WatchRecently bought (Jan 2011) for $550k, put $150k down, mortgage is $400k at 4.5%, no points for 30 years. My wife and I make about $160k annually.
No debt, got a newborn coming, both cars paid. Mortgage is about $2026 permonth. We pay $200 more per month to the principle, scheduled biweekly payment plan to cut down from 30 to 20 years mortgage etc.
Renting out 1 room to a relative and making $500 for it monthly. We have 401k with about $300k in it and $150k cash/investment.
We try to save a little money just in case double dip, RE crash or U.S go bankrupt etc. We stored foods, water and gasoline and medicines just in case)
We try to do the right things and pay bills on time. Our big worry is whether we did buy the house in the right time. Rent to own ratio make sense in our case. It's cheaper to pay my mortgage than paying rent for the same house (2300sqft, 4beds, 3baths, 2 stories, nice view, rent at $2400-2500)
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San Bruno, CA
rob8024 says
I am storing rice, grains, can foods, dried food mainly, liquid fuels for those Coleman style outdoor burners. All food stored in air tight vacuum bags. I am in the process of searching for a good generator. I feel no shame in sharing that because I think it's a good idea to pray for the best and plan for the worst.
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San Bruno, CA
MyPunanyIsBiggerThanYourPunany says
Yes, forget to mention, I have purchased a condo with my side business partner, 1120sqft near college area just for rental income purchase. I am trying to get some of my money out and diverse away from stocks and bonds. It's been going up too much and I feel a need to take some profit away and invest in other asset class.
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Amazing! Has anyone ever bothered to read Chapter One of
Waldon --- Economy? Or is freedom from debt out of style?
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Denver, CO
Michinaga says
Do not do this. Also do not pay extra on your mortgage every month. You have a 4.5% tax advantaged loan -- use it.
Unless you think the long term environment is going to tend toward low interest rates / low investment returns / deflation, you should hang on to that insanely cheap money and invest it -- or for a rainy day. At a minimum pay off any loans (sounds like you probably don't have any) and stuff all of your tax deferred investment opportunities to the gills (college savings? 401K, IRA..) (sounds like you might already be doing this). At a minimum keep enough cash around to have 6 months (or a year) of living expenses on hand. Paying down your loan another 150k would not change your monthly payment, just your payoff date...and you would instantly lose a lot of your tax savings from interest payments (your interest portion would drop.)
Now, if you aren't going to put any extra money to work, and would just have it sit in a low interest savings account...and you think rates aren't going up any time soon, then maybe it's best to pay down your mortgage.
On average, someone your age (long term investment horizon), with even a moderate risk tolerance will come out ahead (probably way ahead) by investing the money instead of paying down the mortgage.
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Boston, MA
swebb says
But the flip side of losing the tax savings is that you would be paying less interest.
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swebb says
Nada. Cash is the King in the current environment of declining home equity. Keep the cash in the pocket. The lesser the debt the better off you are.
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What is Mom doing for $500 a month? What could she be doing rent free?
Capital that never leaves the family is good capital.
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San Francisco, CA
masayako2456 says
Heh I was just kidding about the marshmallows!
It sounds like you are well prepared and doing everything you can. You will be fine.
There are a lot of things to worry about when you have a new baby on the way, but you are doing everything and then some. It sounds like you and your wife are very capable, and with only about $3000 of expenses per month, you would do fine even if you were out of work for a long time.
I appreciate your radical self-reliance, but don't forget the value of your neighbors and community.
Generators are a great idea. Consider diesel. Or solar panels.
Beyond that, I suggest you visit the Burning Man festival after the baby is born.
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Mountain View, CA
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DUDE,
is this a bragging post?
I think you are in very good shape financially. Lot of people would be lucky to be where you are.
so what was your question again? :-)
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swebb says
So? The tax deduction is merely a reduction/subsidy in the interest rate -- if you have a 4.5% rate, it's like paying perhaps 3% interest instead. The mortgage interest deduction doesn't do anything for taxes on its own. That's why you need a good reason to pay 4.5% to save 1.5%.
What you really need to do is compare a 3% loan (or whatever your effective rate is) to other opportunities.
Most people overestimate how the mortgage interest deduction works and just make some sort of vague statement of "tax benefit" without really understanding what the tax benefit is. The mortgage interest deduction is integrated into the purchase price of the house, which would be lower if there were no deduction.
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Virginia Beach, VA
Sikit says
Perhaps its for the torches and molotav coctails, which work well against the zombies. (though they do attract attention)
OP be sure to use a fuel stabilizer and try and rotate that stock every 6 months or so. Don't want to get caught with stale gasoline 5 or 10 years down the road when the apocalypse happens.
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Virginia Beach, VA
rob8024 says
I'd throw in learning how to grow food in the mix too. Long term growing your own vegetables is far superior to eating 3 year old canned food.
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Schizlor says
You can get 30-year old shelf-stable canned food too, of course. I have some crazy libertarian survivalist friends who tell me about this stuff, along with the other preparations they make for their "compounds."
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growing your own vegetable isn't going to save you much. My wife and I spend $10 a week on veggies, it would cost us a lot more time and headache to actually grow these ourselves.
And we eat a lot of veggies. Potatoes are 10lbs for a dollar, cucumbers are 59c/lb, tomatoes are usually around 80c/lb, corn is dirt cheap as well, apples often are 33c/lb .... you just have to know where to shop.
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Virginia Beach, VA
corntrollio says
Oh sure. But wouldn't a nice, fresh, juicy tomato make a tastier dinner? You would of course want to supplement with long-term storable foods, but I see it as kind of a, "give a man to fish, teach a man to fish" situation. It's a lot easier to carry that agro knowledge around in your brain with you than it would be to travel any distance carrying all that food. (for example)
OP sorry to get off topic, but presenting the scenario above and worrying if you're "OK" or not is equivalent to Megan Fox asking a male between 15-85, "Do you think I'm pretty?".
Yeah. I'd say you're doin' alright.
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I think you need to adjust priorities. Having a child is different than having a pet. Yes there are similarities and that is why many people are using pets as substitutes for children even unknowingly... It amazes me to see someone having a child (something of great value) and then give it in the care of someone making minimum wage. Children learn constantly from what they experience. They need Love and no one will love your child like you and its mother. Yes you will earn and save more money but can not buy what your child will miss now and can not get later. Your time with the child in the evening is valuable but will not be enough to compensate for 90% of its awake time. You can not come to this conclusion with a calculator but the implications are very real and and next to impossible to correct late in life if you get it wrong. This is intended as friendly advice.
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Virginia Beach, VA
ChrisLA says
Yeah, but you're talking about now. I'm talking APOCALYPSEFUCK style living. Collapse of Western civilization as we know it. (only because the OP mentioned as part of his reasoning for planning like that, "US go bankrupt') In the event of total societal collapse, knowing a good deal about agriculture would probably come in quite handy. (in addition to being armed to the teeth)
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You need advice or are you giving one?
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Virginia Beach, VA
masayako2456 says
If your first question means, "Did I time the bottom?" then I'd have to say no. But that doesn't mean it was the wrong time to buy (if you have other considerations for buying besides getting the bottom timed perfectly, which you obviously do) Your next two sentences should reinforce that. Rent vs. Own makes sense to own, and you are paying less than if you tried to rent that exact same house. You obviously have the cash reserves to cover any depreciation, should you ABSOLUTELY have to move for some reason in the next couple years (which will suck to spend, but you will have an option that doesn't involve default available to you) so you haven't painted yourselves into any corners, but that should be your primary concern now. (the possibility of you needing to relocate)
Long term you'd look fine. But if you plan or even thought there was a chance of you moving in the next 2-5 years, you'd have been well advised to wait I think. (just opinion based on the fact I believe, even in SF and D.C., prices will go lower before they trend higher for any significant length of time going-forward)
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Denver, CO
corntrollio says
So you are agreeing with me? The key here is that you don't just compare it to other opportunities / needs in today's market -- you have to look to the future. That 4.5% (and subsidized) rate is *locked in*. So, as I said, unless you think the long term outlook is bleak, or your investment risk tolerance is low, it's probably best to hang on to your cheap money.
corntrollio says
I think I have a pretty good handle on how it works (but if you think I'm missing something, do share). I have gone on record speaking out against it because typical income situations don't benefit much/at all from it. However, if you notice, the OP has a $160k joint income. Someone (SFace?) has pointed out numerous times that this salary range is in the "sweet spot" for the deduction.
corntrollio says
In the same way that the homebuyer tax credit artificially boosted prices, the mortgage interest tax deduction does too...yes. Would you advise someone to not claim the homebuyer tax credit because it is built into the price they paid? Why wouldn't someone take advantage of the MITD as well? It's some of the cheapest money they will ever get.
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San Francisco, CA
TimT says
This is so dippy.
It takes a village to raise a child, and its ok for kids to have more than one caretaker, not just have a social circle of one...their Mommy. It's OK to have a nanny watching your child part of the day. It's OK to go to work to provide for your children. They won't be irreversibly damaged by this.
To insinuate that the OP has his priorities mixed up because he is providing for his family is wrongheaded. You don't know what the situation is from the post.
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swebb says
Not entirely. You have to consider whether taking on debt at 3% to buy a house is worth it or not. It doesn't matter that it's allegedly "tax advantaged." People tend to hone in on "tax benefits" without considering the other factors, but that's like buying sale items you don't need.
With respect to the OP's situation, they have to consider their risk profile, their investment goals, their job situation, their housing situation, their debt profile, etc. It's stupid to do a deal just because it's "tax advantaged" when you're not certain you want to do the deal.
swebb says
Saying stuff like this makes me think you don't understand the mortgage interest deduction or our tax system. If you pay mortgage interest, you save on the interest rate through a tax subsidy. However, you also have the option NOT TO PAY INTEREST.
Moreover, $160K is not necessarily the "sweet spot" if you look at our tax brackets. In order to maximize mortgage interest deduction, you need the highest marginal rate and have sufficient mortgage interest to warrant a deduction at that rate.
Thus, if the AMT does not apply, this would be $379K in AGI so this hits the 35% bracket. If the AMT does apply, the applicable breakpoint for 2011 is $230K to $448K in AGI, where you have an effective rate of 35%. A close second is $150K to $230K in AGI under the AMT at an effective rate of 32.5%.
But note that that's AGI, not income. You could easily have 20%-30% more in income than AGI, so the sweet spot is probably closer to $200K if the AMT applies to you, and something over $400K if it doesn't.
swebb says
Possibly. I'm still getting 0% balance transfers, sometimes with a 3-5% fee, but sometimes not. And some of my student loans are below 2% right now, and some right around 3%. If only there was a real student loan interest deduction instead of the half-assed version we have now...
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Seems like you are making this way too complicated. If his effective interest rate is 3%, then you just have to compare it to the expected rate of return of his investments.
And if he chooses to PAY NO INTEREST, then you have to factor in the opportunity cost--which should be the same as his expected rate of return on his investments.
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Denver, CO
corntrollio says
I agree with you, but consider that he already "did the deal."
).corntrollio says
To be clear, I'm not saying the tax deduction covers all of the interest, or is otherwise a break-even deal on its own. I'm saying that the combination of the low rate, the fact that it is a long term fixed rate loan, and the tax benefit that you get because it's a mortgage all contribute to it being unusually cheap money. Money that could be invested, very likely at a high enough rate of return to cover the net borrowing cost (and then some). I get it that you still pay an effective rate of 3% (or whatever it works out to be). I get it that you would pay less if you just paid down your principal...BUT you wouldn't have the cash to work with anymore. And if you can and do put that cash to work for you, you will likely come out way ahead...even if you have to sit on it for a few years only earning 2% (net -1%, or whatever) interest. Now, if you are going to use it to go buy a boat, a vacation, or a bunch of steak dinners...no, not a good idea.
corntrollio says
You are right. This situation is probably not optimal, but there is still a compelling benefit. I believe that all of the interest being paid on the "extra 150k" would be deductible. Even in the 28% tax bracket it's a good deal. Again, on its own the tax deduction isn't "worth it", you have to invest the money (I believe the OP said he owns a rental condo? Maybe another one of those would be a good use for the extra (cheap) money).
And sure, you can get 0% cash advance from a credit card, but rarely for $100k, and never for 30 years.
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Corntrollio, you said:
"If the AMT does apply, the applicable breakpoint for 2011 is $230K to $448K in AGI, where you have an effective rate of 35%. A close second is $150K to $230K in AGI under the AMT at an effective rate of 32.5%"
I guess you are talking about the phase out of the AMT exemption right? Unfortunately this is an ultra screw, as the MID doesn't help the phase out. So as one gets more income, it's effectively taxed at 35%, but the deduction only pays back at the statutory 28%.
I don't mind paying taxes per se but I really don't like these special little gotchas.
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SiO2 says
Yes, you get hosed if your income falls in this range.
SiO2 says
I don't mind either, but I agree on the gotchas. The AMT was originally meant to cover 400 ultra-rich tax payers who severely underpaid taxes in the 1960s, but because it was implemented poorly and never indexed for inflation, it covers more and more middle class and upper middle class households every year.
Congress should have gotten rid of it years ago or fixed it, but they don't because it makes future revenue projections look good. In addition, they fix it on a year-by-year basis inadequate, which essentially serves as a method of redistributing tax payments from the ultra-rich to the merely well-off/comfortable and additionally helps Congress balance budgets. It's a complete screwjob.
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San Bruno, CA
Fuel stabilizer.. This is the first time I hear that, will check it out.
Schizlor says
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San Bruno, CA
I have thought about that. Since my house is next to natural reserve, lots of land to grow stuff on. After Babi is settled don, will explore the idea to grow my own vegetables. Healthier than buying GMO from monsanto.
Schizlor says
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San Bruno, CA
Seems like paying down my mortgage by $200 cause some controversy. What are the pros and cons. When SHTF, I just want to make sure my house is paid off, no one know if I would still have a job at 45, 50. It's not much job security in high tech nowadays. Just thought that paying off the house 10 years earlier seems make sense, don't you think?
The feeling of Zero housing debt is just too good and feels like 'freedom' to me :-)
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Just thought that paying off the house 10 years earlier seems make sense, don’t you think?
Feels good. But you're paying off inflated prices during that same time frame.
MITD is going away. Interest rates are going to rise. Housing prices have 95 in 100 chances to fall, 3 in 100 to stablize and 2 in 100 of rising.
Since you already bought, you might as well try to pay the least amount in mortgage payments as you can.
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masayako2456 says
Why? Who is going to enforce your mortgage if the Armageddon you're predicting happens?
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Virginia Beach, VA
corntrollio says
LOL. Exactly. When SHTF, you need lots of rations, fresh water, and ammunition. Those people you're afraid of (repo men) have families as well, and won't care in the slightest about their prior day job responsibilities, and the type of people who would try to come take your house at that point aren't going to be dissuaded by the fact that you hold the deed. You'll need a 12 guage for that.
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Schizlor says
Don't forget a crossbow. If you don't want to attract the attention of deed-holders and the flesh-eating undead, you must defend yourself in total silence.
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masayako2456 says
I highly recommend you to make AF as your friend.
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San Francisco, CA
PRIME's website
what is your reliance on fossile fuels? how much gas and oil does your family consume per week. i think you should calculate fuel price scenarios and see how that will impact your budget. also, what is the water supply source in your area.
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bubblesitter says
2456, that proposition sounds sorta ridiculous. You live in an urban area of over 1M, and you're gonna sustain your Nuclear Family in some kinda cocoon off your hoard for 3-6 months in some kinda Omega Man existence? The closest thing I read about to trying to make that work was as the days grinded on in Weimar Germany. Read up on it: the only "escape" from it was to leave.
Think about it. You cannot stockpile enough ammo in your urban hideaway to make that a practical plan.
If you wanna be a survivalist, best relocate to the kinds of places they favor.
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Right - this nightmare is going to stretch out 3-6 generations at least. And the worst of it hasn't even begun to appear on the horizon.
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F*ckhead,
That Common Sense of His Own is so ridiculous that either his posts are written as parodies for comical relief or he is so out of touch with reality that it'd call into question the thinking behind the original post.
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if the mortgage is less then rent, sure, that's always a good sign,
you have 3 income streams, your's the wife and the relative.
you have 3 adults at home.
hard to fuck up.
Now, here's what i would suggest.
Super insulate the roof and attic, so you use less energy.
Install a solar hot water heater, so you can always have hot water,
even if there is an interruption in utilities.
Add in rain barrels and perhaps a water cistern...
maybe a small 1500 watt PV array so you have critical power.
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San Bruno, CA
Good suggestion, I will definitely consider that.
patb says