Interest rates. WTF? Why are we getting almost free money?

[BigRedChief]

I put a contract on a house yesterday. Locked in a rate and loan. Got 3.625 and they gave me $8,800 towards closing costs. Which is obviously more than it costs.

We were able to lower the purchase price because we didn't have any closing costs.

Last time we bought a house we got 5.25% which at the time our loan guy said was the lowest rate since WWII.

So my question for the board is why is the public getting home loans that are maybe 1%-2% above inflation? Where's the money being made or lost?

[Comrade Crapski]

Originally Posted by Pawnmower

While I agree that Jensen is being an obtuse moron in this thread, just for the sake of either arguing or pretending he knows shit, there are a lot of variables to consider....

If you only consider your data in a vacuum , then you 'save' 294 k in interest over 30 years....

But, lets say you got a loan for under 4 % (common if it is your primary residence)....

#1) you would get to deduct the interest at tax time

#2) you could use that other 400k (assuming 20% down) over the course of 30 years to make much more than 294k

(using 500k to make/save 294 k is not as good as using 100k down, and taking the 400k and using it to make money).

3) all you have to do is find the 'break even' point between the say 3.75% interest, then the deductions (which brings the actual rate much lower, say to 2%), then beat that 2% ROI, and it is a better deal.

It isn't very hard to beat ~2%ROI, especially if you have 400k

All of this is true, and convincing.

Except for one thing.

The paradigm has shifted. The dynamics of the "new normal" post-obamugage America are still unknown.

So I'm not so certain that I want to use the template my parents and grandparents used when they were trying to figure all of this stuff out. At this point in time in our space and time continuum, I would prefer to own my home outright. It's just my personal perogative.

[La literatura]

Originally Posted by Comrade Crapski

How do you know that? You have a crystal ball?

Based on America's financial history spanning over two centuries, it's almost certain to happen. It's a good, smart bet. It's a better bet than anything else. And a rational investor should take it.

And what's stopping me from investing "what I've saved in cash for the house" in the same portfolio?

Lots of things will, but importantly, you don't benefit from the compounding that happens to early investments. To take a small example, investing $5K in 2013 will most likely yield a higher return than the same $5K spread out over 10 years.

This isn't to say that dollar cost averaging isn't a smart investor strategy (my research says, on the contrary, that it's a must), but only to say that the principle of 'time value of money' must be taken into account.

Another way of thinking this is something Warren Buffet asked himself every time he spent a dollar when he was young: Is what I'm about to buy right now for a dollar actually worth the $7 this money will be worth in the future?

[La literatura]

Originally Posted by Comrade Crapski

At this point in time in our space and time continuum, I would prefer to own my home outright. It's just my personal perogative.

Just know that your personal prerogative is based on more emotion than rational investment decisions.

[Pawnmower]

Originally Posted by Comrade Crapski

All of this is true, and convincing.

Except for one thing.

The paradigm has shifted. The dynamics of the "new normal" post-obamugage America are still unknown.

So I'm not so certain that I want to use the template my parents and grandparents used when they were trying to figure all of this stuff out. At this point in time in our space and time continuum, I would prefer to own my home outright. It's just my personal perogative.

Absolutely....and that can't be argued against, and is reasonable.

But lets say you pay off your house, and decide real eastate should be a part of your portfolio....

Then, any further investment ABSOLUTELY should be done using the bank's money as much as you can, as leverage...given 1) the prices remain relatively low and 2)the interest rates remain low as well..... Any change to 1 or 2 screws this all up but lets look at one more example:

Crapski just paid off his house, and now has a pretty large portfolio....and has been advised / or believes that real estate should be a part of this....He decides the best way to do this is to buy a small house as a rental property....

Lets say the house is 200k.....and we assume the same variables as before

If your choices are to pay 100% cash or pay 25-30% down (it is an investment property, so they make you put more down)....

And we use all of the same logic as before...

There are a couple of HUGE important factor that changes everything......

1) now the tenant is paying the mortgage! not you! of course , this is income, and must be claimed as income BUT

2) you can now write off DEPRECIATION (1/27th the value of the home) every year! Also, you can write off every penny of expnses for the rental....

so....

even if you aren't making ONE PENNY after you calculate everything (which as we saw before, would be difficult since all you need to do is beat less than 2% ROI)....

You could do all of this X1 if you put 200k cash into it....

or

You could do all of this X4 if you put 50k down and carry 75% with a bank...

And pay off 4 mortgages, with tenants money...all while beating most other investments....and with great write offs.

[petegz28]

Originally Posted by La literatura

Just know that your personal prerogative is based on more emotion than rational investment decisions.

that's bs, but whatever

[Comrade Crapski]

Originally Posted by Pawnmower

Absolutely....and that can't be argued against, and is reasonable.

But lets say you pay off your house, and decide real eastate should be a part of your portfolio....

Then, any further investment ABSOLUTELY should be done using the bank's money as much as you can, as leverage...given 1) the prices remain relatively low and 2)the interest rates remain low as well..... Any change to 1 or 2 screws this all up but lets look at one more example:

Crapski just paid off his house, and now has a pretty large portfolio....and has been advised / or believes that real estate should be a part of this....He decides the best way to do this is to buy a small house as a rental property....

Lets say the house is 200k.....and we assume the same variables as before

If your choices are to pay 100% cash or pay 25-30% down (it is an investment property, so they make you put more down)....

And we use all of the same logic as before...

There are a couple of HUGE important factor that changes everything......

1) now the tenant is paying the mortgage! not you! of course , this is income, and must be claimed as income BUT

2) you can now write off DEPRECIATION (1/27th the value of the home) every year! Also, you can write off every penny of expnses for the rental....

so....

even if you aren't making ONE PENNY after you calculate everything (which as we saw before, would be difficult since all you need to do is beat less than 2% ROI)....

You could do all of this X1 if you put 200k cash into it....

or

You could do all of this X4 if you put 50k down and carry 75% with a bank...

And pay off 4 mortgages, with tenants money...all while beating most other investments....and with great write offs.

Thanks. That's good advice. I'll consider it.

[Comrade Crapski]

Originally Posted by La literatura

Just know that your personal prerogative is based on more emotion than rational investment decisions.

When the CEO of Subway says if he tried to start his business today, he couldn't, that's not emotion. That's reality.

As far as making "rational investment decisions" tell that to the millions of people who couldn't retire in 2008 because everything they planned, hoped and dreamed for the past thirty years went up in smoke.

[La literatura]

Originally Posted by Comrade Crapski

When the CEO of Subway says if he tried to start his business today, he couldn't, that's not emotion. That's reality.

As far as making "rational investment decisions" tell that to the millions of people who couldn't retire in 2008 because everything they planned, hoped and dreamed for the past thirty years went up in smoke.

More emotion. I get it -- you're investment behavior is based on emotion. If you can't separate yourself from that, then it's your problem, not mine.

[RedDread]

Originally Posted by La literatura

More emotion. I get it -- you're investment behavior is based on emotion. If you can't separate yourself from that, then it's your problem, not mine.

http://www.psmag.com/politics/fear-m...iberals-39283/

[Pawnmower]

Originally Posted by La literatura

More emotion. I get it -- you're investment behavior is based on emotion. If you can't separate yourself from that, then it's your problem, not mine.

There are many reasonable people that feel your primary residence should not be an investment...but rather a castle, fortress....

The reality is that for many families, their home IS their single biggest investment.

This can go both ways, as we have easily seen....

Mr. Crapski is not being unreasonable here IMO.....

There isn't much that could go wrong....but lets say you had a 80%mortgage, and got into medical/financial troubles ...or involved in litigation.......

you could lose your home, and the 20% down quite easily

or , prices could drop 25-50% and it might not make sense to stay in the house (as we have seen)...so you walk away, rent a place much cheaper and lose the 20%....It has happened to millions of families.


If youre young, like jensen, maybe its worth the risk......I'm 40 and I choose to take some risk on my personal residence.....I probably have about 50% equity...., but im still young enough that I am trying to use it to build.....

I think there is a balance that is right for most......most people are going to carry SOME debt on their residence...but people who carry a lot, or refi and take cash out to buy toys......are playing a dangerous game......even taking equity out and making 'safe' investments could be risk not worth taking...

there really isn't one solution for everyone...thank god or no one would need 'wealth management' classes...everyone would just do x,y z formula