Posted on 02/25/2008 7:21:45 PM PST by chiya
I need some advice. My husband recently received a small workers comp settlement and given the way the housing market is going and the fact that he will never be able to support himself because of his disabilities, we decided to use the money to pay down our mortgage and get ourselves out of debt.
I went on their website and used their calculator to get a payoff figure and determined that the amount we had would not completely pay it off but would pay it down to around 6,000 dollars.
I called Country wide and told them the money was coming and that I wanted it applied to the prinicipal. Our bank called country wide and was given instructions where to wire the money into something called an MRC account I think with Bank of America.
6 days later our bank called and said the money had just been returned to them. I called Country wide to find out why and was told: that because I had requested the payoff figure and the amount sent wasn't sufficient to pay it off that they didn't know what I wanted done with it. So they sent it back. Is this even legal?
If you are going from a two-income household to a one-income household, you need liquidity and the least liquid investment usually - and right now certainly - is real estate.
I'll put it this way: say your house has a nominal value of $100,000 and your mortgage is $75,000 and your equity is $25,000.
Now let's say that you spend %65,000 to pay it down.
So now you have $10,000 in debt ($75,000 minus the $65,000 you paid down) and $90,000 in equity (the original equity of $25,000 plus the $65,000 in equity you purchased when you paid down your mortgage.
Now, say real estate prices go down 10% over the next year or two - which is certainly possible. The equity in your house will then drop in value from $90,000 to $81,000.
You will have lost $9,000 in total and $6,500 of the cash you put in.
If you had taken the $65,000 and instead just invested it in a very safe - albeit low-yielding - money market fund, you probably would have made $2,500 in interest - but you didn't because it was tied up in your house.
So your opportunity cost probably wiped out any benefit you would have received from lower interest payments on the remaining stub of the mortgage.
Besides the fact that paying down the debt is not a good investment by the numbers, what if you have a medical emergency? Without that cash, you might have to sell your house in a very weak market in order to raise the funds, which will probably add another 5% loss plus broker fees, etc.
I would advise you to sit down and think this through much more carefully.
If you believe that there is a recession coming, you are going to want cash in the bank - not equity in your home that you cannot tap unless you borrow all over again.
CountryWide returning the money is the manifestation of Someone ‘up there’ looking out for you.
Follow the advice in reply #10. Consider things carefully. Your house may be your largest investment but it is not necessarily your biggest burden debt-wise. You don’t want to hurt yourself by acting in what you perceive as your own best interest.
Right now, 30 year fixed rates are quite low. It may be years before we see them this low again.
If someone pays off their mortgage and then some kind of emergency arises and they need to raise cash fast by mortgaging the house all over again, they will wind up with much higher rates.
The debt-free obsession is great when your debt consists of paying 17% to a credit card company for money you spent on temporary perishable consumer goods like groceries or clothes, but not when you are paying 6.5% on a long-term durable good like a home.
Not all debts are bad, and not all equity investments are good.
It is nice to know that you don’t have to worry about house payments. Just remember to put away some money for property taxes and insurance, if they were included in your payment.
I’m sorry to hear about the disability but I am glad to hear you are only $6000 away from being out of debt!
I think the advice given is correct, pay everything you can on your next mortgage coupon. Often the coupon has a line on it for “prepayment amount”. It might cost you a few days extra interest but the big picture is good news. You could enclose an extra note saying “please apply the excess to the principle”. They were probably a little confused because you were so close to making a total payoff and they probably wondered why you were off by $6k.
Hopefully the disability isn’t too bad and perhaps he can find some other work that he will find enjoyable given whatever limitations he has.
I understand where you are coming from, the thought did cross my mind to mention that I am not sure if it was 100% wise to pay off the debt. But each has their own view and to some, being out of debt is a high priority. She works. So if they don’t have a mortgage payment maybe her earnings are enough to pay the utilities and eat.
They might consider getting a line of credit on the equity in their house. No need to every use that line of credit, but at least having that will give them access to cash if they ever need it for an emergency. You can get 10 year lines at prime rate (much better than credit card debt) and its backed by the equity in your home, so if the worst does happen you still can eat while you try to sell the home.
“but once you paid it off, you will never be able to get the money back out, unless you sell the house.”
Home equity line of credit.
I’m not a financial analyst and I know nothing about investing other peoples money. But, I did stay in a Holiday Inn Express last night. -Wb
“but once you paid it off, you will never be able to get the money back out, unless you sell the house.”
“Home equity line of credit.”
NOT if you don’t have any income — that was the point, she says her husband will not have any income to make the mortgage payments. Not to mention that home equity lines of credit are at much higher interest rate than 1st TDs.
I must have not understood you.
I thought you had said “you will >never< be able to get the money back out, unless you sell the house.”
If you have no income, you will NOT qualify for home equity line of credit. It is not particularly wise, not to say it’s plain dumb to give up a say 5% mortgage, then borrow the money back at 12%, which is about what someone would have to pay with no income, though now that they tightened up the landing practices, you might not be able to get any money out at any interest. For practical purposes this is not the way to get the money out.
So basically if you have no income, you WOULD have to sell the house to get the money out - not to mention that it takes time and as others pointed it out as well, you might be forced to sell in a bad market, whereas, if you keep the money, you make some interest on it and can keep paying the mortgage for a very long time having the best of both worlds, security, liquidity and keeping the house.
Paying off a low interest mortgage gives people the ILLUSION of security, but having no liquidity is a much higher risk, than having a mortgage, with the money sitting there getting almost enough interest to couteract the interest you are paying on the mortgage — especially if you take into account the tax consequences too.
Right now, with mortgage lenders being desperately short of money, you may be able to buy your mortgage back at a discount. After all, virtually all mortgages are sold during their term, some several times, to investors with different time-value horizons than the originating bank. A time like this is ideal for suggesting your own "smokin' deal" buyout.
“If you have no income, you will NOT qualify for home equity line of credit.”
Please read post # 8.
Why a Certificate? Then if you really need the money, you get slapped with penalties. You're better off with an online savings account paying 3.5-4.0 percent (see ING Direct or Emigrant Direct) or a MMA at your local credit union (since credit unions are insured under the NCUA, not the FDIC). At least then your money retains more liquidity than if it were parked in a Certificate.
If you like living life on the edge, you could try a Countrywide Savings Link account at 4.50% APY, but you need to watch your balances so they are entirely "protected" by FDIC insurance. Countrywide (like a few of the other big banks) is a rotting corpse, and may God have mercy on us all if it fails.
Side remark is that you should be aware that long term inflation due to rising prices and the falling dollar will destroy the real value of the money that you just got.
Au contraire! You do know something: the trick is to borrow OPM (other peoples' money) at low rates, invest it in something that appreciates in value, and pocket the spread.
stupid post of the day.
Obviously I agree that for many, it is best to not pay off a mortgage. My beef is with anybody who gives investment advice that includes the term “always”, or implies a one size fits all solution.
In some situations, it is best to keep a mortgage. In others, it is best to pay off. To infer that anybody who pays off their mortgage is “stupid” is “stupid”.
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