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get in the game for real and out of your finance class and you will probably have a different view. remember, most teachers are teaching and writing books about theory and not practice...
Heh, although the BEST way to make money on the stock market is to...
Write a book about making money on the stock market.
get in the game for real and out of your finance class and you will probably have a different view. remember, most teachers are teaching and writing books about theory and not practice...
In your first scenario, interest payments of $880 per month would add up to $10,560 in the first year alone on a $128,000 loan (160-32), that's an annual interest rate of 8.67%, that's a bit high, most new home loans hover around 6.25% or lower. In fact, if you paid $1,000/month you would actually be paying off your mortgage balance faster.
Your scenario:
128K balance after 20% down
30-year fixed
8.67% annual percent
Payment = $1000.00
Closer to reality:
128K balance after 20% down
30-year fixed
6.25% annual percent
Payment = $788.00 (overpayment per month = $212.000)
*minus taxes, insurance, points, etc...
My point is that by making even a few dollars extra in payment on your mortgage every month you can chop off years off the standard 30-year mortgage. Even under your 8.67% scenario, your last payment is $992 in Principal and only $7 dollars in interest, by paying a little extra every month you are subtracting directly from the end of the loan, meaning that every $992 dollars extra you pay, you remove 1 payment from the books, and it only accelerates after that as your balance drops. Based on your scenario of an extra ~1,000 you could cut your payment period down to 17 years and that gives most people valuable years to invest for retirement when they could have still been paying off the original home loan.
Hold on for the wild ride on the downside of the economic cycle, 'cause here it comes. Slowing house prices and rising interest rates are historically the first indicators of a recession on the way, and it is not going to be fun for anyone. With interest rates and inflation rising, and the oil price going through the roof, anyone recall the oil shocks of the 70s? All we need right now to send the world into recession is the situation in Iran or Iraq to worsen.
Batten down the hatches, put as much money away as you can right now, and make sure you have a secure job, because the end of this decade is going to squeeze us all.
It will be the high gas prices that do us in. Consumers can survive $3 gas for awhile as long as their credit holds out, but they will need to sacrafice on other things and that is exactly what people have been doing, consumer product sales are down in most sectors when compared to the same numbers in 05. New home construction was keeping the economy going, but now that this has slowed in most parts of the country, there really isn't anything out there to keep the economy chirning. There will be slow growth if any until we attack Iran, but the stock market wonn't care, they will keep on dumping money into their crap game, it's like these guys live in their own Kleptocracy or something.
however, most of you are forgetting what really makes money grow.. it is not putting in large sums 15 yrs down the road... it is putting in steady amounts now and letting the money compound.
basic rule of 72.
Actually I read a lot outside of class.
I acknowledged as much.
I ran the numbers.
Assuming:
$150,000 borrowed.
9% rate of return on invested capital (10%-tax effect)
6% interest on loan (6.5% + tax effect)
$100 each month towards your mortgage instead of invested.
At the end of 30 years, the difference in money is:
$7,422 in favor of taking that $100 and investing it.
For that $7,422 of forgone income you gain:
Home ownership 7 years earlier.
Home ownership=security. Provided you have also mitigated your risk of loss with good insurance, of course.
The difference does get wider as more money is put towards the mortgage.
A payment of $200 means a difference after 30 years of $34,000 in favor of investing.
BUT
You are NOT guaranteed that 9% return for 30 years. Assuming that any future rate of return will equal the same as the past is patently and dangerously false. One CAN say that it is PROBABLE but not CERTAIN.
If you start investing that money in a downturn in the economy, the benefits of that compounding will disappear. Note: This should never discourage you from investing. Worrying about "timing" the market is foolish. Do it anyways. The reason for this is a whole other thread.
Paying off debt IS 100% certain in terms of payoff.
Paying off debt DOES allow for living on reduced cash flows. Pay off the house sooner, you can retire sooner, if you so choose. It also provides something of a form of insurance against homelessness. Lose your job, and you don't have to worry about losing your house.
The economic value of that house will rise no matter what. The cost of housing tends to follow the pace of inflation. If you insulate yourself from those increases, you have insulated yourself from housing inflation.
Hmm. Interesting. I upped the tax bracket for that scenario from 10% to 20%, and the home investment actually came out ahead in both the $100 and $200 per month scenarios.
Clandestino comments in blue
Factor in the fact that most brokerages that set up investment accounts will charge fees for not having enough money. That reduces the rate of return earned on having money there if you are just starting out.usually negated by higher returns...
You mean the higher returns are partially negated by the extra fees?
Another happy fun thing about mutual funds is that one never knows what one is getting into. The "timing" scandals as well as tons of other brokerage scams that have happened with alarming frequency and almost invariably involve taking money from small investors.higher an advisor.
An advisor who can no more say who is crooked than you can.
Let's say you sock your money away in mutual funds and keep that house payment.
You get sick or lose a job, and have to live a greatly reduced income, AND the market at that time tanks reducing the rate of return on that invested money. You then have to no only use up the interest, but start eating the principal as well, taking money out and paying taxes on the interest and any capital gains.you would be worse off if all your money was stuck in your house... you would have to pull out a loan at 8-9% to get you by.
You can sell your house for tax free gains if you really need to. My understanding of personal unsecured loans is that they are more than 8-9%.
Pay off the house sooner, and you can afford to either refinance, and reduce your cash flow requirements, or were lucky enough to have paid off your house, having a greatly reduced cash flow requirement.
I am not saying to sock everything in your house. One still needs to diversify eventually. But if you really want a conservative investent, with a 100% guaranteed return, investing in one's debt, such as a mortgage loan, is a very good way to go.i think you've been listening to dave ramsey too much...and he is rich not bc he is/was an investor... he sells 44.95 get out of debt programs...
I have heard about this guy. Never read the book though. As I have said before, the surest way to make money on the stock market is to write a book on making money on the stock market.
In any good portfolio, you will have a mix of investments, that offer differing amounts of risk, from stocks to bonds, to treasury securities. Investing in your own debt (paying it off sooner) is absolutely riskless. This makes it on par in terms of risk with treasury securities that average 3%5% (at the moment). Sooooo if you have any debt at all that is ac ulating at a higher rate than that, you would do better to put that money into that debt than in US treasuries.
You have to quantify a discount factor for a long-term return, which won't be the same for every person.
RG, you are waaaaaaaaaay too conservative in your investment strategy. Your strategy makes sense for a 55-year-old who cannot afford the risk of investment volatility.
Volatility for a young person is considerably less of a problem.
Your argument that a person with cash flow trouble could just sell their house (and presumably downsize) neglects 1) the illiquidity of real estate and 2) the expenses of moving.
#1 and #2--yup on both counts.
Now let's take it a step further and put it in a bit of a different light that really makes this make a bit more sense.
You are entirely correct about this form of debt investment being conservative. As I stated before, a good investment strategy is diversified with a mix of returns, and you would agree I am sure.
Investments when young should be mostly higher risk followed by medium risk, followed by low risk in decending order of amounts. Say you have $600 to save in any given month, you put $300 in risky (stocks), $200 in medium (corporate bonds), and $100 in safe (US treasuries). This mix should change towards less risk as you age.
I would and do argue that given the choice between giving up a small amount of investment income is a small price to pay for the security of housing. This is what economists call "utility". What price are you willing to pay for the security of not having to worry about house payments?
BUT
Let's hold your and clandestino's point that investing in your mortgage makes no sense when you subs ute it for stock investing as a given.
What about when you subs ute it for the safe investment portion of your portfolio?
US treasuries generally pay LESS than any home loan. That hypothetical young person should pay towards the mortgage rather than earn a lower return on US treasuries, yes?
As you stated before, you do lose some liquidity, but if most of your investing is mostly liquid, such as stock or bond funds, then you have only given up a small amount of liquidity and gained a higher return. Add to that the financial security of reduced housing cash outflows, and it makes even more sense.
Take the whole idea of debt investing a step further.
IF you have any balance on your credit cards that you are paying 20% on, does it make sense to invest in stocks that historically average 10-15%?
Nope. THAT is the most basic concept of ac ulating wealth that most people miss, and one of the things that is hurting the US consumer more than many realize.
Let me make one thing clear:
These are my opinions alone. I read a lot of investment columns, study the topic in school, and read an occasional book, but these are more my opinions than anything else, albeit opinions based on education about the subject.
It is ALWAYS good to do your own homework, and I DO recommend sitting down with a CERTIFIED financial planner to set out a plan, even at the extra expense.
Last edited by RandomGuy; 08-16-2006 at 11:03 AM.
Hmmm. Didn't get a reply on this one... BUMP
TAKE THAT BACK!!!! YOU WANT TO RUIN MY REPUTATION OR SOMETHING?!?!
rg, you finally made some sense about people sitting with a cfp... all the rest of your advice(and math) has been a little off..
it is extemely evident that you have no real idea or EXPERIENCE in the world of personal finance
Is there any guarantee that future returns on ANY form of investment will match the average returns of the last 30 years?
I noticed that you also didn't comment on the strategy of paying off your mortgage earlier with the proportion of your investment money used for low risk investing...
Ok then go back to my post at #36 and give me some numbers based on EXPERIENCE.
I am always willing to learn something new.
Let me help you out a little Random Guy.
#1- Not buying too much house is very important. This will allow you to purchase disability insurance (cause of 50% of foreclosures). You can get short term disability for about $300 a year. Selling your house or borrowing from your house makes no sense if you're sick/disabled.
#2- I'm in total agreement that paying off a home is very important. However, at times it's a balancing act between your house and investments. Stick to a 15 year mortgage for discipline.
#3- The average return in the stock market has been over 10% since the civil war. However, if you use the NYSE numbers stocks have done over 11% since 1924. What's interesting is that the average investor has experience a much lower result due to buying high and selling low.
Yup. Index funds, index funds, index funds.
The interesting thing about owning a house is that the value of the housing, in terms of cash flows/opportunity costs, goes up with inflation, i.e. once you own your home, you avoid increases in the other option to owning-- renting.
Heh, find a financial advisor who has taken a course in cost accounting.
August 23, 2006
Home Sales Fall to Unexpectedly Low Rate
By JEREMY W. PETERS
Sales of existing homes fell in July to an unexpectedly low rate, a sign that a widespread softening of the housing market is taking hold.
The National Association of Realtors reported today that purchases fell 4.1 percent last month to an annual rate of 6.3 million homes, the slowest since early 2003. The rate was 11.2 percent higher a year ago.
At the same time, the inventory of unsold homes on the market swelled to a 7.3-month supply, the most in more than a decade.
The national median price of a sold home held steady in July at $230,000. But the association said that prices fell in most areas of the country, and in many places are now lower than a year ago. Only in the South are prices still rising: the median home there sold for 3.2 percent more last month than a year earlier. Had it not been for that gain, the national median home price would have declined for the first time since 1995.
“This surge in excess supply is having a major effect on house prices,” Capital Economics wrote in a research report today.
The number of homes changing hands fell in every region, with the West experiencing the sharpest decline, of 6.4 percent. Sales volume was off by 5.9 percent in the Midwest, 5.4 percent in the Northeast and 1.2 percent in the South.
When combined with other recent statistics showing falling real estate investment and fewer application for building permits, the sales figures today make clear that a housing slowdown is now underway. Most economists, including Federal Reserve chairman Ben S. Bernanke, still expect the slowdown to be orderly. But it remains to be seen just how far home sales will slide in the coming months and what the impact on the economy will be.
Economic expansion in the second quarter slowed to a 2.5 percent annual rate, down from 5.6 percent in the first quarter. Because housing has been so central to the overall health of the nation’s economy in recent years, forecasters are concerned that a steep decline in home sales may help push the economy into a recession.
But so far, many economists are predicting a slowdown, not a collapse. “The trend here is one of stabilizing prices after the sharp gains seen for many years,” said Joshua Shapiro, chief United States economist with MFR. “While certainly a change in trend, so far the official data are not corroborating some of the more alarmist stories being bandied about recently.”
Copyright 2006 The New York Times Company
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I read one article last week that said that unending health care inflation will push health care from 16% to 20% of GDP in a few years, and that sick people/health care will be a major driver of the economy.
I find there's something totally sick about driving an economy with health care products and sick people.
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