What to do? mortgage advice

[poundcruncher]

All right everybody. Just wanted a quick opinion on what to do with my upcoming mortgage.

Mortgage of approximately $500K. My wife and I make $175K per annum in salary + I make approximately $20K per year consulting.

Pre-tax monthly income = $16,250 give or take.

I have 5 year mortgage rate quote of 4.24%.

5 year variable is P + 0%.

Monthly payment works out to approximately $2,695 for fixed. Variable is $2,180.

Take home is approximately $10,000 per month.

Any extra cash I make I plan on putting against my mortgage while rates are low. Double up where I can. 10% paydown per year when I can.

So... what would you do? (yes meth... I know I overpaid but sometimes life deals you a hand that you'd rather not have played). if y'all can please stay on topic, that would be great!

As a tangent to another thread, anybody see any better rates out there than ones I've quoted?

[unicas]

you pay 2.25% interests and you want to pay off quick? I would delay my payment as much as I can so I can use the cheap money for other investment opportunities.

[Marco911]

^ I would tend to agree. In fact, that is the only way to make some serious money in the long run.

You want to essentially NEVER have anything paid off. You should always borrow as much as you can for as long as you can.

The trick of course is to make sure that you're returns on investment are higher than the interest you're paying. If you can see yourself and your wife in the same level of stability in terms of earning potential then you should never pay off anything. In fact, with that income, you should be able to amass some seriously high net worth in matter of 10 years or so if you know what you're doing.

The problem with this "never pay off anything" process is that some people cannot psychologically handle it and others hear only the "never pay anything off" but without understanding how it works.

The idea of being mortgage free is a poor mans way of feeling rich. All that matters is your net worth. As long as it is growing rapidly, that's all that should matter. Oh, and of course your ability to handle whatever debt you have

[energie]

what if you fear that interest will increase significantly in the near future? Does it still not make sense to pay off as much as we can now, so that when rate is high the amount owing will be as long as possible?

thanks
E

[Invisiblehand]

All right everybody. Just wanted a quick opinion on what to do with my upcoming mortgage.

Mortgage of approximately $500K. My wife and I make $175K per annum in salary + I make approximately $20K per year consulting.

Pre-tax monthly income = $16,250 give or take.

I have 5 year mortgage rate quote of 4.24%.

5 year variable is P + 0%.

Monthly payment works out to approximately $2,695 for fixed. Variable is $2,180.

Take home is approximately $10,000 per month.

Any extra cash I make I plan on putting against my mortgage while rates are low. Double up where I can. 10% paydown per year when I can.

So... what would you do? (yes meth... I know I overpaid but sometimes life deals you a hand that you'd rather not have played). if y'all can please stay on topic, that would be great!

As a tangent to another thread, anybody see any better rates out there than ones I've quoted?

My first thought is way are you looking at a 5 year fixed @ 4.24? Even with good pre payment options you could probably get <4%. ING is 3.99%

See rates here: http://www.redflagdeals.com/deals/main. ... ageclosed/

[Marco911]

what if you fear that interest will increase significantly in the near future? Does it still not make sense to pay off as much as we can now, so that when rate is high the amount owing will be as long as possible?

thanks
E

That's why it's important to have your net worth going in the up direction at all times. So you can move things around if things get wild.

I will give you a personal example.

My current residence is mortgaged to the max. I was paying 0% through my previously employer but now I'm forced to pay prime which is still not a bad deal since prime is only 2.25%

I have yet switched my loan so it is an interest only loan. I am not suggesting everyone run out and do this but I'm giving you my exact situation. I could pay the loan off in full right now and have no mortgage but why would I do that?

If I am earning 10% return on my money (which is a really pathetic return) and my income keeps pace with inflation, why would I want to pay off my loan? If anything, I would want to find more ways to dump money into my 10% growth. That may be with more loans or by dumping the money in directly.

So what if interest rates go to 20%? Well, if that happened, I'm pretty sure I'd be able to find an investment that would give me even better returns so the idea of paying off my home would still be pointless. However, let us assume all hell broke out and there was nowhere to put my money. Well, I'd simply pay off the loan.

To put it in a light that might make more sense to Vancouverites:

When home prices were going up double digits year after year, what did people do? Did they pay off their homes? No. They used whatever equity they could get in their current homes to buy more homes. For those that knew what they were doing and NOT part of the sheep event, some serious money was made.

Why pay off something when you can have it and make more money elsewhere?

You ever hear about people worth 100 million dollars and they HAVE to sell their home and you think "how is that possible?" Or you hear about some business owner going bankrupt and has to sell his home but then you find out after they still have all this money?

It's because most of these people do not own their home outright. They sometimes get in a pinch with what happened in this global credit crunch and have to liquidate some assets and move things around but it's the smartest way to run your finances. Like I said before though, for many people, it's just too much, it goes over their head, or they can't be bothered.

[poundcruncher]

you pay 2.25% interests and you want to pay off quick? I would delay my payment as much as I can so I can use the cheap money for other investment opportunities.

unicas / marco911 - Yes... but I can borrow against my equity on the home @ P + .5% and have it tax deductible.

So if investment opportunities arise, yes, I'll have funds available.

the main topic i'm trying to deal w/ at this time is whether to go variable vs. fixed today.

invisible hand - thanks for the link.

[Marco911]

you pay 2.25% interests and you want to pay off quick? I would delay my payment as much as I can so I can use the cheap money for other investment opportunities.

unicas / marco911 - Yes... but I can borrow against my equity on the home @ P + .5% and have it tax deductible.

So if investment opportunities arise, yes, I'll have funds available.

the main topic i'm trying to deal w/ at this time is whether to go variable vs. fixed today.

invisible hand - thanks for the link.

Has CRA fully decided on how to treat HELOCs? I know the case was won a while ago but I keep hearing there might be some changes on that. If you decide to sell later on you might end up with a huge tax bill. I'm not an accountant and Canadian taxation is secondary to US tax for me so perhaps it's worth looking in.

That said, if you can do it without any implications you're better off with whatever rate will allow you to borrow at the lowest rate. They aren't doing HELOC at prime anymore? ouch

[poundcruncher]

you pay 2.25% interests and you want to pay off quick? I would delay my payment as much as I can so I can use the cheap money for other investment opportunities.

unicas / marco911 - Yes... but I can borrow against my equity on the home @ P + .5% and have it tax deductible.

So if investment opportunities arise, yes, I'll have funds available.

the main topic i'm trying to deal w/ at this time is whether to go variable vs. fixed today.

invisible hand - thanks for the link.

Has CRA fully decided on how to treat HELOCs? I know the case was won a while ago but I keep hearing there might be some changes on that. If you decide to sell later on you might end up with a huge tax bill. I'm not an accountant and Canadian taxation is secondary to US tax for me so perhaps it's worth looking in.

That said, if you can do it without any implications you're better off with whatever rate will allow you to borrow at the lowest rate. They aren't doing HELOC at prime anymore? ouch

Times have changed.... they used to do variables at prime minus... although that might still be the case i just haven't done in depth research yet.

[eyesthebye]

All right everybody. Just wanted a quick opinion on what to do with my upcoming mortgage.

Mortgage of approximately $500K. My wife and I make $175K per annum in salary + I make approximately $20K per year consulting.

Pre-tax monthly income = $16,250 give or take.

I have 5 year mortgage rate quote of 4.24%.

5 year variable is P + 0%.

Monthly payment works out to approximately $2,695 for fixed. Variable is $2,180.

Take home is approximately $10,000 per month.

Any extra cash I make I plan on putting against my mortgage while rates are low. Double up where I can. 10% paydown per year when I can.

So... what would you do? (yes meth... I know I overpaid but sometimes life deals you a hand that you'd rather not have played). if y'all can please stay on topic, that would be great!

As a tangent to another thread, anybody see any better rates out there than ones I've quoted?

you've got a good income pound - that said, I think you can cover any spread if rates go up. So my advcie would be to keep your variable long term. As a backup, get yourself pre-approved for a fixed and keep renewing every 3 months - your anxiety level will tell you when it's time to lock in.

[mabajada]

.

[eyesthebye]

this is an article from AgentWill.com that might help

Which Rate? Fixed or Variable?
I’m going to give the summary right here: The lesson contained is to take the lowest rate (Variable) at the longest amortization (35 Years) and make accelerated bi-weekly payments equal to what the fixed rate payment would have been. This will save you a heck of a lot of money. Read on to see the numbers and get an excel sheet to play with on your own.

It’s oh so tempting, isn’t it? Look at them… the cheapest money we’ve ever had (unless you borrowed when variable rates were even better. One of my clients has Prime -0.9%!). Right now you can get a fixed rate for around 3.85%. The variable is sitting at Prime -0.25% which is 2%.

If you go Variable you will not know what your rate is next month. Should the Bank of Canada not change their rates then you will stay at 2%. If they up it to offset inflation then your rate will go up as well. So far the BOC has said nothing to change the rates but they have hinted that they will be increasing them sometime next year.

If you are squeamish about that then you should probably go for a fixed rate. that means that for the length of your term your rate will not change, your payments will stay constant, and you can know EXACTLY what your mortgage payment will be 2,3,4,5 years out.

Even so, I wouldn’t do it. Only two of my clients have ever gone fixed and one of them now regrets it. Variable rates, even in times of uncertainty, have trumped fixed rates in total cost over the long term. Let me show you something:

The monthly for borrowing $100,000 with a 35 Year Amortization (I use 35 years because you can almost always pay down your loan but you cannot extend it from 25-35) with biweekly payments (26 payments – one every two weeks, which saves you interest):

at 2% = $152.84

at 4% = $204.27

Total Savings every two weeks $51.43 which $1337.18 every year! So let’s go shopping, right? Wrong! Put that back in your mortgage. It’s pure principle that you are paying down. What happens at the end of Year 1?

If you just went with the 2% rate and nothing changed and you made your minimum payments of $152.84 every two weeks at the end of the year you would owe $98,006.08. That’s still better than the 4% fixed where you would owe $98,663.36 (by about $657). But, and this is where the terms of your mortgage are very important, if you can apply your savings to make extra payments and put that bi-weekly $51.43 into the mortgage at the end of Year 1 or into every payment then you would only owe about $96, 656.85! A difference of $2006.51! How is that for a return?! You just turned $1337.18 (the total value of your payment difference into $2006.51 (the total value of the difference between paying down and not paying down). That’s like a 50% return!

Now, I know what some of you are saying: “Will, but what if interest rates rise?” Sure. They probably will. Nothing is definite and we don’t know when or by how much. We don’t even know if. We do know that the likelihood of them rising is far greater then them falling. So let’s say rates rise by a pretty extreme 1% before the end of your first year. Your new variable rate, 6 months in goes to 2.5% and then at 9 months goes to 3%. The chances of them going up to 4% over the next five years are pretty good, too (we were just there about a year ago). You’ll still save in the long term if history is any judge.

Payments:

1-6months Payments 1-13 2%: Paying $152.84 and Owing $99,008.47 at the end of 6 months.

7-9months Payments 14-20 2.5%: Now paying $164.94 and Owing $98,518.88 at the end of 9 months.

10-12months Payments 21-26 3%: Now paying $177.56 and Owing $98,134.50 at the end of the first Year.

So to compare that to the fixed rate: Your variable rate went up but at the end of the first year you came out ahead by $528.86 even with the increased rates. Had you applied the difference all along and kept your payments constant at what the fixed rate mortgage would have cost you then you would come out ahead by $1648.60!

Want to something else that’s even bigger and better? The savings you make off those first few years turn into a lot of money over the life of the mortgage. In some cases hundreds of thousands of dollars and that is even if the rates go up.

[mabajada]

Marco, where does the 'poor man who's feeling rich' start. We have 90% equity in a couple of properties. The idea was to buy more property, but the cap rates havent justified it yet. So it would be prudent to look at other investments.

[Marco911]

Marco, where does the 'poor man who's feeling rich' start. We have 90% equity in a couple of properties. The idea was to buy more property, but the cap rates havent justified it yet. So it would be prudent to look at other investments.

If you're the kind of person that's happy with what you have then it's moot, however I doubt it based on your comment.

The good news is you've stopped buying because it doesn't make sense. That's what smart people should do. Unfortunately some people get euphoric and greedy and forget that element. 90% equity is pretty high and there are plenty of places that money could be put to work to make you more money. It just depends on what you're comfortable with. One thing I will stress is that whatever you do, make sure you understand it. Don't even take a professional's word on it because most professionals don't have a clue.

I've had a record year with stock returns although right now, it's a bit tricky to figure out where to put large chunks of cash.

The problem is that the average Joe, feels as though they're rich once they have their home paid off because all the money they make they get to keep (more or less) as most of the income people make goes towards paying a mortgage. They feel rich once this huge asset is paid off. It's more of a head trip. Anyway, 90% is high as hell. I think anything more than 20% is crazy but I'm a high risk kind of guy.

[mabajada]

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