Paying down a home mortage vs alternate investments. Looking for advice

[ERICOPOLY]

In the event of an earthquakes, if you don't have earthquake insurance and your house is totalled there is a big chance IMO that FEMA will help pay for restoring your house.

 

Hahahahahahahahahahahahahah

 

 

Yeah, that would go over really well on the national news -- Obama orders it an emergency and uses national funds to restore $3m homes in Montecito.

 

Well that was NOT a joke.

 

Ok my use of the acronym FEMA may be incorrect. But when the fed government approves $3.5B in assistance to repair earthquakes, the fact that the funds are helping multi-millionaires in their beachfront condo is hidden from the taxpayer.  That's my impression what happened in the 1989 quake. I just saw one article that said California paid $1B, and the Feds paid $3.5B, and elsewhere I read the cost of the quake is $5B. So there you go, seems like the math says the damage was 100% borne by the taxpayer.

 

A friend of mine (when I was in high school) lived in a Los Altos Hills home that was knocked off it's foundation.  No FEMA money.  It was the Loma Prieta earthquake.

 

Well, we are going back and forth on this, I stated that $5B was spent by the taxpayer to repair the damage from the Loma Prieta quake (I NOW live where the quake hit so this is not just a intellectual exercise). So let's invert the statement, are you saying none of that $5B was used to repair a home, or just none was used to repair a $3Mil home?

 

Here are some facts regarding the financial assistance from the state/federal government with regards to the 1989 Loma Prieta earthquake:

 

http://nisee.berkeley.edu/loma_prieta/comerio.html

 

Repair of Single-Family Houses

Individual homeowners with repairable damage found a variety of resources in federal and state housing recovery programs. The majority of the single-family housing reconstruction funding came through the SBA loan program. Other programs include:a $5,000 minimum home repair (MHR) grant from FEMA for limited repairs to primary dwellings, and Individual Family Grants (IFGP) combining FEMA and state funds (maximum $21,500) for real and personal property replacement. Mortgage assistance and Additional Living Expenses (ALE) were also available if needed through a FEMA program. Finally, if a homeowner’s needs were not met through these programs, they could apply for a loan from the California Disaster Assistance Program (CALDAP), administered by the state office of Housing and Community Development (HCD). The CALDAP program was initially set up on two tracks:CALDAP-O for owner occupiers, and CALDAP-R for rental housing owners, and initially funded with $23 million in each track for loans and grants. Four years after the event, CALDAP-O has provided $43 million in loans to homeowners, but there are still some loans applications pending.

 

 

Ericopoly: I don't know what is your point in quoting the article because the article says nothing about how much gov't money was paid out for home repairs. I don't know whether you agree with my statement that gov't dollars went to repair homes. But I do see one fact from the article: about 43000 owned homes were damaged of which 1/4 was destroyed. So if that is 1/2 the damage of the earthquake that would work out to $5B / 2 / 43000 = 58k per house. So the cost of repair is about 58k which sounds reasonable. And the government paid $5B so it would make sense that the government could pay $58k on average for every damaged house. I mean my numbers are very rough guessemite but my point now sounds reasonable.

 

I suppose a person can drown in a lake that is on average 1 millimeter deep.

 

Therefore, the lake is safe enough to let your toddlers play in without any adult supervision???

 

I think that's what you are claiming.

 

Or perhaps you don't need medical insurance because your expected losses from insured health issues don't exceed the monthly premium.  That's a better analogy. 

 

Ahh.... but the point of insurance is to protect the individual that bears greater than his average share.  So why are you making a point about average costs when you know some of the homes were completely destroyed?  Didn't you tell us earlier that the government will pay for everything, so therefore catastrophic damage from an earthquake is not really something to worry about?

 

PS:  The article pointed out that the maximum cash grant was $21,500, and after that the individual homeowners were looking at getting further assistance via loans -- in other words, you are on the hook for the bulk of the catastrophic damage.

[locatevalue]

I don't know where DCg stands in terms of tax rates, age, mortgage ability, or investing ability; the above likely does not apply to him.

 

 

I'm 37 years old, have a 30-year-fixed mortage, & I think we're (my wife & I) taxed at either 25% or 28%. As far as investing ability, I've done well over the last 6 or so years (although I started with a relatively small amount of investable cash), but it's been a great run for the market. I'm not naive enough to think that I can guarantee I can continue to produce great returns every year going forward.

 

I think you sort of answered your original question.  As the market matures re-investing becomes more difficult. 

 

I have watched my stock portfolio drop by around 70% in Feb/March 2009.  Even since then I have taken hits of greater than 20% (the peril of options).  Each time I have kicked myself for not paying down real debt when things were up.  I guess it goes back to know thyself.  Since I know I will be upset for not paying off the debt the next time the market tanks, that is probably what I should do.

 

On the other hand there is alot of merit to keeping a tax deductible loan as cheap as that.  Our situations are somewhat different.  I am leaving the day job, and want to reduce regular outlays as low as possible.  Our mortgages can only be locked in for 5 years, and are not tax deductible, whereas a HELOC is tax deductible.

 

I think in US it makesense to keep the 30year or 15 year loans as the current rate and use all taxable deductions that you can get, I refinanced my house to 2.75% APR for 15 year and took max possible loan unfortunately texas doesn't allow you to refi more than 80% of home value otherwise i would have preffered 100% and did the same thing with investment property last year. I still see lot of investments around that generate more than what i pay for loan after tax. Cash flow is not an issue as me and my wife work and similar tax bracket and age as you DCG. Also having mortgage doesn't bother me and i feel more safe having 20% down and all upside of realestate.

[Yours Truly]

Out of curiousity, any Canadians on this board practicing the Smith Manuever?

 

Essentially it's taking a HELOC to invest and taking a tax write-off on the loan thus structuring the mortgage to be tax deductible. 

[randomep]

In the event of an earthquakes, if you don't have earthquake insurance and your house is totalled there is a big chance IMO that FEMA will help pay for restoring your house.

 

Hahahahahahahahahahahahahah

 

 

Yeah, that would go over really well on the national news -- Obama orders it an emergency and uses national funds to restore $3m homes in Montecito.

 

Well that was NOT a joke.

 

Ok my use of the acronym FEMA may be incorrect. But when the fed government approves $3.5B in assistance to repair earthquakes, the fact that the funds are helping multi-millionaires in their beachfront condo is hidden from the taxpayer.  That's my impression what happened in the 1989 quake. I just saw one article that said California paid $1B, and the Feds paid $3.5B, and elsewhere I read the cost of the quake is $5B. So there you go, seems like the math says the damage was 100% borne by the taxpayer.

 

A friend of mine (when I was in high school) lived in a Los Altos Hills home that was knocked off it's foundation.  No FEMA money.  It was the Loma Prieta earthquake.

 

Well, we are going back and forth on this, I stated that $5B was spent by the taxpayer to repair the damage from the Loma Prieta quake (I NOW live where the quake hit so this is not just a intellectual exercise). So let's invert the statement, are you saying none of that $5B was used to repair a home, or just none was used to repair a $3Mil home?

 

Here are some facts regarding the financial assistance from the state/federal government with regards to the 1989 Loma Prieta earthquake:

 

http://nisee.berkeley.edu/loma_prieta/comerio.html

 

Repair of Single-Family Houses

Individual homeowners with repairable damage found a variety of resources in federal and state housing recovery programs. The majority of the single-family housing reconstruction funding came through the SBA loan program. Other programs include:a $5,000 minimum home repair (MHR) grant from FEMA for limited repairs to primary dwellings, and Individual Family Grants (IFGP) combining FEMA and state funds (maximum $21,500) for real and personal property replacement. Mortgage assistance and Additional Living Expenses (ALE) were also available if needed through a FEMA program. Finally, if a homeowner’s needs were not met through these programs, they could apply for a loan from the California Disaster Assistance Program (CALDAP), administered by the state office of Housing and Community Development (HCD). The CALDAP program was initially set up on two tracks:CALDAP-O for owner occupiers, and CALDAP-R for rental housing owners, and initially funded with $23 million in each track for loans and grants. Four years after the event, CALDAP-O has provided $43 million in loans to homeowners, but there are still some loans applications pending.

 

 

Ericopoly: I don't know what is your point in quoting the article because the article says nothing about how much gov't money was paid out for home repairs. I don't know whether you agree with my statement that gov't dollars went to repair homes. But I do see one fact from the article: about 43000 owned homes were damaged of which 1/4 was destroyed. So if that is 1/2 the damage of the earthquake that would work out to $5B / 2 / 43000 = 58k per house. So the cost of repair is about 58k which sounds reasonable. And the government paid $5B so it would make sense that the government could pay $58k on average for every damaged house. I mean my numbers are very rough guessemite but my point now sounds reasonable.

 

I suppose a person can drown in a lake that is on average 1 millimeter deep.

 

Therefore, the lake is safe enough to let your toddlers play in without any adult supervision???

 

I think that's what you are claiming.

 

Or perhaps you don't need medical insurance because your expected losses from insured health issues don't exceed the monthly premium.  That's a better analogy. 

 

Ahh.... but the point of insurance is to protect the individual that bears greater than his average share.  So why are you making a point about average costs when you know some of the homes were completely destroyed?  Didn't you tell us earlier that the government will pay for everything, so therefore catastrophic damage from an earthquake is not really something to worry about?

 

PS:  The article pointed out that the maximum cash grant was $21,500, and after that the individual homeowners were looking at getting further assistance via loans -- in other words, you are on the hook for the bulk of the catastrophic damage.

 

 

 

OMG, I love your analogies, you have a library and you pull them out whether they make apply here or not.

 

Firstly, we should talk of a typical house which my house is. If it is totaled, I think it'll cost say 250k to rebuild and make me whole (house is worth 600k but that's cos of where I live). In the last quake to hit my area, in 1989(emphasis) the average government assistance for repair was I guessemiate 58k. So let's go with my logic here. In 2013 if this happens and the government does the same then they would give 103k average assistance cos that's what 58k in 1989 is worth today. If it is 3:1 ratio of damaged to demolished house and say 50k is for each damaged house (which is already quite high its probably nothing really) and then it means that the average price of assistance to rebuild a demolished house is 250k. So at least I think I am covered, or are you just worried about the 3Mil houses, sure they got a problem, but they are rich and most of it is borne by the bank probably. This is simply my logic for living in the loma priota earthquake zone and not buying earthquake insurance. I am not paying the government beforehand for FEMA or whatever bill they will pass to give me relief in the quake so this is not insurance so I don't know why you refer to some premium, this is the government implicitly backing the banks or Fannie Mae.

 

Secondly, you misunderstood your articles first 3 sentences. I am going to need to go to over each sentence.

 

1st sentence:  there are various government schemes to help homeowners with relief (meaning, they don't know all the programs out there)

2nd sentence: the main program is so and so loan (I am skeptical what this generalization implies).

3rd sentence and so forth: eg. eg. eg. of programs one of which pays out max 21,000

 

So be logical, how can you know how much the government paid to each homeowner in the aggregate?

 

Ok I am seriously not trying to be rude but I think this thread has gone on long enough don't you?

[ERICOPOLY]

The article clearly stated that $21,500 was the maximum combined assistance (federal and state) for repairs to a given single-family residence.

 

It also mentioned that further relief was provided in the form of temporary housing, among other things.

 

You are treating all of these costs as if they alltogether provide $50+k towards repairs to the home.  The article was clear that not all of the assistance went towards repairs.

[ERICOPOLY]

The second major clue from the article is that the majority of single-family reconstruction costs were funded by the SBA loan program.

 

Loans... Majority....  That's the short version.

[Uccmal]

Out of curiousity, any Canadians on this board practicing the Smith Manuever?

 

Essentially it's taking a HELOC to invest and taking a tax write-off on the loan thus structuring the mortgage to be tax deductible.

 

Yours Truly, I have more or less done that for years.  We financed a major home reno from a Heloc, and other life related items rather than increasing the mortgage.  Then I deduct the interest against investment gains.  After the market run up the Heloc is empty, and I am paying whatever advances the bank allows me on the mortgage each year. 

 

If there is a major market downturn I can borrow the money back instantly to invest.  Of note: we got the Heloc in winter 2010, a year after the meltdown.  The drawback is the flexible interest rates (its 3.75%) but it looks like the BofCan wont raise rates until the Fed does, and judging by the "disinflation" numbers that isn't happening soon. 

[jeffmori7]

Out of curiousity, any Canadians on this board practicing the Smith Manuever?

 

Essentially it's taking a HELOC to invest and taking a tax write-off on the loan thus structuring the mortgage to be tax deductible.

 

Yours Truly, I have more or less done that for years.  We financed a major home reno from a Heloc, and other life related items rather than increasing the mortgage.  Then I deduct the interest against investment gains.  After the market run up the Heloc is empty, and I am paying whatever advances the bank allows me on the mortgage each year. 

 

If there is a major market downturn I can borrow the money back instantly to invest.  Of note: we got the Heloc in winter 2010, a year after the meltdown.  The drawback is the flexible interest rates (its 3.75%) but it looks like the BofCan wont raise rates until the Fed does, and judging by the "disinflation" numbers that isn't happening soon.

 

From what I understand, if you use your HELOC to invest, you cannot use it at the same time for other stuff like home reno. Or I should say, you can do that, but you won't be allowed to deduct your interest. You can deduct interest only if your HELOC is use as an investment vehicle only. Am I right on this?

[bizaro86]

Out of curiousity, any Canadians on this board practicing the Smith Manuever?

 

Essentially it's taking a HELOC to invest and taking a tax write-off on the loan thus structuring the mortgage to be tax deductible.

 

Yours Truly, I have more or less done that for years.  We financed a major home reno from a Heloc, and other life related items rather than increasing the mortgage.  Then I deduct the interest against investment gains.  After the market run up the Heloc is empty, and I am paying whatever advances the bank allows me on the mortgage each year. 

 

If there is a major market downturn I can borrow the money back instantly to invest.  Of note: we got the Heloc in winter 2010, a year after the meltdown.  The drawback is the flexible interest rates (its 3.75%) but it looks like the BofCan wont raise rates until the Fed does, and judging by the "disinflation" numbers that isn't happening soon.

 

From what I understand, if you use your HELOC to invest, you cannot use it at the same time for other stuff like home reno. Or I should say, you can do that, but you won't be allowed to deduct your interest. You can deduct interest only if your HELOC is use as an investment vehicle only. Am I right on this?

 

You can only deduct the portion of the interest used for investments. So if you have a 100k heloc and 50k is stocks and 50k is a new kitchen, you can only deduct interest on half. The proportion holds for the life of the loan too, so you can't pay back 50k and then start deducting it all.

 

I assume the Uccmal actually sold investments to pay for the renos, then borrowed money on the HELOC to buy new investments, thus making the interest tax deductible. Interest on debt for home renos isn't tax deductible in Canada, whether borrowed on a heloc or any other way.

[moody202]

 

Well, my only point is that when you talk about investment returns, that is an orthogonal issue to the problem of whether you pay down the mortgage. And returns a whole can of worms. In fact this whole forum is devoted to that. So using this thread to answer that isn't possible.

 

But if you talk about rental income and housing. I will tell you what I plan to do with my house(s) and why. I do not plan to ever rent for profit because:

 

1. income is taxable

2. I don't believe it can be 9% after factoring all costs

3. I believe as Shiller says, housing has traditionally grown at inflation rate, so my expected return on my house is inflation (despite the fact that my house has gone up 15% last year)

4. frictional cost of house sale is 6% fees

5. the work and stress makes renting different from being a true passive investor whose only tool is the computer

6. the single family home rental market is distorted by lots of unknowledgable people acting as landlords, so overall it is probably not a profitable industry

 

If I have more than one house, which is likely to happen in the future, I will only rent it out for a nominal fee to friends or relatives, so that it covers their utilities usage and minor upkeep.

 

Maybe you are right it is truly 9% return. But I know of people who have taken a year to evict someone. If you factor that in it is still expected to be 9%? ok.

 

I own a house as if it is gold, no returns, just keep up with inflation. The plus side to gold is that it is not as volatile, and the downside is the 6% transaction fee.

 

Also have you factored in the labour cost of yourself going there to fix the water heater or broken toilets?

 

cheers

 

Randomep –  We both have perspectives and there is no right or wrong as what works for you depends on your personal financial situation, risk appetite and number of other factors. So my intent is not to prove that my views are correct and yours not. Here are a few thoughts to consider.

 

1. Yes – income is taxable but expenses are not.  Also – you get to take depreciation out of you income. Your capital gains taxes (when you sell) are lower than regular income tax.

2. I know firsthand of people producing 15%+ on properties. Leverage it up and you go north of 20. While hard to hit these numbers in the current market with values goin g up, 9% is very achievable.

3. I can agree with what Shiller says. However, inefficiencies exit in all market and you are a value investor and know how to take advantage of them.

4. Yes, its 6% but can be managed to lower number.  Number of techniques available.

5. Agree - - there is stress that can come with renting. To me that is not very different from investing in stocks where I get stressed when my stock goes down 25%. May be you handle the market stress better.  Agree that investing in stocks provides you the ability to work from anywhere

6. I don’t know what you are trying to say here. All the landlords I know understand finane 101 and are making money.

7. My 2 cents  -- try to stay away from renting to friends and family. You are better off finding a good tenant that pays a fair price

 

I am not implying that renting is a better option that investing in stocks, just sharing that it is a worthwhile avenue for cashflow and consistency. It is different from the stock market where you can have a phenomenal year followed by a rough patch.

 

[randomep]

 

Well, my only point is that when you talk about investment returns, that is an orthogonal issue to the problem of whether you pay down the mortgage. And returns a whole can of worms. In fact this whole forum is devoted to that. So using this thread to answer that isn't possible.

 

But if you talk about rental income and housing. I will tell you what I plan to do with my house(s) and why. I do not plan to ever rent for profit because:

 

1. income is taxable

2. I don't believe it can be 9% after factoring all costs

3. I believe as Shiller says, housing has traditionally grown at inflation rate, so my expected return on my house is inflation (despite the fact that my house has gone up 15% last year)

4. frictional cost of house sale is 6% fees

5. the work and stress makes renting different from being a true passive investor whose only tool is the computer

6. the single family home rental market is distorted by lots of unknowledgable people acting as landlords, so overall it is probably not a profitable industry

 

If I have more than one house, which is likely to happen in the future, I will only rent it out for a nominal fee to friends or relatives, so that it covers their utilities usage and minor upkeep.

 

Maybe you are right it is truly 9% return. But I know of people who have taken a year to evict someone. If you factor that in it is still expected to be 9%? ok.

 

I own a house as if it is gold, no returns, just keep up with inflation. The plus side to gold is that it is not as volatile, and the downside is the 6% transaction fee.

 

Also have you factored in the labour cost of yourself going there to fix the water heater or broken toilets?

 

cheers

 

Randomep –  We both have perspectives and there is no right or wrong as what works for you depends on your personal financial situation, risk appetite and number of other factors. So my intent is not to prove that my views are correct and yours not. Here are a few thoughts to consider.

 

 

ABSOLUTELY :)

[Uccmal]

Out of curiousity, any Canadians on this board practicing the Smith Manuever?

 

Essentially it's taking a HELOC to invest and taking a tax write-off on the loan thus structuring the mortgage to be tax deductible.

 

Yours Truly, I have more or less done that for years.  We financed a major home reno from a Heloc, and other life related items rather than increasing the mortgage.  Then I deduct the interest against investment gains.  After the market run up the Heloc is empty, and I am paying whatever advances the bank allows me on the mortgage each year. 

 

If there is a major market downturn I can borrow the money back instantly to invest.  Of note: we got the Heloc in winter 2010, a year after the meltdown.  The drawback is the flexible interest rates (its 3.75%) but it looks like the BofCan wont raise rates until the Fed does, and judging by the "disinflation" numbers that isn't happening soon.

 

From what I understand, if you use your HELOC to invest, you cannot use it at the same time for other stuff like home reno. Or I should say, you can do that, but you won't be allowed to deduct your interest. You can deduct interest only if your HELOC is use as an investment vehicle only. Am I right on this?

 

You can only deduct the portion of the interest used for investments. So if you have a 100k heloc and 50k is stocks and 50k is a new kitchen, you can only deduct interest on half. The proportion holds for the life of the loan too, so you can't pay back 50k and then start deducting it all.

 

I assume the Uccmal actually sold investments to pay for the renos, then borrowed money on the HELOC to buy new investments, thus making the interest tax deductible. Interest on debt for home renos isn't tax deductible in Canada, whether borrowed on a heloc or any other way.

 

That is correct.  It sounds completely perverse but that is the way the system works. 

[ERICOPOLY]

And the government paid $5B so it would make sense that the government could pay $58k on average for every damaged house.

 

 

 

The MAXIMUM the govt paid was $21,500 per single-family home.

 

Maximum!

 

Quoting:

Other programs include:a $5,000 minimum home repair (MHR) grant from FEMA for limited repairs to primary dwellings, and Individual Family Grants (IFGP) combining FEMA and state funds (maximum $21,500) for real and personal property replacement.

 

 

I mean my numbers are very rough guessemite but my point now sounds reasonable.

 

Yes, they are a guesstimate.  Emphasis on guess.

 

 

You started off in this thread claiming the government would pick up the tab.  Not true!

 

The MAJORITY of costs were born by the homeowner.

 

Quoting the article again:

 

The majority of the single-family housing reconstruction funding came through the SBA loan program.

 

[warrior]

Out of curiousity, any Canadians on this board practicing the Smith Manuever?

 

Essentially it's taking a HELOC to invest and taking a tax write-off on the loan thus structuring the mortgage to be tax deductible.

 

Yours Truly, I have more or less done that for years.  We financed a major home reno from a Heloc, and other life related items rather than increasing the mortgage.  Then I deduct the interest against investment gains.  After the market run up the Heloc is empty, and I am paying whatever advances the bank allows me on the mortgage each year. 

 

If there is a major market downturn I can borrow the money back instantly to invest.  Of note: we got the Heloc in winter 2010, a year after the meltdown.  The drawback is the flexible interest rates (its 3.75%) but it looks like the BofCan wont raise rates until the Fed does, and judging by the "disinflation" numbers that isn't happening soon.

 

From what I understand, if you use your HELOC to invest, you cannot use it at the same time for other stuff like home reno. Or I should say, you can do that, but you won't be allowed to deduct your interest. You can deduct interest only if your HELOC is use as an investment vehicle only. Am I right on this?

 

You can only deduct the portion of the interest used for investments. So if you have a 100k heloc and 50k is stocks and 50k is a new kitchen, you can only deduct interest on half. The proportion holds for the life of the loan too, so you can't pay back 50k and then start deducting it all.

 

I assume the Uccmal actually sold investments to pay for the renos, then borrowed money on the HELOC to buy new investments, thus making the interest tax deductible. Interest on debt for home renos isn't tax deductible in Canada, whether borrowed on a heloc or any other way.

HELOC should be segregated for personal use and investment with 2 separates accounts. you  can have one charge  against the property  but 2 different-segregated  # ,as  CRA  may not allow to  expense interest, if one use the same line of credit for investment and personal use. 

[randomep]

And the government paid $5B so it would make sense that the government could pay $58k on average for every damaged house.

 

 

 

The MAXIMUM the govt paid was $21,500 per single-family home.

 

Maximum!

 

Quoting:

Other programs include:a $5,000 minimum home repair (MHR) grant from FEMA for limited repairs to primary dwellings, and Individual Family Grants (IFGP) combining FEMA and state funds (maximum $21,500) for real and personal property replacement.

 

 

I mean my numbers are very rough guessemite but my point now sounds reasonable.

 

Yes, they are a guesstimate.  Emphasis on guess.

 

 

You started off in this thread claiming the government would pick up the tab.  Not true!

 

The MAJORITY of costs were born by the homeowner.

 

Quoting the article again:

 

The majority of the single-family housing reconstruction funding came through the SBA loan program.

 

I thought the government would do more to bail me out if my house is demolished. Now I think I may be mistaken. OK!