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In some cases, paying off one's house may not be as financially sound as paying the mortgage. If you can borrow the money at let's say a rate of 5.5% (today's rate), and write off 25% of that, the actual cost to borrow the money is 3.75%. There are other investments which should yield a greater net than 3.75%. So, one would need to do the math to decide which is better, paying off the house, or investing the money into something else.

SJ, you're right on the money. Even my clients who had the ability to pay cash for a house got a mortgage. They were very conservative people and also financially savvy about investing for the long term. Consider that every 10 years or so the stock market averages 10% and you're not a day trader, having a mortgage makes sense with low rates. I do want to add they did not do 100% financing or any tricky or liar loans.
Full doc, good debt ratios, low loan to values and excellent credit.

SJ, you're right on the money. Even my clients who had the ability to pay cash for a house got a mortgage. They were very conservative people and also financially savvy about investing for the long term. Consider that every 10 years or so the stock market averages 10% and you're not a day trader, having a mortgage makes sense with low rates. I do want to add they did not do 100% financing or any tricky or liar loans.
Full doc, good debt ratios, low loan to values and excellent credit.

Not so conservative if they chose to invest versus payoff their mortgage. Nearly every conservative financial planner will advise clients to payoff the mortgage.

And, your statement about investing in the average stock market versus paying off the mortgage is dead wrong.

Here are some examples (mortgage rates are from Freddie Mac website)--

1972-- Market reaches 1000. Average return from 1972 through 2002 (length of a 30 year mortgage) when market was around 8400 is about 7.4%. In 1972, mortgage rates were running in the range of 8.5%. Paying off the mortgage would have been a much better deal.

1977 --Market at about 1000. Average return since then is about 9.4%. Average mortgage rate in 1977 was about 9.1%. A better deal to pay off the mortgage especially considering the return is risk free and the stock market is fairly risky.

End of 1982--Market around 1000. Return since 1982 to today at 12000 is about 10.5%. Mortgage rates were around 14% at the end of 1987. Again, definitely payoff the mortgage.

End of 1987--Market around 2000. Return since 1987 to today at 12000 is about 9.5%. Mortgage rates were around 10.5% at the end of 1987. Again, a much better deal to payoff the mortgage.

End of 1997--Market around 7800. Return since 1997 is about 4.5%. Average 30 year mortgage was around 7.1%. Paying off the mortgage would have been a smoking deal.

Also, the market does not average 10% growth per year. I always hear that number quoted, but it just isn't true. In 1940, the market was around 100. If you had invested in the Dow in 1940 at 100, your average annual return would have been around 7.4% through yesterday. Go back to 1920, and the average return drops to under 6%.

The moral of the story--always, always payoff the mortgage. I'm not sure who started the myth regarding keeping a mortgage if you have the wherewithal to pay it off (probably a mortgage broker;-)just kidding), but it is an urban legend.

Also, the market does not average 10% growth per year. I always hear that number quoted, but it just isn't true. In 1940, the market was around 100. If you had invested in the Dow in 1940 at 100, your average annual return would have been around 7.4% through yesterday. Go back to 1920, and the average return drops to under 6%.

The moral of the story--always, always payoff the mortgage. I'm not sure who started the myth regarding keeping a mortgage if you have the wherewithal to pay it off (probably a mortgage broker;-)just kidding), but it is an urban legend.

I guess you glanced over my post and missed words like "not being a day trader" or when "mortgage rates are low". My definition of conservative is they did not have any credit debt or car payments. They took fixed rate mortgages, usually 15 year terms.
In full disclosure, I am a mortgage broker by referral only with a large percentage of those referrals coming from Financial Planners.
I am not sure where you are getting your numbers from but also they do not appear to be taking into account the mortgage tax deduction.

Since 1927, the S&P 500 stock index has gained 10.4% a year on average. But in any given year it could be up 29.9% or down 9.0% or somewhere in between, says IFA.com. The trick is understanding that risk is a fact of investing. And it's also knowing you can manage risk intelligently by deciding how much risk you want to take and tailoring your portfolio to generate the top return for your level of acceptable risk.
To do that, it's important to understand the power of diversification and the benefits of owning many types of stocks, from large value-priced stocks to small value-priced stocks. Diversification lets you minimize the risk posed by a single stock or type of stock and lets you still get your share of the market's return. You must also understand that to claim your 10% return, you need to be invested for a number of years and ignore short-term stock movements.

The Borrowers I had take mortgages who didn't need to understood these principles, were not overweighted in anyone one investment and also had cash reserves. They also had low loan to values on their homes, so no risk of losing it if the economy tanks.

The decision to do such is obviously not for everyone. A good financial planner obviously would not recommend this to people reaching retirement where risk should be lessened or those who will do the freak out everytime the market blips. Some people also just like to know they have no mortgage, that's cool, but there are those who have proven themselves to be financially savvy and it has worked out well for them.

You wouldn't also have a screen name of Little Fish too would you Fisher?

I guess you glanced over my post and missed words like "not being a day trader" or when "mortgage rates are low". My definition of conservative is they did not have any credit debt or car payments. They took fixed rate mortgages, usually 15 year terms.
In full disclosure, I am a mortgage broker by referral only with a large percentage of those referrals coming from Financial Planners.
I am not sure where you are getting your numbers from but also they do not appear to be taking into account the mortgage tax deduction.

Since 1927, the S&P 500 stock index has gained 10.4% a year on average. But in any given year it could be up 29.9% or down 9.0% or somewhere in between, says IFA.com. The trick is understanding that risk is a fact of investing. And it's also knowing you can manage risk intelligently by deciding how much risk you want to take and tailoring your portfolio to generate the top return for your level of acceptable risk.
To do that, it's important to understand the power of diversification and the benefits of owning many types of stocks, from large value-priced stocks to small value-priced stocks. Diversification lets you minimize the risk posed by a single stock or type of stock and lets you still get your share of the market's return. You must also understand that to claim your 10% return, you need to be invested for a number of years and ignore short-term stock movements.

The Borrowers I had take mortgages who didn't need to understood these principles, were not overweighted in anyone one investment and also had cash reserves. They also had low loan to values on their homes, so no risk of losing it if the economy tanks.

The decision to do such is obviously not for everyone. A good financial planner obviously would not recommend this to people reaching retirement where risk should be lessened or those who will do the freak out everytime the market blips. Some people also just like to know they have no mortgage, that's cool, but there are those who have proven themselves to be financially savvy and it has worked out well for them.

You wouldn't also have a screen name of Little Fish too would you Fisher?

I answered your point directly. I was not assuming these folks were day traders. I assumed they were long term investors in my analysis. I didn't cut and paste an article that quotes a 10% average return. I actually went back and did the math. Niether the DJIA or the S&P 500 have gotten anywhere near 10% over the long term. In very short term bursts, maybe, but over the long, long term, no.

And, no, not little fish.

I answered your point directly. I was not assuming these folks were day traders. I assumed they were long term investors in my analysis. I didn't cut and paste an article that quotes a 10% average return. I actually went back and did the math. Niether the DJIA or the S&P 500 have gotten anywhere near 10% over the long term. In very short term bursts, maybe, but over the long, long term, no.

And, no, not little fish.

Fisher, I did view your numbers and I also googled the bejeesus out of the numbers as well. Here is a Yale Study done in 2001 that examined 6 different methods of decomposing historical returns from 1926-2000. The historical return the study shows is 10.6% from Data obtained from Wilson and Jones.

But setting that aside, I will not debate S & P returns since it is not my topic of expertise, but lets examine if someone bought or refinanced in 2004, took a 15 year fixed rate mortgage, where rates ranged between 4.50-5% or so. I will use 5% for this scenario. Using a 33% tax bracket. The effective rate is then 3.35% with mortgage deduction. If I used your lowest rate of return since 1927 which was 6%, would you not argue that fiscally it made sense at that time to put money into an investment vehicle where those funds will be compounding?

I want to be pointed that not all need apply for the above.
The people who did this had a certain level of financial maturity, monitored their investments closely and may have also had other tax/estate pressing reasons for doing such.

Fisher, I did view your numbers and I also googled the bejeesus out of the numbers as well. Here is a Yale Study done in 2001 that examined 6 different methods of decomposing historical returns from 1926-2000. The historical return the study shows is 10.6% from Data obtained from Wilson and Jones.

But setting that aside, I will not debate S & P returns since it is not my topic of expertise, but lets examine if someone bought or refinanced in 2004, took a 15 year fixed rate mortgage, where rates ranged between 4.50-5% or so. I will use 5% for this scenario. Using a 33% tax bracket. The effective rate is then 3.35% with mortgage deduction. If I used your lowest rate of return since 1927 which was 6%, would you not argue that fiscally it made sense at that time to put money into an investment vehicle where those funds will be compounding?

I want to be pointed that not all need apply for the above.
The people who did this had a certain level of financial maturity, monitored their investments closely and may have also had other tax/estate pressing reasons for doing such.

Mango, don't forget the taxes you must pay on the returns you get. You must compare pretax to pretax or after tax to after tax. I am keeping it simple by comparing pretax to pretax on both the mortgage and investment side. Also, remember that the mortgage rates quoted above are conventional loans. Many of the folks financing homes along 30A are taking out jumbos that have a higher rate making it an even better deal to payoff the mortgage. ;-)

As for your example above. If you had taken out a 30 year mortgage in January 2004, you would have paid roughly 5.7% plus .7 points making your APR closer to 6%. In January 2004, the DJIA stood at about 10600. The DJIA now stands at about 12100. Your return since 2004 on the DJIA would stand at a mere 4.5% with no day trading--we are talking long term investing here in a diversified portfolio. Paying cash still would have been a much better deal in your example. You would be saving yourself a guaranteed 5.7% annually versus making 4.5% annually on a risky investment. Hands down a better deal to pay cash for the house.

Mango, don't forget the taxes you must pay on the returns you get. You must compare pretax to pretax or after tax to after tax. I am keeping it simple by comparing pretax to pretax on both the mortgage and investment side. Also, remember that the mortgage rates quoted above are conventional loans. Many of the folks financing homes along 30A are taking out jumbos that have a higher rate making it an even better deal to payoff the mortgage. ;-)

As for your example above. If you had taken out a 30 year mortgage in January 2004, you would have paid roughly 5.7% plus .7 points making your APR closer to 6%. In January 2004, the DJIA stood at about 10600. The DJIA now stands at about 12100. Your return since 2004 on the DJIA would stand at a mere 4.5% with no day trading--we are talking long term investing here in a diversified portfolio. Paying cash still would have been a much better deal in your example. You would be saving yourself a guaranteed 5.7% annually versus making 4.5% annually on a risky investment. Hands down a better deal to pay cash for the house.

Explain your definition of long term to you because based on your example of 4 years, I am assuming this is what you mean by long term. It's not what I was comparing to. You also are making the assumption that people used funds in the market that generated taxable capital gains as opposed to maximizing their contributions to pension plans, ie; self employed persons, which are not subject to taxes. You're also using 4.5% in your above example, but 4.5% of what amount? The amount initially invested, or the compounded balance. We are also just using S&P figures as well. The people who were successful with our conversation invested in International stocks, bonds, tax free AAA muni bonds, in general have well rounded portfolios and pay close attention to them varying the mix based on market conditions.
Interesting topic, glad it was raised. Hopefully someone who has experience in financial planning will chime in with their opinions.

Explain your definition of long term to you because based on your example of 4 years, I am assuming this is what you mean by long term. It's not what I was comparing to. You also are making the assumption that people used funds in the market that generated taxable capital gains as opposed to maximizing their contributions to pension plans, ie; self employed persons, which are not subject to taxes. You're also using 4.5% in your above example, but 4.5% of what amount? The amount initially invested, or the compounded balance. We are also just using S&P figures as well. The people who were successful with our conversation invested in International stocks, bonds, tax free AAA muni bonds, in general have well rounded portfolios and pay close attention to them varying the mix based on market conditions.
Interesting topic, glad it was raised. Hopefully someone who has experience in financial planning will chime in with their opinions.

I was simply responding to your example of taking out a mortgage in 2004. In addition, you eventually pay taxes on virtually all investments including those made into retirement plans. In every example I gave, paying off the mortgage would have been the best long term or short term bet. AAA bonds and tax free munis will never beat the risk free rate of paying off your mortgage. International stocks may work in the short term snapshots, but not over the long term. Again, paying off your mortgage is risk free. There are no risk free rates that exceed mortgage rates at any given point in time that I am aware of.

Again, conservative financial planners (not those who are also selling investment vehicles or taking a cut of investable dollars from their clients) will almost always tell you to pay off the mortgage.

And don't forget that even though the iPod says Apple on the box, it is made in China, same as the cheap toaster.

Consumer purchases, comprise roughly three quarters of our economy. Giving back a little of the income already earned by the taxpayer is not a free money giveaway. Those tax dollars spent in the short term will have some beneficial effect.

I was simply responding to your example of taking out a mortgage in 2004. In addition, you eventually pay taxes on virtually all investments including those made into retirement plans. In every example I gave, paying off the mortgage would have been the best long term or short term bet. AAA bonds and tax free munis will never beat the risk free rate of paying off your mortgage. International stocks may work in the short term snapshots, but not over the long term. Again, paying off your mortgage is risk free. There are no risk free rates that exceed mortgage rates at any given point in time that I am aware of.

Again, conservative financial planners (not those who are also selling investment vehicles or taking a cut of investable dollars from their clients) will almost always tell you to pay off the mortgage.

Those conservative financial planners must have been hiding the last 20 years.

How's the disclaimer go? Past returns are not necessarily an indicator of future performance.

My concern over the next 20 years comes from the baby boomers- a lot of them are going to be selling off investments in order to have cash for retirement. Who's going to come along to increase the number of buyers for stock to keep it somewhat in equilibrium with the growing number of sellers?

I'm tending to see it as yet another way the Gen Xers are going to get the demographic squeeze put on them, and that we're looking at lower return rates in the medium-long term unless there's a significant increase from somewhere in the number of people buying American stocks, or the boomers start dying off in large numbers.

Again, conservative financial planners (not those who are also selling investment vehicles or taking a cut of investable dollars from their clients) will almost always tell you to pay off the mortgage.

Fisher, frankly I do not feel that there is any one right answer. It all depends on the level of risk aversion one has.
Here's an interesting article that vocalizes multiple opinions.
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Fisher, frankly I do not feel that there is any one right answer. It all depends on the level of risk aversion one has.
Here's an interesting article that vocalizes multiple opinions.
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Excellent article...there is no one-size-fits-all when it comes to investing. If someone writes in an article "this is the ONLY/BEST way/time to invest/buy" your BS alarm should be blinking red....or better yet, appear on a BIG BLUE SIGN.

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Those conservative financial planners must have been hiding the last 20 years.

You can do better than that.

To answer the original questions, I am a licensed Florida Realtor in this area. I don't post here very often. The posts that I have made don't really comment on the market as far as I remember, so I don't think I'm guilty of putting a positive spin on things.

Anyway, "judge" both properties and realtors on an individual basis, and you will be happiest with your results!

Good luck!

don't be offended by people calling your post a "downer".

people on this site think if you live in denial and smile alot that somehow reality will dissipate. it's a tragic part of the culture here. keep pretending and somehow the facade will become real that's why businesses here are so frail and do so poorly and why they've destroyed what marketability the area has to offer. not too bright, but plenty arrogant...with a smile.

it's not that they're lying to you..knowingly..even if they told you it was the best investment ever..they'd totally believe it because sadly..not much is going on behind those passive aggressive grins.

as for changing your name to protect your honesty... frankly, if you have to lie to be friends with people...who cares?

as for bush's "stimulus" package..it's not an economic plan, it's a bribe. plus, it will all go to china in the end.

don't be offended by people calling your post a "downer".

people on this site think if you live in denial and smile alot that somehow reality will dissipate. it's a tragic part of the culture here. keep pretending and somehow the facade will become real that's why businesses here are so frail and do so poorly and why they've destroyed what marketability the area has to offer. not too bright, but plenty arrogant...with a smile.

it's not that they're lying to you..knowingly..even if they told you it was the best investment ever..they'd totally believe it because sadly..not much is going on behind those passive aggressive grins.

as for changing your name to protect your honesty... frankly, if you have to lie to be friends with people...who cares?

as for bush's "stimulus" package..it's not an economic plan, it's a bribe. plus, it will all go to china in the end.

Raven,

I stated in an earlier thread, I tend to be an overly optimistic person. It is how I live my life. My dad is a builder and one of the most negative people you will ever meet. Probably why he builds and I sell. I would probably be less optimistic if someone would point me in the direction of a beach community that had a better value. Can you show me this area? I may move there.

don't be offended by people calling your post a "downer".

people on this site think if you live in denial and smile alot that somehow reality will dissipate. it's a tragic part of the culture here. keep pretending and somehow the facade will become real that's why businesses here are so frail and do so poorly and why they've destroyed what marketability the area has to offer. not too bright, but plenty arrogant...with a smile.

it's not that they're lying to you..knowingly..even if they told you it was the best investment ever..they'd totally believe it because sadly..not much is going on behind those passive aggressive grins.

as for changing your name to protect your honesty... frankly, if you have to lie to be friends with people...who cares?

as for bush's "stimulus" package..it's not an economic plan, it's a bribe. plus, it will all go to china in the end.

This is the best time to buy Real Estate right now.
<---- arrogant smile

Best Wishes,

Josh the Realtor

Sorry I can't post more, but too busy selling Real Estate to be a downer on Sowal all day.

My Magic 8-Ball says that it may help stimulate the economy of China, since everything we buy today, seems to come from China. Don't think that China doesn't feel the hurt.

Them China boys got their real first taste of capitalism Monday when their stock market lost a Trillion gazillion in value because of us. We finally got them back!

Them China boys got their real first taste of capitalism Monday when their stock market lost a Trillion gazillion in value because of us. We finally got them back!

From the Financial Times:

Beijing creates subprime taskforce

By Jamil Anderlini in Beijing
Published: January 22 2008 21:11 | Last updated: January 22 2008 21:11

China?s banking regulator has convened a task force to monitor US subprime exposure at Chinese banks as they prepare for larger-than-expected losses on those holdings, senior officials told the Financial Times on Tuesday.

The China Banking Regulatory Commission has established a special group to investigate the subprime holdings of China?s largest lenders and report on a monthly basis, according to officials who asked not to be named.

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You think they're going to be open to lending the US back our dollars to make loans in the future???.....Not!



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people on this site think if you live in denial and smile alot that somehow reality will dissipate. it's a tragic part of the culture here. keep pretending and somehow the facade will become real that's why businesses here are so frail and do so poorly and why they've destroyed what marketability the area has to offer. not too bright, but plenty arrogant...with a smile.

What reality? Yours? destroyed marketability of the area? hello, but the entire country is in a recession. Maybe what you consider denial are those going about their business seeking ways to exact change or keep their heads above water in this fragile economy.

What have YOU done lately to exact any change? Probably nothing since it appears you have your head so far up your behind scraping past the cynicism to reach your flawed thinking.

Another development to keep your eyes on:

MGIC Investment Corp, the nation's largest insurer of mortgages, is in trouble. They've announced they'll have over $2B in losses as a result of mortgages they've insured going south--and a growing number of mortgages defaulting.

Problem is, Fanny & Freddie previously bought up these "insured" mortgages, so their portfolios are being kicked to the curb as well.

If MGIC goes bust, what will that say for all the mortgages they've "insured" and what will that do to the mortgage industry going forward.

Comments?

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Another development to keep your eyes on:

MGIC Investment Corp, the nation's largest insurer of mortgages, is in trouble. They've announced they'll have over $2B in losses as a result of mortgages they've insured going south--and a growing number of mortgages defaulting.

Problem is, Fanny & Freddie previously bought up these "insured" mortgages, so their portfolios are being kicked to the curb as well.

If MGIC goes bust, what will that say for all the mortgages they've "insured" and what will that do to the mortgage industry going forward.

Comments?

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I think MGIC is going to hold their own since I think they more than any other MI company are best prepared fiscally. They've always been relatively conservative. But in the event that this hole gets deeper than anticipated, what do y'all think of Jim Kramers plan for the Feds to buyout mortgage insurers and help bailout Banks? He may not be that far out in left field with part of the idea. (although I think he is nutz personally, but every mad man has an epiphany every now and then) Fannie and Freddie are gov't agencies afterall so it's all one in the same. NAR's idea to raise the Fannie/freddie loan limit by 200K is absurd in my opinion and the economic stimulus plan is like handing out lollipops at the doctors office. Makes you feel good for a few minutes, but you still need to fill the prescription.

But in the event that this hole gets deeper than anticipated, what do y'all think of Jim Kramers plan for the Feds to buyout mortgage insurers and help bailout Banks?

I'm against the government bailing out any businesses or individuals who risked it all. Too many of the mortgages are...shall we say...garbage at worst and "questionable" at best.

All this talk of "buyouts" and "handouts" and "rate increases" are only postponing the pain and unfairly dumping more debt on future generations.

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