Bob Brinker Free Discussion Site 59,820+

Top 371. Jul 16, 2005 8:04 AM

» bbaddict - Re: Re: Mortgage Cost Calculator

In response to Re: Mortgage Cost Calculator posted by SteveT:

Steve,

I don't have enough information to help with that decision, but what does the calculator say to do? That is what it is for.

I think you might not be comparing apples-to-apples, which is easy to do as this gets complex.

You have to consider the principal on both sides of the analysis, in order to properly calculate the time value of money:

Assuming Mortgage balance=$35000, rate=4.75%, time=8yrs, pmt=$439

Scenario 1: You pay $35000 now to pay off your mortgage. You put your $439 per month former payment (this is a payment you made from regular earnings, over and above the income from the investment) into an investment that earns 4.75% after taxes. After 8 years, you have your house paid off and $51148 in your account.

Scenario 2: You keep your mortgage, and put the $35000 into the same investment. {You still make the payment from your reg earnings.}. After 8 years, you have your mortgage paid off and an account worth $51148.

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

Or, if you want to look at it another way, where you don't make the payment out of reg earnings, but out of this $35000:

Scenario 1: You send $35000 to pay off your mortgage. No more payments.

Scenario 2: You invest the $35000 in an account that earns 4.75% after taxes. You take $439 out of this account to make the payment on your mortgage (no more payments, net). After 8 years, this account is zero. Essentially the same thing.

But you must account for principal and interest in both scenarios. I think in your "let it ride" example above, you forgot to account for the earning power of the $35000.

Essentially, the question is: Can you earn more than 4.75% after taxes?

-- posted by bbaddict

Top 372. Jul 16, 2005 9:01 AM

» allancoleman - Re: Mortgage Cost Calculator

In response to Re: Re: Re: Mortgage Cost Calculator posted by Kirk:

you are absolutely correct about AMT ( alternative minimum tax ) being a big deal . i , myself , got caught once by it and since then have been very careful staying away from it . if you come under it , you have to do your tax return TWICE . once the normal way and the second time without certain deductions , and you then pay the higher of the two tax return calculations .

it's another of the reasons i switched to tax software cause it makes it easier . doesn't save you from it - just figures it out for ya .

i think , in the end , weither you pay off your home mortgage is simply a matter of personal choice . i hate regular payments of any kind so for me it's simple . no mortgage allows me to sleep better and makes my investment decisions much easier in my retirement .

-- posted by allancoleman

Top 373. Jul 16, 2005 11:12 AM

» retiredinprescot - Re: Re: AMT problems

In response to Re: Mortgage Cost Calculator posted by allancoleman:

I recently put together a large Municipal Bond ladder for my mother. I made sure none of the bonds was subject to AMT (very easy to do these days at Fidelity). This income stream replaces the rent she was getting from a building she had to sell. It's a "sleep at night" solution with virtually no tax consequences. Good by AMT.

-- posted by retiredinprescot

http://www.PureJazz.com/Mortgage.asp

Top 374. Jul 16, 2005 12:37 PM

» bbaddict - Re: Re: Re: AMT problems

In response to Re: Re: AMT problems posted by retiredinprescot:

The calculator has an alert feature to warn you if you MIGHT have to pay the AMT. Of course, you would still have to fill out the ridiculous worksheet to know for sure, but at least you get the alert.

This is not just a calculator showing your net mortgage cost, but also a good tool for seeing the tax consequences of other decisions. Notice how if your income rises, your Exemptions deduction can decrease, and you may lose your Itemized Deductions.

Give it a try:

But bottom line is: Your net mortgage cost is not really just your rate less your marginal tax rate. Since everyone can get the Standard Deduction, and Itemized Deductions can be limited, the net mortgage cost is a complex calculation, and can only be figured by doing the complex math. The calculator does it for you.

-- posted by bbaddict

Top 375. Jul 16, 2005 1:01 PM

» alphacd - Has Bob voiced an opinion about eastern european oil funds?

Funds like ING Russia (letrx), investing in the russian oil industry, have had an incredible ride. Does anyone know if Bob has voiced an opinion about this kind of an investment. It seems like high oil prices are here to stay.

-- posted by alphacd

Top 376. Jul 16, 2005 1:19 PM

» allancoleman - Re: Has Bob voiced an opinion about eastern european oil funds?

In response to Has Bob voiced an opinion about eastern european oil funds? posted by alphacd:

hi alphacd ,

bob has gotten questions lately about his selection of international funds and usually answers the same line : he suggests the Vanguard International Growth fund ( VWIGX ) . in listening to bob , he probably isn't going to attempt to do any short term international market timing to take advantage of a sector play such as you've mentioned .

i agree with you that high oil prices are here to stay , but how that's going to effect the different individual energy stocks or international mutual funds over the long term is yet to be shown .

course , as bob preaches , you should be your own individual money manager . and , as such , are probably better served by doing your own homework and chosing these different investments on your own . some people , in the past , who have followed bob's specific advice ( Qs ) and don't have the faintest idea of what they are doing or how to develop an exit strategy of their own , haven't done well .

rather than ask what bob brinker is doing , you should probably ask kirk or DanG_6 , or anyone else on suite101's numberous stock trading forums your specific stock or mutual fund questions . at least , that's what i've done and i've always gotten a very quick , well thought out reply . plus kirk usually throws in some really nice chart work in his response .

-- posted by allancoleman

Top 377. Jul 16, 2005 3:41 PM

» Happy_2 - Paying off the Mortgage

In response to Re: Re: Re: AMT problems posted by bbaddict:
Thanks for the neat calculator.

However, one factor in determing whether or not one should pay off their home mortgage is not considered in the calculator. That factor is the direction of interest rates. I might not be able to invest excess capital in a safe investment and earn more than the net cost of my mortgage at this time. But, this may change in the future.

Suppose t-bill rates go back to 10% in a future period. I would be happy I didn't pay off that 5+% mortgage with my excess cash.

The 5+% rate on your mortgage is good for 30 years. The return available on CD's, short term bonds etc. will fluctuate.

-- posted by Happy_2

Top 378. Jul 16, 2005 3:54 PM

» jamesj24 - Re: Re: Higher Oil is Like A Tax, it slows Growth

In response to Re: Higher Oil is Like A Tax, it slows Growth posted by JIMMY62:

Which would be better way Bob to keep our economy cool? To send more money to the OPEC countries or to send more money to our federal government? Yet Bob’s reaction to a tax increase a mild as raising the amount of income subject to SSI tax was gross indignation. Then on Saturday Bob says high oil prices have some good effects. Being consistent is no fun anyway.

These are excellent points. It's clear that Bob doesn't depend heavily on the price of gas, but I'd say most people do, especially those with long communtes. As far as comparing the high oil prices to a tax increase, I think the issue is the order of magnitude. Probably whenever the gov't raises taxes, it usually goes too far and the effect on economic growth is more pronounced than an oil increase. The effect of gas increases is more subtle, and to some extent, avoidable by driving less. Taxes are only legally avoidable by earning less, or by dying. My father owned a small tree service business, and I know his business was greatly impacted by gas prices.

I think Bob is clearly more impacted by his social security taxes than by the price he pays for gas. I myself was only once above the taxable social security income base, for a short while until the SS base grew faster than my salary. There is no maximum for paying the medicare component. So I we're all in the same boat with Bob on that one.

When people say our generation is leaving these debts "to our children", that is not correct. It is more accurate to say that the deficits are jeopardizing our own well-being in retirement, when many, if not most of us will be means tested out of SS and medicare benefits. Our children will have their own opportunity to figure out a way to run things differently if they so choose. Probably, they'll keep running things the same screwed up way our generation does, since our system seems to depend on major gov't support of the economy through spending.

-- posted by jamesj24

Top 379. Jul 16, 2005 5:34 PM

» jamesj24 - Re: Re: Mortgage Cost Calculator

In response to Re: Mortgage Cost Calculator posted by SteveT:

Interesting that you bring up this topic about investing vs. payoff of a loan.

I’m about to receive approximately $210,000 of cash out from a refinancing for which I just signed the closing documents yesterday. The loan is a 10/1, with a 30-year amortization, meaning it has a fixed interest rate of 5% for 10 years, after which it becomes variable for 20 years. I’m paying about $3,100 of closing costs, excluding interest and taxes, with no points or impounds.

I had planned to invest the proceeds in a 5-year CD that was paying 6% interest, but I since found out the offer, which was a promotion of my credit union, had expired. The current CD rates fall short of covering the cost of the money. Now I’m facing the question of what to do with $210,000 of extra cash.

I have tentatively decided to put the money in I-bonds, which are now paying 4.8% through Oct (?), and as Bob coincidentally mentioned today on the program, the interest earnings on them can be deferred for up to 30 years. The only risks I see are disinflation/deflation. I myself don’t think these are likely to occur in the current economy, notwithstanding the latest benign CPI report, which Bob discussed on the program today. The other risk is that the base rate which is now only 1.2%, and which will remain fixed for 30 years, will be increased on subsequent new bond issues, thereby deflating the value of the bonds I'm buying with a 1.2% base rate. At least these bonds should keep up with inflation as measure by the 6-month CPI, doubled to annualize the rate.

There is a penalty if the bonds are cashed in before 5 years, but they can be sold for only a $45 commission through treasury direct. (I'll have to double check that. I was also reading about TIPS and might be confusing them.)

I’m very close to taking the leap to buy I-bonds. I never dreamed I would be making such a large investment at one time, but I think it will reward me over time. Any of your thoughts would be appreciated. BTW, I'm have a 28% incremental Federal tax rate and a 34.7%combined fed/state income tax rate.

-- posted by jamesj24