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What would YOU do? A Finance Question.

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Matty.Barkowski
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What would YOU do? A Finance Question.  Reply with quote  

I am 30 years old, recently married. I bought a house 5 years ago for approx $93K, now is worth approx $150K. I am on a 30 year mortgage and owe about $67,000. Our monthly payment is $720. We are planning to stay in the house at least 1-2 years

We have $132,000 in cash, $40,000 of which is an emergency fund. We are currently saving about $3200 a month with the intention of eventually moving in to something bigger/better suited for a family.

Quick math

$720(Total House Payment) - 200(Current Equity Built Each Month) = $500 month x 12 = $6000 - $2000 (insurance) = $4000/year I am paying for not paying off my house

Also, we temporarily lowered our 401K auto-draft from 15% to about 5% to save faster. Paying off the house would allow us to contribute a full 15% to our Roth 401K and slightly increase our aggressive savings, which as stated before is about $3200/month

The whole idea behind this is to have a huge down-payment on our next house as to lower our obligation, thus opening up more money for investing/family/whatever
Post Sun Oct 02, 2016 7:41 pm
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oldguy
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quote:
The whole idea behind this is to have a huge down-payment on our next house as to lower our obligation, thus opening up more money for investing/family/whatever


I do the opposite, I make minimum DPs on my houses, and keep the loans for 30 yrs. And whenever one of our houses builds equity, I refi it for 30 more yrs.
Eg,, if I refi a house and add $50,000 to the loan, my payment goes up about $275/m (about $100,000 over 30 yrs). I place the borrowed $50,000 into an 11%/yr SP500 Index Fund where it grows to $1,150,000 on average. I've done that with each of our rental houses.over the past 40 yrs. So I would have no problem paying $4000/yr "for not paying off the house", in fact I'm happy to do it. In my example, I pay an extra $50,000 over 30 yrs for the use of the $50,000 - and i use the $50,000 to earn a million.
Post Sun Oct 02, 2016 8:16 pm
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Matty.Barkowski
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Does that leave you exposed, say another '08 happens or do you have enough liquidity to hedge against a bad tenants/bad real estate market?
Post Sun Oct 02, 2016 9:22 pm
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Matty.Barkowski
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Also - if you invest the extra $275 monthly over 30 years at 11%, you would still have approx $730,000.
Post Sun Oct 02, 2016 10:18 pm
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oldguy
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quote:
to hedge against a bad tenants/bad real estate market?


The real estate markets were never a problem, I always had Fixed Rate loans (I avoid VAR, balloon loans, short (15 yr) loans. So my payments were fixed - ie, they didn't go up/down when the prices of houses went up/down. As for bad renters, there were very few, over 40 years and over 40 tenants there were only 2 or 3 that caused over $2500 in damages. On average, a family would rent for 2 to 3 yrs - and I usually had a family waiting to move in as one family moved out, ie very few vacancies.

quote:
Also - if you invest the extra $275 monthly over 30 years at 11%, you would still have approx $730,000.


Exactly. The $730,000 is $420,000 less than the $1,150,000. Or a factor of 1.57 (1150/730).
Both methods use the same projection (SP500 @ 11%/yr) but the risk level is not the same. By having MORE funds invested EARLIER into the SP5000 there is added risk. And that added risk is offset by the extra $420,000 return.
Post Sun Oct 02, 2016 10:52 pm
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