The Investment Thread

[PlayerHader]

Just threw an annual single extra mortgage payment into a payoff calculator and it showed the loan would be paid off 3 years and 5 months earlier. This is a 30 year loan.

When I originally did this years ago it was a correct statement and it still pretty close the way I was thinking of what a payment is but when I say one extra mortgage payment I was including the entire payment including your escrow tax and insurance (which I guess varies by user). I am also thinking it may depend on interest rates as rates are very low right now.

 

Ah, I see. I didn't include escrow money, so that very well could explain it. Either way, it's not a bad idea at all.

 

I know when we were transitioning from the construction loan to our mortgage we asked about making bi-weekly payments on our mortgage and our bank didn't allow that (or at least not in a way that made a difference in the amortization).

[GAME05]

I'm actually quite far behind when it comes to retirement savings. Making little money in my 20s and being out of work for much of my 30s did the trick. Grad school was a waste of time and money, too.

 

But now debt-free, credit cards at $0 and basically no rent for the house. I'll be pushing pretty hard to save over the next 15 years.

 

I'm curious to hear more. How old and where are you currently at with retirement money?

 

I'm 44 and I don't think I'd crack $50k in retirement savings just yet. I'll also have a pension but that won't be more than about $1200/mo. Another benefit is work will continue most of my medical benefits between retirement and 62.

 

Between this and my side job I should be starting this year, saving $1000/mo is realistic if not somewhat conservative.

 

Although I'm a little unsure yet just where to save it all. I have a 401k and a self-directed IRA, but also taxable stocks/crypto. I'm in work housing, so when I retire I'll need a place to live. Sounds crazy right now but I still hope to retire before 60. I've heard rumor you can withdraw from an IRA early without the penalty in order to buy a house, but I also doubt I'll be buying one. So at least for now I'm stuck with capital gains.

 

And since I'm single no kids I have ambitions to retire in Belize. No income tax, no capital gains and a slightly lower cost of living.

[OldHeidelberg]

I never looked into Belize but I have 2 coworkers who have moved to Costa Rica since COVID started and are pretty happy about it. I was working from home even before COVID for the most part and have thought a lot about this, I sort of think Colombia is a good place to get in while it is still cheaper. Still a stigma to it from FARC and Escobar but really coming out of all that.

[homer]

I never looked into Belize but I have 2 coworkers who have moved to Costa Rica since COVID started and are pretty happy about it. I was working from home even before COVID for the most part and have thought a lot about this, I sort of think Colombia is a good place to get in while it is still cheaper. Still a stigma to it from FARC and Escobar but really coming out of all that.

 

Watch out for the hippos

 

https://www.nbcnews.com/news/animal-news/pablo-escobar-s-cocaine-hippos-can-be-legally-recognized-people-n1282292

[OldHeidelberg]

Ha I have always thought the Escobar Hippos were pretty cool but wouldn’t want to run into one while out hiking.

 

Sorta a similar story I lived in Hollywood FL for years and one night at a bar some guy is telling me that Dania Beach has monkeys, I thought he was full of it but looked it up when got home a what do you know some escaped from a zoo or circus or something back in the 1920’s and there has been a stable population living in the mangroves ever since. All we get here in the Midwest is Asian carp and those lamprey things.

[zurch1818]

The rule of 72 boggles my mind. https://www.investopedia.com/ask/answers/what-is-the-rule-72/ This helps me rationalize investment growth over time.

 

It's all about just keep chunking money in the account and don't look at what it does year in and year out. Since my work offers Roth retirement accounts, I have also decided to do that instead of traditional. That way, I get tax-free growth. Otherwise, I have to pay taxes on withdrawals in retirement and there are also minimum distributions that you need to take out. Sure, my tax bracket may be lower than what it is now, but I have just decided that I want to know what my nest egg actually is and not say it is this and then find out it is 20% (or my worse fear, 50%) less. I have no idea what tax brackets will be like in 30 years when I retire (or hopefully sooner). I just want to get to a point where I decide to retire because I want to and not because I have to.

[umphrey]

The rule of 72 boggles my mind. https://www.investopedia.com/ask/answers/what-is-the-rule-72/ This helps me rationalize investment growth over time.

 

It's all about just keep chunking money in the account and don't look at what it does year in and year out. Since my work offers Roth retirement accounts, I have also decided to do that instead of traditional. That way, I get tax-free growth. Otherwise, I have to pay taxes on withdrawals in retirement and there are also minimum distributions that you need to take out. Sure, my tax bracket may be lower than what it is now, but I have just decided that I want to know what my nest egg actually is and not say it is this and then find out it is 20% (or my worse fear, 50%) less. I have no idea what tax brackets will be like in 30 years when I retire (or hopefully sooner). I just want to get to a point where I decide to retire because I want to and not because I have to.

I would think diversifying is better? If I understand current rules correctly in retirement you could take $40k of income from your traditional and it get taxed at 12%. But your current Roth deposits are probably taxed at 22% or above.

[LouisEly]

I don't understand that method. Aren't mortgages calculated with simple interest based on the principal balance? The difference between that and the minimum payment is what goes to principal. Maybe it's about leveraging your equity? If that is the case, if your house is worth $300k, does it make sense to leverage a million dollar mortgage/2nd mortgage (HELOC) off it?

No, mortgages are compounded monthly - what you pay is the interest rate divided by 12 each month on the remaining balance, not the interest rate times the balance divided by 12. And HELOCs aren't a second mortgage - they leverage the equity in your home, so you can only take out a fraction of your home's appraised value.

 

I'm a year into my refinance of ~$400K and a $25K HELOC, if applied to my mortgage balance, cuts almost $33K of interest payments off the top - I jump from month 13 to month 47 on the loan payment schedule. HELOCs have a 10-year draw period during which you only have to pay simple interest, which on the $25K is a little over $90/mo, then a 20-year payback period. I would need to pay that $90/mo for 360+ months to break even on the interest payments I save jumping from month 13 to month 47. Not only do I skip the interest payments, I jump forward to paying more towards the principal each month, faster increasing my equity.

 

Now, with the HELOC over the 10-year draw period you pay whatever extra you are comfortable with (say, $400/mo) each month towards the HELOC balance and then in a couple of months you draw on the HELOC up to your limit again and pay an extra ~$1000 on your mortgage principal (which for me would knock another month+ of payments off of the mortgage). Rinse and repeat for 10 years and you'll knock about every fourth payment off of your schedule, skipping another 36 payments, then you have up to 20 years to pay back the HELOC balance ($25K at 5% interest over 10 years is $265/mo, so you can continue to pay an extra $135/mo towards the principal without increasing your total monthly payment towards the mortgage or pay the HELOC off in 6 years at $400/mo.)

 

In my scenario, after 10 years you'll have knocked ~70 payments off of your loan. You can't do that paying that $400 towards the principal. You can also refi after 10 years, lump in and pay off the HELOC, and probably get a shorter term or lower payment for the remaining term because your balance will be so low.

[PlayerHader]

I'm actually quite far behind when it comes to retirement savings. Making little money in my 20s and being out of work for much of my 30s did the trick. Grad school was a waste of time and money, too.

 

But now debt-free, credit cards at $0 and basically no rent for the house. I'll be pushing pretty hard to save over the next 15 years.

 

I'm curious to hear more. How old and where are you currently at with retirement money?

 

I'm 44 and I don't think I'd crack $50k in retirement savings just yet. I'll also have a pension but that won't be more than about $1200/mo. Another benefit is work will continue most of my medical benefits between retirement and 62.

 

Between this and my side job I should be starting this year, saving $1000/mo is realistic if not somewhat conservative.

 

Although I'm a little unsure yet just where to save it all. I have a 401k and a self-directed IRA, but also taxable stocks/crypto. I'm in work housing, so when I retire I'll need a place to live. Sounds crazy right now but I still hope to retire before 60. I've heard rumor you can withdraw from an IRA early without the penalty in order to buy a house, but I also doubt I'll be buying one. So at least for now I'm stuck with capital gains.

 

And since I'm single no kids I have ambitions to retire in Belize. No income tax, no capital gains and a slightly lower cost of living.

 

I’m no expert, and maybe you already do this, but I’d probably start by maxing a Roth IRA. You can get access to some of that if you do reach your goal of retiring before 60. After that I’d throw the rest into your 401(k) assuming you have decent, low cost investment options in there. Get as much money growing and compounding fully tax free.

 

If you believe in crypto, keep a sliver in there. I’m a Bitcoin believer. Or I think I am. I’ve invested money before, but have never had the balls to keep it in and keep contributing. So maybe I’m not a believer after all.

[MrTPlush]

Just threw an annual single extra mortgage payment into a payoff calculator and it showed the loan would be paid off 3 years and 5 months earlier. This is a 30 year loan.

 

If you started doing that from Day 1 in reality you are only saving a bit over a year worth of payments.

 

I have never really been a huge fan of this concept. Throwing that extra payment into retirement savings, especially early on, would be a way more logical than putting it towards the mortgage. Especially for loans taken out in the last 10+ years or now. The interest rates just aren't very high anymore.

 

I just did a really basic exercise and it looked like the extra payment would save about $13,500....investing it and averaging 8% had it over $100k. To be honest, I don't see a ton of value in finishing 3.5 years sooner. You are pretty used to it after 25 years and by the time you would pay it off early it would hardly matter a in all likelihood. Your salary is likely much higher and it is likely your only real debt at that point. Now of course if one was in a situation where they are trying to pay it off before some massive notable life event (kids entering college or trying to pay it off before retirement), then I can understand chasing to rid yourself of that debt.

 

Of course some of these ways to strategically help pay off a mortgage faster aren't allowed by some lenders. My lender won't let me put extra payments towards principal-only and I also can't go into a bi-weekly payment plan. So while both of those can be sound ways to pay it off faster, not always allowed these days.

[OldSchoolSnapper]

I opted not to try and powersave a big down payment. When I bought my house a little over a year ago I figured 2-3 years wasn't really going to gain me anything. Interest rates were so low I figured a bump of 1.5%+ wasn't out of the question 2-3 years from then. Also figured housing prices would just continue going up, thus making it cost more in general. I also considered the fact that my salary really wasn't likely to drastically go up any time soon, so many houses I could afford then I wouldn't be able to afford in three years. Of course I have good credit so my PMI payment is really low. Different story if I would have had some $350 PMI payment.

 

Many young people are balking at the housing market these days, they all just want to wait 3-5 years. They imagine this massive housing crash like 10+ years ago and I think they are sadly mistaken. I also don't think a lot of people truly understand the impact interest rates have on the cost in the long run. 3% compared to 5% just doesn't seem like a big deal to the average person. Even on a modest $250k loan that is nearly $100k over 30 years.

 

We bought our house in 2014. I really did not want to buy a house at the time at all. My wife was pregnant and relentless about it to the point I'd get home and she'd say "we have a showing tomorrow at 1:00." The market was really bad for sellers at the time but I was just out to lunch on all those kinds of things. It ended up being the luckiest financial move of my life to this point. We went USDA, 0 down at 4.25% on a 4BR that had been sitting for 9 months. Our offer $206k was accepted, $15k below list. A year later refi'd at 3.25%, then I just refi'd again to conventional last November to remove PMI as the market value is now above 300k.

 

By not having to ever do the huge down payment thing I was able to pay off my sizable student loans (% between 5 and 6) way ahead of schedule. My payment was something like $256/mo but I was paying a very painful $1200 on it for a couple years. When I got done doing that it felt like I got some huge promotion.

 

We love the area so we'll be here until kids graduate HS, then either become snowbirds or just move altogether...not sure on that yet.

[homer]

Is there still value to putting down 20% to avoid PMI? I know some of the borrowing rules have changed since I bought back in 2006.

[PeaveyFury]

Is there still value to putting down 20% to avoid PMI? I know some of the borrowing rules have changed since I bought back in 2006.

 

I'm still a believer, as PMI is just wasted money even though it's tax deductible if you're still able to itemize. I haven't run any calcs to determine 'lost' market ROR on the hypothetical difference between a 5% down payment and the 20% PMI threshold, though.

[Fear The Chorizo]

I might win the prize for buying a home at the wrong time - we bought our 1st home in IL spring of 2008, with a 0 down, 6% 30 year fixed - after the fact we realized we may have been one of the last people to get a $0 down mortgage because it was right as the bubble started popping. The thing we did do right is we didn't listen to our realtor/mortgage broker when they told us we could afford a home in the $500K pricerange (lol), and instead shopped at the pricepoint just over half that much. Our loan terms were terrible (rates were much higher then), but we were able to make significant extra principle payments the first few years before our kids started showing up to plow through the worst portion of that 30 yr mortgage quickly. Doing that for just a couple years helped get the percentage of our typical monthly mortgage payment dedicated to principle elevated much quicker than had we just paid our mortgage on autopilot, and a refinance 3 years in got our rate down to ~4% on a 20 year term without changing what our monthly mortgage/PMI payment was. Would have loved to eliminate all PMI during the 1st refi but the house value just wasn't there due to the crash, but at least that amount was reduced.

 

We were thankfully able to sell our home for the same price we bought it in 2016 and used the accumulated equity for a big downpayment on our current home in MN so we no longer have a mortgage with PMI and it's at a great rate - also picked the right time to leave IL, as the home value of our 1st place is roughly the same as it was when we bought it in 2008, and our current home has basically doubled in value ~6 years after moving here. At some point home values in this market will stop skyrocketing, but I agree that another housing crash like 2008-2011 isn't going to happen - rent prices are actually outpacing home value increases in most markets, so people waiting on the sidelines are winding up having to pay more for nothing while they wait to start building property equity.

[OldSchoolSnapper]

rent prices are actually outpacing home value increases in most markets, so people waiting on the sidelines are winding up having to pay more for nothing while they wait to start building property equity.

 

I'm not even sure a lot of folks are waiting for anything. There's a major shifting demographic with more people not having kids at all, getting married later...I think way more people are now just happy to rent perpetually and not deal with any of the burden that can come with a house.

[Fear The Chorizo]

Is there still value to putting down 20% to avoid PMI? I know some of the borrowing rules have changed since I bought back in 2006.

 

You'd be surprise how much lower monthly PMI is if you can swing 10% down vs just 5% - I think people trying to save at least 20% down before even thinking about buying a house may actually cost themselves in the long run when home prices are increasing in markets faster than people can save. If you're in the right market you may be better served buying the house sooner than later at a great interest rate without having a full 20% down, deal with the PMI payments for a year or two and after the home appreciates in value work with your lender to try and get PMI removed based on an updated appraisal.

[MrTPlush]

Is there still value to putting down 20% to avoid PMI? I know some of the borrowing rules have changed since I bought back in 2006.

 

If you have plenty of money to put down 20% and still have a ton of reserve funds I think most should avoid PMI.

 

 

If you can't put down 20% or it would greatly reduce reserve funds, depends on your credit score, honestly. If you have a great credit score (like 740+) it can be pretty minimal. I think mine equates to about $7,500 over 8-9 years. That is a pretty minimal cost considering I put down about $7k instead of $47k. Of course if your credit score is pretty rough PMI can start approaching $300. If it will take you years to get 20% to put down, one can argue housing appreciation and/or interest rates can cost you just as much though.

 

Now one could put less down and invest the rest, potentially making more in the long run. However, that is getting pretty complicated and far from a sure thing. I think I would just take the sure thing where I pay no PMI and then spend less over the life of the loan in interest.

[MrTPlush]

rent prices are actually outpacing home value increases in most markets, so people waiting on the sidelines are winding up having to pay more for nothing while they wait to start building property equity.

 

I'm not even sure a lot of folks are waiting for anything. There's a major shifting demographic with more people not having kids at all, getting married later...I think way more people are now just happy to rent perpetually and not deal with any of the burden that can come with a house.

 

I think a lot of people are for sure, social media would certainly confirm many have that thought process.

 

Of course a lot of it might just be jealous people trying to put people down because they bought a house and they can't. Because, you know, the internet.

[Fear The Chorizo]

If you have plenty of money to put down 20% and still have a ton of reserve funds I think most should avoid PMI.

 

Sure - but if I were a 1st time homebuyer in my current neighborhood in 2016, that would have meant needing to come up with ~$60K at closing to avoid a PMI payment of roughly $115 a month on a 3.5% mortgage. Instead we put 10% down, dealt with the nominal PMI payment for a couple years that wound up totaling $3K in extra money out the door over that time, and got rid of it after the home appreciated in value by almost $200K. Now in our neighborhood, 20% down would be roughly $100K for the same home - had we stayed in our previous home and location, there's no way our current home would be affordable to us.

 

I'd add the caveat that part of our move coincided with my wife opting to leave the workforce for a few years to enjoy as much time with our young kids (and one on the way at the time) as possible before they got older, so we opted to not make the perfect financial move in order to improve this time as a young family - different strokes for different folks, and as long as you're happy with the reasons why various financial decisions are made it's all good!

[igor67]

Lot's of good stuff here, I would add that I hope any passive readers are using some of the examples to help them think about what is most applicable. Homes are important but tricky assets. A co-worker of mine for example bought his first house midway through his second year of teaching, and sold it just over a year later out of sheer luck. He actually moved because of his wife to rural MN and needed to sell, but because they had looked originally in the middle of winter they had effectively bought the house at a discount, so even with the short turn around they more than made enough to cover closing costs and turn around and buy 80 acres. It worked out incredibly well, but I think it is way more common that moving forces people into suboptimal decisions on selling the home. So factoring in the smaller liquidity is important in how one approaches the mortgage. When we moved to MN 20+ years ago it was at the tail end of a housing boom, and we bought at 5% down, FHA and 7% interest. In a year we were able to refi, get rid of the PMI due to home value increase alone and borrow in a special low-income program for a bunch of repairs and kept the total payment the same. On the other hand our value had dropped off enough by 2008 that we were probably back to just 5-10% equity. By 2015 though we were hitting closer to peak earning years and we would have had the house paid off easily by now except we decided to invest in our retirement home. In many ways the big value in our first house has been that it's cost of ownership has been way less than inflation. My current payment is what we were paying 20 years ago so that's pretty huge.

 

The point I'm hoping to get across is that when it comes to think about housing investment risk make sure you build in flexibility for changing circumstances or plans. We've changed our thinking at least 4 or 5 times over the years and flexibility is a tough thing to quantitate.

[homer]

rent prices are actually outpacing home value increases in most markets, so people waiting on the sidelines are winding up having to pay more for nothing while they wait to start building property equity.

 

I'm not even sure a lot of folks are waiting for anything. There's a major shifting demographic with more people not having kids at all, getting married later...I think way more people are now just happy to rent perpetually and not deal with any of the burden that can come with a house.

 

There are plenty of markets where home values are outpacing rent by quite a large margin. Best to research if you are on the fence and moving to a new city.

https://www.forbes.com/advisor/mortgages/states-with-highest-rent-hikes/

 

I don't know if this is still the case, but there was a big difference between home and a condo values after Covid. A lot of people wanted yards and what not so condos could be had for pretty cheap (comparatively).

 

edit: looks like condos came back big time. At least here in Chicago.

https://www.chicagobusiness.com/residential-real-estate/chicago-condo-comeback-led-fall-housing-market

[nate82]

 

There are plenty of markets where home values are outpacing rent by quite a large margin. Best to research if you are on the fence and moving to a new city.

https://www.forbes.com/advisor/mortgages/states-with-highest-rent-hikes/

 

I don't know if this is still the case, but there was a big difference between home and a condo values after Covid. A lot of people wanted yards and what not so condos could be had for pretty cheap (comparatively).

 

edit: looks like condos came back big time. At least here in Chicago.

https://www.chicagobusiness.com/residential-real-estate/chicago-condo-comeback-led-fall-housing-market

 

I am not surprised seeing Phoenix and Tucson on the list. The housing market both for rent and buying has exploded due to people moving here from California and Canada well mostly California.

[owbc]

I'm glad that I'm not looking for a house right now. Inventory is basically zero, at least here in the PNW. In a tech city you just wait for your stock options to vest and then your down payment appears in your bank account overnight. Or just skip the down payment. Definitely don't try to save.

 

I think the main driving force is additional bedrooms to serve as home offices. We have a 3-bedroom house but two of the bedrooms are now offices. The other is vacation homes. And of course everyone knows that the supply has not kept up with demand for a long time.

 

Cities are never going to go out of fashion so it isn't surprising to see them rebound. Zoom towns are starting to crack down on short-term rentals. In other cases I think the idea of having a big house with a view in the middle of nowhere is going to get boring for many people. Cities are so convenient. I'd rather renovate my house than try to move again.

[wallus]

I am pouring some money into the market again. Probably a good time for everyone else to pull theirs as I have had comically bad luck in past attempts. For example, I had a large position in BP right before their oil spill. That led me to just focus on real estate which I have had extremely good luck with.

 

I have a specific set of conditions for my real estate purchases and there is nothing out there right now that fit so back to the market I go. Not to "flex" too much but I could retire today from my real estate income which is pretty good for a dude in his 30s.

[PlayerHader]

Moving 50-60% of my emergency fund to I-bonds today. Should have done this a month or two ago probably, but better now than never.

 

Any anybody else done this? It's a bit less liquid, at least for a year, but that's something we can deal with if the worst case scenario happens.