| mortgage investment scheme |
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faugaun
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Ahhh, now the interest only makes sense, always wondered why someone might want that...but for maximizing rent or short-term ownership (flipping). It actually makes sense.
OK so elimination of PMI also makes sense...which brings me to another question....I was thinking pay down to remove PMI....but actually I should think add a room to boost value?
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Mon Jun 09, 2014 11:16 am |
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Publius
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quote:
Originally posted by oldguy
One time, years ago, I had an Interest Only mortgage, it worked great - I didn't have to pay that $250/m to principal, my cash flow was higher, that left more available cash for more investments. My loan remained constant - meanwhile the house value tripled over about 15 years. 
Just a word tempering this anecdote, faugaun, from reading his posts for a while, it is evident that oldguy has been very successful leveraging risk in this way to maximize his profit. However, what isn't clearly stated in his example above is that the risk is higher than if you are paying towards and have acquired equity. I doubt very much if this was his only property at the time, nor his only income stream. If you go with a similar strategy, you run the real risk of running into financial hardship because of any number of reasons and not being able to get out of your investment before losing it to foreclosure.
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Mon Jun 09, 2014 11:19 am |
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oldguy
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..but actually I should think add a room to boost value? quote:
No, that doesn't work, generally you get only about 50% of the money back. Eg, you spend $20k to add a room and it adds only $10,000 to the appraisal.
And keep in mind - there are many buyers who want "as-built" houses, they won't even look at a house that where the footprint has been changed. So that limits your prospective buyers, might even lower the appraisal.
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Mon Jun 09, 2014 9:18 pm |
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faugaun
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quote:
Originally posted by Publius
quote:
Originally posted by oldguy
One time, years ago, I had an Interest Only mortgage, it worked great - I didn't have to pay that $250/m to principal, my cash flow was higher, that left more available cash for more investments. My loan remained constant - meanwhile the house value tripled over about 15 years.
Just a word tempering this anecdote, faugaun, from reading his posts for a while, it is evident that oldguy has been very successful leveraging risk in this way to maximize his profit. However, what isn't clearly stated in his example above is that the risk is higher than if you are paying towards and have acquired equity. I doubt very much if this was his only property at the time, nor his only income stream. If you go with a similar strategy, you run the real risk of running into financial hardship because of any number of reasons and not being able to get out of your investment before losing it to foreclosure.
I appreciate the concern, I'm fairly logical and conservative when it comes to money (never had a loan till I bought a house still only carry a mortgage etc...even then only bought a third of the house the banks wanted me to buy...I'm looking at doubling my income in the near future (maybe just have to wait and see also). That said, the risk may actually be lower than you think...if old guy can cut his expenses by $200 a month then he can also rent it $200 cheaper (or $100 cheaper) and be more competitive in the market, thus reducing time without renters etc..
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Tue Jun 10, 2014 11:34 am |
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DBeavers
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| Re: mortgage investment scheme |
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quote:
Originally posted by faugaun
OK not sure where to post.
Basically I have a mortgage, principle owed = 159k value of property 175k
Am considering refinancing, my current payment is 1180ish PMI is 120 a month original loan 4.5% interest rate 30 year fixed on 175k loan. Debt to income approx 25% credit score 720-755 ....OK hoping to refinance back to 30 years to lower interest rate (???) Current is FHA. Have decent liquid assets and would be willing to pay some additional towards the principal if needed to drop PMI. Hopefully ending up with a monthly rate of 850ish with a total loan of around 139k????
OK so first question, is all of the above acheiveable and realistic?
I am used to paying 1180 a month on mortgage and want to used this technique to free up additional funds for investment to maximize gain. Basically 1180-850 = 330ish....so keep paying 1180 each month (850 to mortgage) with direct depositing the $330 to an investment account where is is in an interest accruing format.....(CD/annuity/ market index fund/??? Open to suggestions) ....to maximize compound interest effect ...
Is this a sound logical plan or is there a financial flaw I'm not seeing? When I run the numbers at 7% interest I'm gaining 350-400k in the investment portion over 30 years assuming 7% interest (is this to high an assumption???), paying off mortgage and not spending a penny more than I would otherwise except an additional 4 years of mortgage at the lower rate....plus tax benefits from the mortgage interest to counter some of the capital gains income????? I hope I made sense 
My suggestion is that you start with calling or visiting a local mortgage company. My guy in Louisiana actually buys some from one of those national mortgage companies that advertises on TV. So, even going to one of those sites and completing the info they require, is most likely going to sell your info to someone in your state.
If I were you, considering that you may find interest rates lower than 4.5% currently, I'd ask about a 25 year mortgage. Probably less than $40 more than the 30-year mortgage, but you save 5 years of payments and thousands of dollars in interest. Than use the difference in savings to start that investment account. You can probably get a 95% mortgage, so you'd still have 5% equity in your home.
For a quicker payback, take some of the additional money you have each month and accelerate payments on one high rate debt or credit card. Gaining 7% on investments annually doesn't add up as much as paying off a credit card costing 10 to 24% or more annually.
And paying down additional debt will also improve your credit score over time. The higher your credit score, the better your odds of getting lower interest rates in the future.
You might also look into a second income, using at least half of those earning build your investment account. That doesn't mean you have to find a second job at hourly wages. There are some excellent business opportunities that you can find to earn extra dollars for 10 to 15 hour a week invested in your own business.
Also, take some of the savings on your mortgage and put into a savings account to be used for vacations or other reward purchases. It'll be easier to stick with you investing if you also have an occasional splurge or reward for your smart money decisions.
Dennis
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Thu Jun 12, 2014 6:19 am |
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faugaun
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| Re: mortgage investment scheme |
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Thanks for your thoughtful reply Dennis, unfortunately much of it is not useful in my particular situation, I would like to explore a few ideas further though.
quote:
If I were you, considering that you may find interest rates lower than 4.5% currently, I'd ask about a 25 year mortgage. Probably less than $40 more than the 30-year mortgage, but you save 5 years of payments and thousands of dollars in interest. Than use the difference in savings to start that investment account. You can probably get a 95% mortgage, so you'd still have 5% equity in your home.
my current interest is 4.5, the $40 a month more that it might cost is $40 a month extra that could be invested, this seems inferior because $40 + interest is greater than $40 with no interest. I'm not sure that paying off the mortgage quicker is an advantage necessarily as it ties up assets in non-fluid locations.
quote:
For a quicker payback, take some of the additional money you have each month and accelerate payments on one high rate debt or credit card. Gaining 7% on investments annually doesn't add up as much as paying off a credit card costing 10 to 24% or more annually.
This is great advice! However, I've no debt except my mortgage. I think the best financial thing anyone can do is to not borrow money to pay for things today (exceptions are mortgages and education loans or other things which increase earning potential or appreciate in value).
quote:
And paying down additional debt will also improve your credit score over time. The higher your credit score, the better your odds of getting lower interest rates in the future.
Great again! However, there is no other debt to pay down...apparently my credit score is only 720 because I have too few lines of credit (apparently if you don't borrow a lot then you are not credit worthy ? ? ? yeah i don't get that. Second, apparently 4 years of perfect payment history equates to "not a long enough credit history" ...
quote:
You might also look into a second income, using at least half of those earning build your investment account. That doesn't mean you have to find a second job at hourly wages. There are some excellent business opportunities that you can find to earn extra dollars for 10 to 15 hour a week invested in your own business.
you've got my attention, where does one look to find the opportunities?
quote:
Also, take some of the savings on your mortgage and put into a savings account to be used for vacations or other reward purchases. It'll be easier to stick with you investing if you also have an occasional splurge or reward for your smart money decisions.
no point in this for me I already vacation for free twice a year
quote:
Dennis
While I am thinking about this, when I have asked people about credit scores they respond with "the best way to increase it quickly is to buy a credit card but again what about credit cards makes fiscal sense? I really do appreciate your post and for 99% of Americans it is probably valid but my personal situation is not the typical situation.
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Fri Jun 13, 2014 8:58 pm |
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DBeavers
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| Mortgages & borrowing |
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Here's the reason you need to check with a mortgage company.
Consider:
If I were you, considering that you may find interest rates lower than 4.5% currently, I'd ask about a 25 year mortgage. Probably less than $40 more than the 30-year mortgage, but you save 5 years of payments and thousands of dollars in interest. Than use the difference in savings to start that investment account. You can probably get a 95% mortgage, so you'd still have 5% equity in your home.
my current interest is 4.5, the $40 a month more that it might cost is $40 a month extra that could be invested, this seems inferior because $40 + interest is greater than $40 with no interest. I'm not sure that paying off the mortgage quicker is an advantage necessarily as it ties up assets in non-fluid locations.
What you have to consider, with a 25 year mortgage, the interest rate is usually lower than the 30 year rate.
So, what if the 30 year rate is 4.2, but the 25 year rate is 3.9. You already benefit from dropping your rate to 4.2, but if the 25 year rate drops it to 3.9, it much less interest over the 25 years.
Most mortgage companies don't voluntarily show 25 or 20 year rates for comparison, as they make their income of the total interest for the life of the loan.
(Ex: If you mortgage will incur $180K interest over 30 years, they can write the mortgage, flip it to a major broker a week later, and earn a margin on the $180K while only holding your paper for a week. This is quite common.)
So, if they offer a 25 year mortgage at a lower rate, and the interest drops by $40K over the life of the deal, they only make their margin on the $140K.
I've actually heard of the loan processors discouraging looking at the 20 & 25 year loans, as they know they'll make less, even when it might be beneficial to you.
Second, instead of thinking in term of a bank card, think of borrowing $1000 as a vacation loan for one year. (You can take the $1000 and dump it into your investment account.) Them pay it off in 6 to 9 months, and you have boosted your credit score.
A higher credit score can get you a lower rate on your mortgage.
If you typically pay cash for your vehicles, take half the money from the car and only pay half down. Put the other half in a savings account which then pays the monthly notes on a one-year car loan. A little interest paid on a simple interest loan will boost your credit score.
Lenders don't like people with little or no debt.
Even employers like to see their prospective employees having debt. If they life debt-free, it's easier to up and quit your job.
Do you have a credit union membership? Take advantage of the benefits.
My wife and I borrowed $1000 for a vacation loan when we went to Ireland. Using money in our credit union account, we borrowed against our account at a very, very low rate. After paying it back in 8 or 9 months, we had paid less than $30.00 interest. That $30.00 help raise both our credit ratings.
I know it's counter-intuitive, but creditors like to see debts, and timely re-payments on several lines of credit.
Get a J.C. Penney's card. You'll save extra money as they offer a higher discount for a Penney's charge than they do for cash or bank cards. Even paying it off every 30 to 60 days will boost your credit rating.
Note: debit cards don't help as you load the money up front.
I hope at least some of this helps.
Dennis
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Sat Jun 14, 2014 1:11 am |
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DBeavers
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| Looking for second income |
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This part of your post takes more diligence on your part.
Some has to do with self-evaluation. What skills do your have that you could put to use to generate a secondary income?
I found myself in a bad situation 30 years ago, when as an E-5 (Spec-5) in the military, I found my family 5 was eligible for food stamps. Knowing that one of the first things that would happen if we applied would be some gov't bureaucrat would suggest that my wife put our 3 young children in day care, and go to work. (It wouldn't matter that it would require us to buy a second vehicle, pay more for insurance, gas, etc.)
I decided instead to look for something I could do for supplemental income. Now this was way before the internet or even home computers. Moonlighting on a second job would be difficult as the National Guard owned me for 5 days a week, 1 weekend a month, and two weeks every summer.
After going to the unemployment office several times, to no avail, I realized the employees there were more concerned about getting people on unemployment, and guaranteeing their job, instead of focusing on the person who actually wanted to work.
Luckily, I spotted an ad in my local newspaper classifieds. Twenty-nine years later, the business I started is still going strong (I've been self-employed for nearly 28 years now.)
I'm not suggesting that selling promotional advertising as I do is the answer for you.
Fortunately for you, the internet exists which offers both opportunities for income, as well as information on various income options for you.
Unfortunately, the legitimate ones will be buried under an unlimited number of scams, schemes, and out-right rip-offs.
A word of caution - If you submit information on yourself with contact information, it will likely be sold to hundreds and hundreds of promoters pushing all kinds of crap and folks who want to sell you information on their, guaranteed, whiz-bang, can't-fail money-making system. They'll offer "money-back guarantees", and top-secret systems, inside knowledge, and lazy-man's way to wealth, if you'll just send them $39.99 to $999.99 for their program.
And, once they get the first payment, they have more back-ed offers to take more of your income.
In some cases, once they drained all the money they can from you, they'll sell your info to other promoters who have other secrets or opportunities to sell you.
The guarantees are often impossible to enforce or more expensive to qualify, than the money they took from you.
So, proceed with caution, ask others for suggestions, or test any possible options for skills you already have.
If you have any good business ideas, you might check with your local SCORE office for counseling on starting your business.
A few unusual income sources most people have no clue about -
Driving vehicles for pick-up or drop-off. Do you have a manufacturer in your area who needs new ambulances, fire trucks, or campers delivered. They pay on contract work, even with those who can only deliver on weekends.
Local car dealers often hunt for the specific new vehicles for clients, and will pay drivers to go pick them up 100 to 400 miles away.
eLance.com has listings for people needing specific jobs done, such as creative writing, logo design, typing manuscripts or term papers, etc.
Best of luck in finding some supplemental income.
Dennis
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Sat Jun 14, 2014 1:46 am |
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faugaun
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What's SCORE?
Yes I have qualifications ...good at statistical analysis, and fixing to finish a masters degree in hard science. Would love to run my own show but I'm not even sure how to start or how to convince the wife it is a good idea.
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Sat Jun 14, 2014 3:43 am |
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DBeavers
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| SCORE |
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SCORE is a government founded program. SCORE stands for
Service
Corps
of
Retired
Executives
You can call for a appointment to assist you with creating a business plan.
You need to have some idea of a business that you want to start to provide a service or products.
First you would need to come up with some way to monetize your skills. Who would pay you on a one-time or contract basis for your statistical analysis, and how would you price it.
Draft up a business outline (think in terms of writing a term paper - First you need the subject, then draft up an outline.
Once you have the outline, it's time to schedule that meeting with SCORE.
Depending on your location, you may be fortunate enough that a local university or Chamber of Commerce has set up a SEED center. Basically, for those who need office space with limited service (access to copiers, fax machine, at a reduced package price. There may be a time limit, but it may be a crucial first step to building the business to where it can support additional overhead including normal office space, furniture, office equipment, etc.
Consider that in meeting with clients, you might not want to bring them into your home. The SEED center could allow you that professional office space at a more affordable cost.
I feel certain you'd have a better idea about who your prospects would be than I would, so just giving you the basics.
You might also talk with your career counselor as he or she should have more information on career options and opportunities for the Hard Sciences and/or Statistical Analysis outside the standard corporate or educational fields.
Dennis
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Sat Jun 14, 2014 4:34 am |
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oldguy
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so keep paying 1180 each month (850 to mortgage) with direct depositing the $330 to an investment account where is is in an interest accruing format.....(CD/annuity/ market index fund/??? Open to suggestions) ....to maximize compound interest effect quote:
Basically, your original question reduces to - can I make a profit by borrowing capital and investing it elsewhere? Yes
Example: In its simplest form, borrow $50,000 @ 4.5% for 30 yrs and invest that $50,000 in an 11%/yr Index. The $50k investment at 11%/yr = $1,145,000. The $50k 4.5% loan costs $253/m, ie $91,200 ($41,200 in interest, that is tax deductible). The capital gains tax on the $1,145,000 profit is $165,000 when/if you you sell. Or, if you leave it to your heirs, they inherit ti tax-free.
I use only fixed rate 30 years loans - no VARs, no balloon payments, no designer loans. I don't want any risk in my money supply, ie I don't want to be forced into refi's, payoffs, etc - those are the issues that force foreclosures, bad decisions, etc.
I concentrate all of my risk on the investment side of the equation - ie, as the 11%/yr average return fluctuates widely from year to year I want to be able hold my position.
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Sat Jun 14, 2014 5:06 pm |
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Wino
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Once again, I have to caution about oldguy's method. He ignores risk, and assumes that past performance will indicate future returns, which it probably will not.
Let's say you followed his advice in 2007, bought at the peak, and saw your property drop to 40% of its value (like in Las Vegas). You would right now have about the same amount in your S&P500 account, and you would have had to have made payments for 6 years without any real income from the mortgaged property.
Once you have a financial buffer to fall back on, and the ability to wait out downturns, oldguy's method is statistically sound; however, if life happens in the middle and you cannot make your payments for any reason - disability, loss of income, etc. - you're SOL, and you'll lose not just your property, but your investments as well, when they take you to court for the overage on your repossessed property.
My plan is to eliminate all debt (would already be there had DW not "needed" a new top of the line Tahoe), and then to buy rental properties. At that time, I'll have enough income to support the rentals, so I can safely borrow to the hilt and use the money I "would have" used to pay for the property for cash to grow.
Yes, oldguy's method assumes you HAVE the $100K to buy the property, but you'll invest it, instead. If you've saved up $100K over and above other expenses, then do his method and take your chances, but if you're financing the property WITHOUT the cash to invest, then oldguy's method falls short UNTIL you earn enough to offset the mortgage using "extra" money to invest while still making the mortgage payments. You see, he assumes you can both buy the property with the $100K AND invest the $100K in the index fund without any problem. So, you need to have $100K to borrow $100K, and you invest the "owned" $100K to grow while you pay off the "borrowed" $100K loan.
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Sat Jun 14, 2014 6:51 pm |
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faugaun
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That's kinda brilliant leveraging
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Sat Jun 14, 2014 8:33 pm |
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faugaun
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Perhaps a duplex would be good first to reduce risk, if one side can cover the payment then it seems fairly stable
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Sat Jun 14, 2014 8:41 pm |
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oldguy
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He ignores risk quote:
Did you see the part above where I concentrate my risk on the investment side of the equation?
Let's say you followed his advice in 2007, bought at the peak, and saw your property drop to 40% of its value (like in Las Vegas). You would right now have about the same amount in your S&P500 account, and you would have had to have made payments for 6 years without any real income from the mortgaged property.
Yes, that has happened a few times since 1972 when I started. That is what "fluctuation" means. But it hasn't been a problem - you keep making the mortgage payments (it stays the same) and you collect the rent checks - the "instant, on-paper"value of the house or the stocks isn't important, just wait a few years until it changes.
If you are a trader and like to go in/out of the markets every few years, longterm investing isn't for you, it takes patience - and decades.
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Sat Jun 14, 2014 9:33 pm |
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