[quote=joedabrkr] [quote=executivejock]

Also nothing down is awesome for certain situations... If one can have a loan for 5% and is able to invest the interest for the past few years they are way ahead!

Most I suspect are doing this for the wrong reason.

[/quote]

Yes and what happens when real estate prices decline (and rates go up) and you have NEGATIVE EQUITY in the house and you can't afford the payment?

What then?
[/quote]

Do you think the lender would foreclose?  HELL NO!!!  (at least not without an extended period to negotiate concessions)

Why would the bank take back an "investment" that they would loose money selling?

A house IS NOT an investment.  The equity in your home earns 0% rate of return.

Why not take out an interest only mortgage, pull the equity out, and put it in a conservative side fund?

If mortgage interest rates are 10% can't you earn a similar rate in a side fund?  Perhaps a floating rate fund.  Combine that with the tax deductibility of the mortgage payment and aren't you coming out ahead?

Don't ARMs have caps where the payment won't increase beyond a certain % within a calendar year?

Why would you get a fully amortized loan with a MUCH HIGHER payment if most of that payment is going to interest for the first 20 years (assuming a 30 year fixed rate mortgage)?

I don't see where an ARM is a bad thing.  After all...aren't increases capped?  Can't you have your payment fixed for 1, 3, or 5 years?

I also don't understand why you would get a fixed rate mortgage with a 15 year or 30 year term if you are only going to keep the house or the mortgage for 7 years or less.

Perhaps you can enlighten me, Joe.

Yeah the ocean rules!! Used to live in Florida on the ocean.. Past few years I have been on the Cape over looking the ocean and it was amazing.. The only thing that stinks is this huge home now blocks the sun rise....

Ohh well one day.. Hopefully sooner then later I will own one!

blarmston:

Ahhhhh... prudence..... what most of us could all use (myself included).... A difficult aspect of our business is trying to communicate that to clients.....

-----------------------------

You're so right, my brotha! 

I shake my head when I see postings from brokers excited that their clients' investment returns are way up YTD. You just know they're calling their clients and bragging about their investment selection acumen. Then the client gets hooked on this drug called "unbounded optimism".  

Now, the broker becomes the dealer of this highly addictive drug. As long as the broker/drug dealer can supply the client with this drug, everything is great. But as we all know, the good times never last.

When the client suffers a negative return for the quarter or the year, they'll start suffering "withdrawal" symptoms (as in withdrawing all their assets from you). They'll look around for another broker who can promise to give them the drug. Then the cycle starts all over again.

The only prospects, I've found, who appreciate the "prudence" aspect of investing are those who have been burned, either by their own hand or that of a broker. 

"A house IS NOT an investment.  The equity in your home earns 0% rate of return."

I have always felt that this is a B.S. argument.

Can't we say, "A stock is NOT an investment.  The equity in your stock earns 0% rate of return."?

The basic argument is that the house appreciates the same regardless of how much money one has in equity.  Well, the stock appreciates the same regardless of how much one has in equity in the stock.  In other words, if we should be keeping as much equity as possible out of our hourse, doesn't it follow that we should be keeping as much equity as possible out of stocks and buying everything on margin?

[quote=menotellname][quote=joedabrkr] [quote=executivejock]

Also nothing down is awesome for certain situations... If one can have a loan for 5% and is able to invest the interest for the past few years they are way ahead!

Most I suspect are doing this for the wrong reason.

[/quote]

Yes and what happens when real estate prices decline (and rates go up) and you have NEGATIVE EQUITY in the house and you can't afford the payment?

What then?
[/quote]

Do you think the lender would foreclose?  HELL NO!!!  (at least not without an extended period to negotiate concessions)

Of course they wouldn't foreclose.  ::rolls eyes::  Thats' why when I bought my first house about 9 years ago I was able to peruse an ample selection of 'bank owned homes'.

Why would the bank take back an "investment" that they would loose money selling?

Because they will lose far less money selling than by continuing to collect insufficient mortgage payments from an overextended borrower.

A house IS NOT an investment.  The equity in your home earns 0% rate of return.

I really need to to explain this revelation that the equity in one's home isn't an investment.  This runs completely counter to any reasonable thinking I've seen in the last decade.  More Americans have accumulated significant personal wealth through the (non) investment in their home equity than the stock market.  This sounds sorta like the "P/E's don't matter it's a NEW ECONOMY" mantra of the late 90's.

Why not take out an interest only mortgage, pull the equity out, and put it in a conservative side fund?

Ummmm.....because even a conservative side fund is generally more risky than continuing to build equity in one's home.  With perhaps the exception for those who live in a declining neighborhood.

If mortgage interest rates are 10% can't you earn a similar rate in a side fund?  Perhaps a floating rate fund.  Combine that with the tax deductibility of the mortgage payment and aren't you coming out ahead?

Yes they do.  Considering you sound like a fellow who lines his pocket by helping clients strip equity out of their homes and invest it, you shouldn't need to ask this question.  By the way, be careful.  If the banking regulators find out they might argue that the money you're using should be subject to REG T rules.  Anyway-the caps on the ARMS still allow for some pretty substantial increases in rates.

Why would you get a fully amortized loan with a MUCH HIGHER payment if most of that payment is going to interest for the first 20 years (assuming a 30 year fixed rate mortgage)?

Ummmm....because I'm building ownership in a significant asset from which I also gain great personal satisfaction.  Because the interest is deductible anyway?  Because it diversifies my risk away from the investment markets-unlike your 'side fund'.

I don't see where an ARM is a bad thing.  After all...aren't increases capped?  Can't you have your payment fixed for 1, 3, or 5 years?

I also don't understand why you would get a fixed rate mortgage with a 15 year or 30 year term if you are only going to keep the house or the mortgage for 7 years or less.

Why?  Because among other things you don't really know how life is going to turn out despite your plans.  I lived in my first house for 8 years, three years past my expected departure.  Here I was able to lock in a 5 3/8% rate for 30 years.  The guy in the bank lobby-one of your ilk-tried to convince me to take out an I/O ARM because the rate(first year) was so much lower, and my cash flow was 'better'.  Well here I am less than a year later and the rate on that ARM he was pushing me is already higher than my stodgy 30 year fixed rate mortgage.  A significant part of my cost of living has now been frozen for a very long time.  If inflation remains a concern, either now or in the future, you ARM-lovers are going to be in for a surprise, and I'll once again have plenty of bank-owned homes to choose from.

Perhaps you can enlighten me, Joe.

Well I hope I was able to 'enlighten you', but somehow I have a feeling that you're already so convinced that you have it all figured out such that my words will fall on deaf ears.  Perhaps, though I can help others contemplate the risks they take.

It's really pretty simple the way I look at it.  I take plenty of risk when it comes to my business and my investments in the financial markets.  I prefer not to take much risk or speculate about future interest rates when it comes to my home....especially when I can lock in a historically low rate and then forget about the issue for a few decades.  Maybe in the end you'll end up being right, but it's not for me.

Joe, you make perfect sense, but you’re response looks a little like MikeB (heaven forbid). 

Joe--

Excellent post.  I don't know why Meno was calling you out, when it was some of my commments that he was taking exception with.  Thanks for answering the bell.  All I can say to each one of your answers is "ditto".  I think we're cut from the same cloth.  My home is almost paid for, but most people would crap their pants if they saw how aggressively I worked by own brokerage account.  I sleep really, really well with my $568 (that's not a typo) monthly mortgage payment. 

[quote=skeedaddy2]Joe, you make perfect sense, but you're response looks a little like MikeB (heaven forbid).  [/quote]

Mike gets a little carried away sometimes, but he strikes me as pretty intelligent and accurate with much of his commentary.  So, I'll take it as a compliment!

[quote=Soothsayer]

Joe--

Excellent post.  I don't know why Meno was calling you out, when it was some of my commments that he was taking exception with.  Thanks for answering the bell.  All I can say to each one of your answers is "ditto".  I think we're cut from the same cloth.  My home is almost paid for, but most people would crap their pants if they saw how aggressively I worked by own brokerage account.  I sleep really, really well with my $568 (that's not a typo) monthly mortgage payment. 

[/quote]

Thanks.

LOL....my mortgage payment would probably make you crap your pants!  Then again, it's the same as the payment on our prior home in the NorthEast(because of lower taxes) and yet I have 50% more square footage, and across from the second fairway!  We could probably afford more, but why?  I don't need it, and don't want to spend any more time taking care of it.

We have about 50% equity, so it's not a bad start.

As far as my brokerage account, it goes in spurts depending upon how much I like the market, how many good ideas I find, and how busy I am taking care of client accounts, because they come first.  I'm usually about 85% equity unless I'm uncomfortable about the market.  Then I'll go to about 50% cash, and maybe even add a little Rydex inverse fund action.  Fun stuff.

So I don't need to be worrying about the rate on my mortgage jumping up all of a sudden.  I've learned hard lessons about leverage(i.e. margin) in the market in the past.  I'm only a fool if I repeat the 'learning experience' with my real estate investment, if you ask me.

Maybe the 40% second home/investors is a cap of the movement.. Like stocks one would suspect that if everyone is buying there may be an issue in the future.

Amazes me that real "real estate" investors are backing away. Fortune just had an American guy with Saudi contacts who has left the market a year ago. There are numerous concerns from every aspect of banking and federal level, but average "Joe" (not forum Joe) thinks buy since the market is and will go up...

If the majority of these investors in baby boom close to 60 then why would you invest in something with such "cyclical risk?" Its like buying into tech before 2000. I mean at least 50% of the analysts are stating a 15% correction in many markets is a possibility. Well from what I see numerous places (friends experiences) from DC to Maine have lost 10% over the past few months. Is that risky? Maybe people think the risk is less then the market or they are just diversifying?    Damn my spelling is improving... Thank to you all!

[quote=anonymous]

"A house IS NOT an investment.  The equity in your home earns 0% rate of return."

I have always felt that this is a B.S. argument.

Can't we say, "A stock is NOT an investment.  The equity in your stock earns 0% rate of return."?

The basic argument is that the house appreciates the same regardless of how much money one has in equity.  Well, the stock appreciates the same regardless of how much one has in equity in the stock.  In other words, if we should be keeping as much equity as possible out of our hourse, doesn't it follow that we should be keeping as much equity as possible out of stocks and buying everything on margin?

[/quote]

Okay.

So why don't you invest all of your money in your house?

Why don't you keep putting money into your home even after you have paid off the mortgage?

Here...let me describe home equity for you...

HOW MUCH WOULD YOU DEPOSIT IN THE FOLLOWING INVESTMENT ACCOUNT?

-The customer determines the amount and length of time for the monthly contributions to continue.

-The customer can pay more than the minimum monthly contribution, but not less.

-If the customer attempts to pay less, the financial institution keeps all of the previous contributions.

-The money desposited in the account is not safe from loss of principal.

-Each contribution made to the account results in less safety.

-The money in the account is not liquid.

-The money in the account earns 0% rate of return.

-The customer's income tax liability increases with each contribution.

-When the plan is fully funded, there is no income paid out.

Sorry but the goal here is NOT to invest in stocks.  Stocks are volitility.  Again...you invest in something safe and conservative that earns a disciplined rate of return.

Your serve.

[quote=menotellname]

Do you think the lender would foreclose?  HELL NO!!!  (at least not without an extended period to negotiate concessions)

Of course they wouldn't foreclose.  ::rolls eyes::  Thats' why when I bought my first house about 9 years ago I was able to peruse an ample selection of 'bank owned homes'.

Wrong.  Banks invest in long term obligations and expect an income stream.  They would much rather have this income stream than a negative return on their investment.  They will wait a long time to revive this income stream before realizing a loss on their investment.

Why would the bank take back an "investment" that they would loose money selling?

Because they will lose far less money selling than by continuing to collect insufficient mortgage payments from an overextended borrower.

Wrong again.  Lenders would much rather have a brief deferral of the payments rather than having to "capture a loss" on their investment.

A house IS NOT an investment.  The equity in your home earns 0% rate of return.

I really need to to explain this revelation that the equity in one's home isn't an investment.  This runs completely counter to any reasonable thinking I've seen in the last decade.  More Americans have accumulated significant personal wealth through the (non) investment in their home equity than the stock market.  This sounds sorta like the "P/E's don't matter it's a NEW ECONOMY" mantra of the late 90's.

Just because a forward thinking concept is beyond your nominal comprehension is no reason to dismiss it.  You simply have a depression era mentality.  Obviously you haven't encountered any new thoughts in the past decade.  Unfortunately it is your clients that will suffer.  I can't imagine seeing a doctor that hasn't learned anything new in a decade.  It must be worse visiting a financial advisor that is in the same boat.

Why not take out an interest only mortgage, pull the equity out, and put it in a conservative side fund?

Ummmm.....because even a conservative side fund is generally more risky than continuing to build equity in one's home.  With perhaps the exception for those who live in a declining neighborhood.

Are you familiar with floating rate funds and how they work?  How about the tax benefits and accumulation benefits of a participating life insurance contract.  Perhaps you should educate yourself on that and three words:  real estate bubble.

If mortgage interest rates are 10% can't you earn a similar rate in a side fund?  Perhaps a floating rate fund.  Combine that with the tax deductibility of the mortgage payment and aren't you coming out ahead?

Perhaps.  But then again that 'side fund' isn't guaranteed, is it?  CD's and Treasuries and Corps aren't going to pay enough to make your idea work.  Bond funds have interest rate(price) risk if rates go up further.  Floating rate funds-if you're talking about the ones that would pay enough to make this idea work-have significant credit risk(most holdings below investment-grade).

Wrong again.  Whole life insurance contracts have guarantees.  Perhaps you only think of securities.  Well rounded folks have many more tools at their disposal.

Yes they do.  Considering you sound like a fellow who lines his pocket by helping clients strip equity out of their homes and invest it, you shouldn't need to ask this question.  By the way, be careful.  If the banking regulators find out they might argue that the money you're using should be subject to REG T rules.  Anyway-the caps on the ARMS still allow for some pretty substantial increases in rates.

That is why I conduct fact finding.

Why would you get a fully amortized loan with a MUCH HIGHER payment if most of that payment is going to interest for the first 20 years (assuming a 30 year fixed rate mortgage)?

Ummmm....because I'm building ownership in a significant asset from which I also gain great personal satisfaction.  Because the interest is deductible anyway?  Because it diversifies my risk away from the investment markets-unlike your 'side fund'.

Great.  But is your ultimate goal to "own the home" or simply to live in the home, control the home, and have a secure retirement.  I bet it is the latter and you have it confused with the former.  You can still own your home but the process to go about it can be much more efficient.

I don't see where an ARM is a bad thing.  After all...aren't increases capped?  Can't you have your payment fixed for 1, 3, or 5 years?

I also don't understand why you would get a fixed rate mortgage with a 15 year or 30 year term if you are only going to keep the house or the mortgage for 7 years or less.

Why?  Because among other things you don't really know how life is going to turn out despite your plans.  I lived in my first house for 8 years, three years past my expected departure.  Here I was able to lock in a 5 3/8% rate for 30 years.  The guy in the bank lobby-one of your ilk-tried to convince me to take out an I/O ARM because the rate(first year) was so much lower, and my cash flow was 'better'.  Well here I am less than a year later and the rate on that ARM he was pushing me is already higher than my stodgy 30 year fixed rate mortgage.  A significant part of my cost of living has now been frozen for a very long time.  If inflation remains a concern, either now or in the future, you ARM-lovers are going to be in for a surprise, and I'll once again have plenty of bank-owned homes to choose from.

It sounds like you aren't doing too well financially if the increases in one year are adversely affecting your living situation.  Perhaps you should get out more and do some more selling.

Perhaps you can enlighten me, Joe.

Well I hope I was able to 'enlighten you', but somehow I have a feeling that you're already so convinced that you have it all figured out such that my words will fall on deaf ears.  Perhaps, though I can help others contemplate the risks they take.

It's really pretty simple the way I look at it.  I take plenty of risk when it comes to my business and my investments in the financial markets.  I prefer not to take much risk or speculate about future interest rates when it comes to my home....especially when I can lock in a historically low rate and then forget about the issue for a few decades.  Maybe in the end you'll end up being right, but it's not for me.

You failed miserably at enlightening me.  Perhaps you should seek enlightenment yourself.  The way I look at it is that you sell the investment of the day and don't do any real planning or understand how money and financing really work.  You may very well understand the markets but you have no concept of money.  That is clearly evident if one year of increases to your ARM has adversely affected you.

Good luck!!!

Menotellname,

You need to work on your reading comprehension.  I am not against pulling money out of one's home or paying as little as possible on one's mortgage depending on one's circumstances.

I just think that the following STATEMENT is stupid:

"A house IS NOT an investment.  The equity in your home earns 0% rate of return." 

The word "house" can be replaced with any asset. 

I think you need to work you YOUR reading comprehension AND your overall level of understanding.

Again...a house IS NOT an investment and the equity in your home earns 0% rate of return.

The people who I know who have made millions in residential real estate investment would beg to differ with you. 

"The equity in your home earns 0% rate of return"    So what?  The equity in no investment gets a return.  It is the underlying asset that gets the return.  

 What's your brilliant point?

[quote=menotellname]Okay.

So why don't you invest all of your money in your house?

It's called diversification.

Why don't you keep putting money into your home even after you have paid off the mortgage?

A lot of people do...it's called home improvement.

Here...let me describe home equity for you...

HOW MUCH WOULD YOU DEPOSIT IN THE FOLLOWING INVESTMENT ACCOUNT?

-The customer determines the amount and length of time for the monthly contributions to continue.  This doesn't bother me at all...who wouldn't want to control how much and how long they invested?

-The customer can pay more than the minimum monthly contribution, but not less.  That's correct, Mr. Obvious.

-If the customer attempts to pay less, the financial institution keeps all of the previous contributions.  Are you serious?!!  I thought you worked in a bank?!!  Where I come from, on a foreclosure, funds received in excess of the loan amount, late charges and foreclosure costs are rightfully the borrower's and must be returned.

-The money desposited in the account is not safe from loss of principal.  Well, Duh.  That's true with many investments.

-Each contribution made to the account results in less safety.  What on earth are you talking about?!!!  How can additional principal payments make this investment less safe?!!

-The money in the account is not liquid.  I can make an argument that I can make the investment pretty liquid with a home equity line of credit, but in the interest of being fair, I'll give you that one also, Mr. Obvious.

-The money in the account earns 0% rate of return.  What planet are you from?!!  If a house is worth $100,000 at the beginning of the loan, and is sold for $175,000 ten years later, how on earth can you say there is a 0% return?!!

-The customer's income tax liability increases with each contribution.  Again, what are you smoking?!!  How on earth does paying down a loan increase your income taxes?!!  Better yet, if you can itemize, the interest paid on the loan actually decreases your income tax liability.

-When the plan is fully funded, there is no income paid out.  Until you sell it, much like a growth stock.  This also assumes that you don't rent out a room or anything of that nature.  Finally, this statement also ignores the value of living in the home rent-free.

Sorry but the goal here is NOT to invest in stocks.  That may be your goal, but you don't speak for the universe.  Stocks are volitility.  Again...you invest in something safe and conservative that earns a disciplined rate of return.  If you're satisfied with 3-8% annual returns.  That's fine for some, but again, you don't speak for the universe.

Your serve.[/quote]

Meno, that post was arrogant and nonsensical, and full of misinformation, but hey, what's new.  I'm not advocating investing 100% of your available funds in real estate, but it sounds like you're advocating variable annuities (again), and I'm sorry, but they just don't fit all the time.  To suggest that there is no return in real estate investing ignores some obvious examples, including rents and capital appreciation from the sale of said real estate.

You might want to stay with your area of expertise next time.

28% of all home buyers last year were 2nd home investments. SO not an investment does not make sense to me..

Now if its good or bad is another thing, but diversity is key. So if one has a million in assets and they wanted to diversify go with a REIT or buy another home.. Not saying this is always, but an investment option.

Nice try…I’m going to spare everyone the long quote of your silly

response. Clearly you have plenty of chutzpah but you’re a little light in

other key attributes such as wisdom, prudence, and reading

comprehension…You state that lenders would ‘rather not’ foreclose on a

property that they would then sell at a loss. Well I have seen evidence to

the contrary with my own eyes. You simply make a statement and then

expect myself and others to accept your decree at face value. How about

a little evidence?“A temporary deferral in payments”? What happens

when the rate on that I/O and the payment jumps high enough that your

customer can’t afford to make the payments. Then they look around and

realize that at the same time interest rates have driven down values in the

real estate market, and rents as well. So, they pack up their stuff and

walk away. If you think it doesn’t happen you’re just plain naive. Worse

still when an investment-oriented owner realizes he has no decent

market for his property. He just hands it back to the bank and moves

on. Then the ‘temporary deferral in payments turns into a bank-owned

home. They don’t ‘capture a loss’ in that situation, they have it dropped

right in their laps.Tell me, meno, have you been in this business long

enough to even survive a period of consistently rising mortgage rates?I

ask you to explain your assertion that the equity in one’s home generates

a 0% rate of return for the benefit of myself and others. Too, to see if you

can back up your statement. Rather than accepting the challenge, you

resort to an ad hominem attack, suggesting that my understanding is

’nominal’(I don’t even think that’s a proper use of the word) and that my

thinking is ‘depression era’. What’s wrong meno? Can’t even explain the

fancy concepts you’re throwing around in terms that us 'mental midgets’

can understand?You toss out the term ‘real estate bubble’. Explain to

me how one of your clients-with plenty of leverage, little or no equity in

their home and an increasing mortgage payment(due to higher rates) is

going to weather the bursting of your so-called ‘bubble’ better than I

shall with my FIXED monthly payment and constantly declining liability.

Folks who follow your path are going to end up with negative equity in

their homes, a big fat mortgage balance, and a higher monthly housing

cost. Hmmm…wow now THAT sounds like a GREAT deal! Sign me up

right away for the Meno path to wealth!Oh that’s right, I forgot about

the ‘side fund’ your promoting. (In other words, ‘the way he bumps up

his gross after helping the customer strip equity out of his home’.) You

start out by asking if I’ve ever heard about adjustable rate funds, until you

realize I’d pointed out that they have signficantly more credit risk than

simply paying down one’s own debt, so then you switch to talking about

the benefits of using whole life as an investment? Are you REALLY going

to try to tell me how a ‘participating life insurance policy’ and its tax

benefits are going to do better for me than to build equity in my home

over the long term? Then again, your clients need to buy LOADS of

permanent life insurance to protect their spouses from the interest-ony

mortgage you sold them, considering that if they die after 10 years they

still have the same amount of principal ‘due’ on their mortage.For a

guy who talks about how he conducts fact finding and planning, you sure

have made a lot of assumptions about my goals. Wrong-my goal is not

to “control” my home. I want to OWN it. I want to know that one day I

can burn my mortgage if I want. Maybe that’s a little old-fashioned, but

the idea of owning my ‘homestead’ appeals to me. I can keep it and enjoy

it, or I can sell it mostly likely for a nice gain. People who follow your

train of thinking end up ‘owning’ a big pile of debt and a lot of life

insurance.Now let’s get to the reading comprehension part…You are

living under the delusion that increases in rates on my ARM are putting a

pinch on me. I suggest you go back and take another look at my post. I

state clearly that I locked in 5 3/8% for a 30 year mortgage.

Dumbarse…it was right there in print for you!So…while I keep making

my fixed mortgage payments your clients are panicking because their

montly payment is 30-50% higher than it was a year ago. Some of them

are probabaly paying the costs of refinancing to a fixed-rate mortgage at

a rate far higher than they could have gotten a year or two ago, or

perhaps cutting back on payments to the insurnance policy you sold

them. NO worries, though, because I’m sure Meno gets paid for the new

mortage on the refinancing, too. All under the guise of 'forward thinking’

and ‘liability management’.I never expected to enlighten you, because

clearly you already ‘know’ that you have it all figured out. Personally, I

think you should stick to slinging annuities in the bank lobby. Then

again, keep up the work you’re doing now, and someday a bunch of us

more prudent folks will have the opportunity to bargain hunt amongst the

bank-owned homes your clients lost to foreclosure…

Joe; you make some good points but do you ALWAYS have to be so rude?

Are you in sales?

The money in the account earns 0% rate of return.  What planet are you from?!!  If a house is worth $100,000 at the beginning of the loan, and is sold for $175,000 ten years later, how on earth can you say there is a 0% return?!!

So you made $75,000, what you fail to understand is that you will make that same $75,000 if your house is fully mortgaged.  The money invested in the home is not making any money.  The home has appreciated in price, the mortgage has no effect on that.