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post #81 of 102 (permalink) Old 12-07-2007, 11:11 AM Thread Starter
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Again, mlfun, do you think this the President did the right thing or not?

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post #82 of 102 (permalink) Old 12-07-2007, 11:58 AM
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There's mileage in that argument. consider this:

In a 30 year fixed mortgage, at any rate, it takes 21 years of monthly amortization (monthly payments with NO additional money toward principal) for the PRINCIPAL balance to reach 1/2 of it's starting point. (With a 15 yr fixed it takes 2 years to get there).

People need to get their heads around what the EFFECTIVE RATE of their loan is, regardless of what type of program they're in. Even a fixed interest loan is technically an ARM depending on how long you stay in the loan/house. Example:

$150K borrowed on a 30 year fixed loan at 6% (for argument's sake), roughly $900 per month P & I. $10,800 per year roughly in payments.

After 12 months of payments $8949 services interest, $1842 chews into principal bringing the principal balance from $150K down to $148,158.00. so in year one, it costs you NINE grand to pay off $1800 worth of debt.

During year 7, $8154 services interest, and $2637 chews into principal. 7 years how long the avg American keeps a home for (and unfortunately, they REFI more often than that, starting the Amort ALL OVER AGAIN)

....but let's say they didn't refi - let's say at the end of year 7 it's time to move. 7 x 10,800 per year = $75,600 invested IN THE LOAN (a good loan at that) - Roughly $60,000 has been spent in servicing the interest, and onlly $15,600 of the principal of the loan has been paid back. That is NOT a 6% interest rate. It's only a 6% interest rate if you KEEP THIS LOAN FOR 30 YEARS. Know anybody who has done that?? I do, my folks. In September, they JUST paid off the 30 year note on the house I grew up in. They had the thing built in September of 1977, and have been in it ever since and have NEVER moved or refinanced. Other than them, I've never seen anyone do that. Think about where you were in Sept 1977. That;s how long my folks kep their mortgage.

Back to the folks who are moving after year 7 - $60K invested in interest, $15K actually paid back on the loan. This is an EFFECTIVE interest rate in the neighborhood of 60%. It's ONLY a wise investment IF the house appreciates. (OR if they PAY DOWN PRINCIPAL, which is what EVERYONE SHOULD DO- or take out a 15 year loan and make due with 4 Luxury cars instead of ) Not much of ANY of that has been happening in the US recently.

NOW, the ILLUSIONARY profit people see in times when RE market is bouyant:

Mr. and Mrs. Jones bought their house in 2000 for $150K, 6% 30 year fixed. They lived happily in it for 5 years, had another kid, and in 2005 put it up for sale for $190K, and it sold in one day. Mr. Jones says to Mrs. Jones "honey we did GREAT, we made $40K in profit on our investment!!" Mrs. Jones says "honey, that's why I married you, because you're SO SMART" and bangs the shit outta him that night, and they wake up the next morning happy as clams.

Problem is that they actually LOST money - they made 60 monthly payments of $899.33 (p & I) for a total amount of $54K, $43K of which went to interest, and the other $11K went to principal, bringing their principal bal down to $139K. So they made $40K in equity on the house, and $11K in equity on the loan - $51K, basically a WASH in investment terms, and when you factor in closing costs and fees, they're in the negative.

In a market where housing values arent appreciating, they're REALLY in the negative. If they held onto that house until 2007, they wouldn't be much further into that loan, and they'd only be able to sell that house for 160-170, if AT ALL.

A House is an investment. A mortgage really isn't....unless you manage it properly.
Excellent review of just how folks that move constantly pay more in interest than the advertised. Only factor you did not calculate in was the mortgage writeoff you get on your taxes which burns much of [but not all of] the up front interest on the "Rules of 78" tables and make them more palatable.

McBear,
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post #83 of 102 (permalink) Old 12-07-2007, 12:11 PM
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^ That, and the fact that you have to live somewhere.
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post #84 of 102 (permalink) Old 12-07-2007, 12:16 PM
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Originally Posted by Jayhawk View Post
I believe that more than 95% of mortgage-holders are paying them off on time, and less than 5% are having problems. There has always been a small %age of loan defaults, and although the sub-prime thing has increased that a bit, THE WORLD IS REALLY NOT COMING TO AN END--as many of you seem to think (or want to make us think).
The world is NOT coming to an end BUT, there are a whole bunch of people for who it sure seems that way. The problem with the 95% number [which is based on aggregate prime/sub-prime/pre mortgage DOLLAR amounts] is that it is very misleading.

Examples for perspective [based on numbers of loans, not dollar amount]:

96% of Prime Mortgages are either "up to date" or "to 30 days" which all fall into the "on time" figure.
2% of Prime Mortgages are in Default/Foreclosure [highest ever]
40% of Sub-Prime Mortgages are OVER 30 behind
12% of Sub-Prime Mortgages are in Default/Foreclosure
20% of 2006 Sub-Prime Mortgages are Foreclosed and off the statistical books

Since that 95% number is based on Dollar amount, realize that all the $1Million+ mortgages that are paid on time in the Prime category skew the numbers for all the $120K Sub-Prime Mortgages that are in default.

The problem is further exacerbated by the finance sectors brilliant hedge fund and derivatives portfolios, many leveraged up to 35:1 with these Sub-Prime loans. The portfolios were supposed to be tucked away like this so the banks were able to avoid risk and push it out to things like Teachers Pension Funds and Mutual Funds and other investors who needed a "pop" for their bonus.

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post #85 of 102 (permalink) Old 12-07-2007, 12:50 PM
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The world is NOT coming to an end BUT, there are a whole bunch of people for who it sure seems that way. The problem with the 95% number [which is based on aggregate prime/sub-prime/pre mortgage DOLLAR amounts] is that it is very misleading.

Examples for perspective [based on numbers of loans, not dollar amount]:

96% of Prime Mortgages are either "up to date" or "to 30 days" which all fall into the "on time" figure.
2% of Prime Mortgages are in Default/Foreclosure [highest ever]
40% of Sub-Prime Mortgages are OVER 30 behind
12% of Sub-Prime Mortgages are in Default/Foreclosure
20% of 2006 Sub-Prime Mortgages are Foreclosed and off the statistical books

Since that 95% number is based on Dollar amount, realize that all the $1Million+ mortgages that are paid on time in the Prime category skew the numbers for all the $120K Sub-Prime Mortgages that are in default.

The problem is further exacerbated by the finance sectors brilliant hedge fund and derivatives portfolios, many leveraged up to 35:1 with these Sub-Prime loans. The portfolios were supposed to be tucked away like this so the banks were able to avoid risk and push it out to things like Teachers Pension Funds and Mutual Funds and other investors who needed a "pop" for their bonus.
The data I have seen are based on the number of prime/sub-prime mortgages outstanding, not dollar amount. But that notwithstanding, I have to marvel at how hard you work just to make the situation "seem" dire. If you put half of that energy into finding a way to prove the positive side of things you could move mountains!

Don't believe everything you think
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post #86 of 102 (permalink) Old 12-07-2007, 01:01 PM
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^ That, and the fact that you have to live somewhere.
Well, I'm not saying that it's bad to have a mortgage.....just to recognize that the investment is the actual property, and the mortgage is just a vehicle and needs management and maintenance (kinda like our Benz's ).

Investment being the property: Sure, the neighbor's house might have been up for sale for the last year and not getting any bites, or maybe you just got appraised at 75% of what you would have 3 years ago.....but at SOME time in the future, the property's value will recover....might be next year, 5 years, 10 years from now.....just like any other investment, there are ups and downs.

The thing IS, when things are DOWN, is when the mortgage REALLY needs to be efficient, and "efficient" means mastering the amortization in your favor....it's just math, but there's only really three ways to do this -

1. 15 year mortgage from the get go. Like I said, you're eating bigtime into your principal by year 2 (as opposed to year 21 in a 30y loan).

2. 30 year fixed and PAY EXTRA TOWARD PRINCIPAL regularly. If you do that, even an I/O is fine and so is ARM.

3. What I do....I Use an equity line of credit like it's my checking account - all expenses get paid out of it, all income gets dumped into it, I move "chunks" of principal AWAY from the actual mortgage, and dump it onto the heloc, and let it get eaten down THERE. Yes, you incur interest on the HELOC, but in the long haul it's NOTHING compared to the interest you pay on a 30 year mortgage.

I have a 30 year note originated 6/2005 with a 5 year I/O period and a fixed rate that pops into an ARM on the 5 year mark. The note is for roughly $500K - I'm in year 2.5, and the principal is now under $400K - and by 2010 when it pops, I'll be under $100K....so big deal Meanwhile, this involves riding with a constant balance on my Heloc somewhere beteween $20K-$40K, and paying about $200 per month in interest - TOTAL, that's interest on my house, on my cars, on my purchases that would otherwise go on a credit card. (All deductible of course)

Some folks here may have heard about this program, and yes, I do market it....I'm not here to ram it down the throats of any of you, my MB brethren and sistren....but I can tell ya it works, and if anyone is interested in more info, feel free to pm me.

1. It kicks the shit outta my mortgage.
2. It turned a "problem" 5 year ARM with an I/O payment that my wife and I used to loose sleep over into something I now Yawn at when I think about it.
3. It gives me a "cushion" to buy more cars with.
4. Even if I wasn't looking to pay down my mortgage, it's the most incredible strategic financing strategy I've ever been exposed to. Anybody looking to buy ANY big ticket item, and wants to do it with the banks money, and pay pennies in interest on that item should consider it.

Anyway, to stay on topic, from a mortgage perspective, the MATH is set up in the BANK'S favor.....ALWAYS. You have to take ACTION to pivot the math into your own favor. Like I said - forget the program I do......the BEST route of financing a house is a 15 year mortgage from the outset. Bar none.
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post #87 of 102 (permalink) Old 12-07-2007, 01:20 PM Thread Starter
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15 year loan term is good but how many of your clients call you for a rate on a 15 or even consider 15 as their first choice?
Helocs are great too but remember that we have a math challenged society in here and many would tip their debt to sink the Titanic on a calm summer day. Think about it, how many people have you had to refinance again after you put them through a debt consolidation program? It's simple most consumers are not too bright and you can thank our educational system for your success.
Since you are in NJ, do you think most people would afford 15 years term? No way! Why do you think that the lending industry came up with even FORTY years terms (fixed)? The game of stretching has been sold as follows: What would be your return on investment if you invest your money rather than pay down your mortgage? People are made to believe that they will get an average of 8% (I didn't come up with that figure, I assure you) by investing in stocks or mutual funds. When it comes to it, many don't end up investing, hell they don't even save anything!
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post #88 of 102 (permalink) Old 12-07-2007, 01:30 PM
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Originally Posted by Jayhawk View Post
The data I have seen are based on the number of prime/sub-prime mortgages outstanding, not dollar amount. But that notwithstanding, I have to marvel at how hard you work just to make the situation "seem" dire. If you put half of that energy into finding a way to prove the positive side of things you could move mountains!
What resource are you using for that? I am using the Bernake report to the Joint Economic Committee jec/senate.gov

The dollar/debt ratio is right in line with the 95% number [94.87% actually] you quoted which is why it looks as if it is based on dollars instead of numbers.

And that required no work, just looking at a table on one screen and typing the numbers on another. And if folks DON'T look at the impact this is causing the folks in the middle class, it won't matter how many mountains are moved.

This thing doesn't impact you, me or many of us on this board directly [although the collapse of the housing market might just...] because we are in that nice cozy top 10% but for the folks that are NOT in the 10%, this is important and it required "moving mountains" just to get Washington to pay attention that there was a problem- IT DID TAKE THEM A YEAR.

McBear,
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post #89 of 102 (permalink) Old 12-07-2007, 01:43 PM
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15 year loan term is good but how many of your clients call you for a rate on a 15 or even consider 15 as their first choice?
Helocs are great too but remember that we have a math challenged society in here and many would tip their debt to sink the Titanic on a calm summer day. Think about it, how many people have you had to refinance again after you put them through a debt consolidation program? It's simple most consumers are not too bright and you can thank our educational system for your success.
Since you are in NJ, do you think most people would afford 15 years term? No way! Why do you think that the lending industry came up with even FORTY years terms (fixed)? The game of stretching has been sold as follows: What would be your return on investment if you invest your money rather than pay down your mortgage? People are made to believe that they will get an average of 8% (I didn't come up with that figure, I assure you) by investing in stocks or mutual funds. When it comes to it, many don't end up investing, hell they don't even save anything!
I was lucky enough to get some good advice when I bought my first house, a friend told me to get a 15 year fixed rate, I didn't think I could do this. On a 30 fixed the payment was $421.00 a month and on the 15 year fixed the payment was $479.00 per month, I couldn't believe there was only $58.00 difference between the two. I was also advised to pay double principal when I could. I paid it off in 12 years.
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post #90 of 102 (permalink) Old 12-07-2007, 01:51 PM Thread Starter
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I was lucky enough to get some good advice when I bought my first house, a friend told me to get a 15 year fixed rate, I didn't think I could do this. On a 30 fixed the payment was $421.00 a month and on the 15 year fixed the payment was $479.00 per month, I couldn't believe there was only $58.00 difference between the two. I was also advised to pay double principal when I could. I paid it off in 12 years.
Dude that payment of $420 for a 30 year mortgage assuming a 7% interest rate is based on a $63K loan. You cant apply that example to justify that the spread between a 30 year and 15 year loan is too small to only consider a 15.
Most people are in the mid to high six figures in housing debt.
I agree that a 15 year loan will allow you see that burden gone sooner, as matter of fact that's what I have and mine will be done and over with in four years but I would not recommend it just based on what I feel is right for me. Some people, cash flow is the game so a 30 year mortgage is just seen as rent.
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