-graphic.html
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Old 02-17-2011, 06:34 AM   #47
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Originally Posted by mgeoffriau View Post
Finance noob asking for more specific info:

My 30 yr fixed rate mortgage is locked in a 5.25%...what sort of (relatively) accessible investments would yield an after-tax return of more than that 5.25%? How much risk would I be taking on?
The real answer is NONE. There is no way to get a guaranteed 5.25% return on any investment. However, I can guarantee that any money you pay off on the principle will save you 5.25% (if that was your rate). As far as taking the interest off on your taxes, we have never been able to do that (not entirely true but true enough without going into a lot of detail). Our first house was so cheap that the interest didn't add up to enough to overcome the benefit of taking the standard deduction. We put a big chunk of cash down on the second house so same thing there. If you think borrowing money from a bank to get a tax break is the same as investing the max in your 401K to get a tax break you need to look at it again.

Don't get hung up on the $$$ amounts. The biggest thing about paying off a house early is emotional vs financial, especially if you are married. If you want your wife to be happy get out of debt including the house. Women love that security and there are no more fights about money. We went through layoff's a few years back at work. Everyone with a $1,000 mortgage was sweating bullets but I knew that even if I just got a job at McDonalds we would be ok because we had no debt. It is hard to explain how having that burden lifted off your shoulders feels but trust me, it is VERY nice. I own everything I have and no one can take it from me.

A cool little benefit of no debt is being able to drive around, see a Miata sitting on the side of the road and buy it without thinking about how you are going to get the money. Even though they were all cheap (most of them) I have purchased seven cars in the past two years. Financial freedom is sweet!
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Old 02-17-2011, 09:49 AM   #48
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The real answer is NONE. There is no way to get a guaranteed 5.25% return on any investment. However, I can guarantee that any money you pay off on the principle will save you 5.25%
But that's just it. At the time you are paying off your home, your rate on paper is still 5.25%, but your effective rate is lower than that at about 3%.

If you want to go the route of "investing" back into your home, then max out everything else first. Roth IRA, Roth 401K, 401K, 503B, 457, etc. Whatever is available for you. I can imagine the peace of mind to be pretty great to pay off your home, but I personally can't justify it.

Above all esle make sure you are going to be living in that house past the point you expect to pay it off early. If you don't, then you have just give then bank an interest free loan for that time.
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Old 02-17-2011, 09:57 AM   #49
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I spent over 6 figures to sell my house last month!
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Old 02-17-2011, 11:07 AM   #50
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I opened a roth ira just for fun this year. it may only end up with a few thousand dollars of initial cash in it, but whatever it earns is MINE until someone says otherwise.
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Old 02-17-2011, 11:13 AM   #51
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Have your wife open her own as well. We've been each contributing 5000 a year to ours for 4-5 years now.

plus we have roll over iras converted into roths, and our 401ks.
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Old 02-17-2011, 11:16 AM   #52
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On a similar note to some of the links posted, are things really this bad down there?
http://www.businessinsider.com/auste...-2011-1?slop=1
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Old 02-17-2011, 08:46 PM   #53
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But that's just it. At the time you are paying off your home, your rate on paper is still 5.25%, but your effective rate is lower than that at about 3%.

If you want to go the route of "investing" back into your home, then max out everything else first. Roth IRA, Roth 401K, 401K, 503B, 457, etc. Whatever is available for you. I can imagine the peace of mind to be pretty great to pay off your home, but I personally can't justify it.

Above all esle make sure you are going to be living in that house past the point you expect to pay it off early. If you don't, then you have just give then bank an interest free loan for that time.
I am confused by some of your points:

What is an effective rate and why is it 3%?

How do you give a bank an interest free loan? What money did you loan them?

Side note on your comment - Yes, it is very hard for some people to justify paying off your house. We stopped investing in our 401K for several years and paid HUGE tax "penalties" for doing it. I am still very happy I did it. As I said before, it is more of an emotional thing than a financial thing.
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Old 02-17-2011, 09:48 PM   #54
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What is an effective rate and why is it 3%?
I'm guessing he means if you take the tax deduction on the interest.

The last couple years I tried itemizing and the standard deduction was still better.
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Old 02-17-2011, 09:59 PM   #55
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I'm guessing he means if you take the tax deduction on the interest.

The last couple years I tried itemizing and the standard deduction was still better.
I never did get that. It is a really weak argument against paying off your house early. Personally, I can't wait until the gov't closes that tax loophole. I get taxed more because I have a paid off house, I am married, and I don't have any kids. Why does the gov't hate me <G>?
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Old 02-18-2011, 05:32 PM   #56
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No. If you look at an amortization schedule for a loan, the first payment is 90% paid toward interest and 10% toward principle. At the end of the loan the inverse is true. The average over the time of the loan comes out to be your loan rate. This is the only way that banks would make money off loaning money that much money for that long of a time. They a good chunk of the interest upfront to be able to reinvest into other things.

The reason why I say your effective rate, is because the money you have paid into as interest is a sunk cost. You will have a set amount of interest you will have to pay on your loan and during the first 10-15 years you will pay a good chunk of it, leaving the remaining payments to flip to a majority principle. Since you are now paying less in interest than before, your effective rate is lower than before. Obviously the longer you wait the lower your effective rate will be, thus less incentive to pay it off.

I don't really count the tax break on interest into the rate of the loan, because that is a variable cost that doesn't even apply to some people. If it does apply to you, then I guess that is another incentive.

I agree with Robert M that there is no need to take away possible tax benefits because you own your house outright. That's another issue though.
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Old 02-18-2011, 05:52 PM   #57
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There is no set amount of interest that you pay on a loan (unless you pay the standard payments). The interest rate does not change during the lifetime of the loan. However, the principle does so of course the amount of interest will be less. Because you sign up for equal payments there is a higher interest payment in the beginning (but the rate is still the same). The first payment on a 30 year loan is more like 81% INT and 19% PRI. The even out when about 40% of the house has been paid off. So, make a $40,000 payment #1 on a $100,000 house and you are on the downside. Of course, you will pay less than $500 INT that first month (not sure what that means with your "effective rate" thing) and will probably keep you from itemizing since you just knocked off the majority of your INT.
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Old 02-19-2011, 02:57 AM   #58
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I am not saying that you have to pay a certain amount of interest before the bank will let you out of the loan. What I am saying is that there is a set schedule of interest payments until the house is paid for. Regardless of what you put towards the principle at any given time, your schedule will be the same until paid off. You can't just pay $40,000 on a $100,000 loan and jump to where those payments would be. I don't know for sure if that's what you were saying.

Example:
If you have a loan and your payments are $1000 and according to the amortization schedule, you will be paying $810 of that in interest and $190 in principle for the first year, $790/$210 for the second, and $770/$230 for the third, etc. If you pay an extra $40,000 into the loan toward principle after the loan is created, then you have just shortened the length of the loan, but not modified the terms while active. You will still pay the $810 in interest the first year, $790 the second, and $770 the third regardless of whatever extra you have put toward principle. The only thing extra principle does is shorten the loan.

I am not saying that the actual interest rate changes throughout the course of the loan. What I am saying is that when you are toward the end of the loan, where you are paying closer to the $190 in interest and $810 in principle, your loan becomes effectively cheaper at that point. I used the very end of the loan as an extreme example, but it illustrates what I am talking about with your loan becoming cheaper and more sensible for you to hold long term rather than pay off.
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Old 02-19-2011, 03:47 AM   #59
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I opened a roth ira just for fun this year. it may only end up with a few thousand dollars of initial cash in it, but whatever it earns is MINE until someone says otherwise.
You mean like an Executive Order that says "the nation is in an extreme financial emergency and thus it is everyone's patriotic duty to convert half of all their retirement accounts into government bonds".
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Old 02-19-2011, 03:53 AM   #60
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On a similar note to some of the links posted, are things really this bad down there?
http://www.businessinsider.com/auste...-2011-1?slop=1
Depends where you look and how you look at it. The real unemployment rate is probably close to 15%, which means that 85% have jobs.
The worst thing about the economy is indeed the unemployment rate and the fact that small businesses are closing at a very high rate.

This link at the bottom is the real deal:
http://www.businessinsider.com/niall...n-debt-2010-5#
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