<p>BCEagle91 - true, but the creditors are also hard at work making sure that “credit” is useless.</p>
<p>I just went through this process in purchasing a small condo for my daughter to live in while in college. Got tired of flushing money down the toilet for dorm or apartment living. Our analysis was based on having a lump sum of money set aside for college and how to best spend it. We looked at 30 and 15 year mortgages, 20% and 50% down. After we ran the numbers, our conclusion was that a 30 yr 20% down mortgage made the most sense and provided the best flexibility. At the end of college, the money available for our daughter to use to start her post college life will be maximized and the condo, if she choses to move out, will be rentable in an amount greater than the debt service, condo fees and real estate taxes. In the mean time, the money saved on the lower down money can be invested in safe fixed income vehicles. You really need to sit down and run the numbers, do a cash flow projection and think about the intended use of the property over time.</p>
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Anxiousmom:
Well, you’re right. If one does their HW up front to determine when they want to have the loan paid off and how much the extra principal payment would be, is very disciplined, and misses none of the extra payments, they’ll pay it off in the same timeframe at the same total interest paid. However, if one decides to skip making any of those extra principal payments then they run the risk of extending the payoff date and total interest paid.</p>
<p>I agree, the OP should play with the amortization calculators with different scenarios to determine what’s best for her. IMO, if the cash flow isn’t considered to be an issue, it’s easier to just get the 15 year loan. They can often be obtained at slightly lower rates vs a 30 year as well.</p>
<p>Many banks or credit unions are also offering 20 loans. Could you check into that? The interest rate may be less than the 30 year loan, but lower payments than the 15 year loan. It doesn’t hurt to ask.</p>
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<p>It’s not that hard. Just set up automatic payment with online banking. They never missed a beat(Hey, can we use that line for a commercial?).</p>
<p>Thanks everyone ! Just had a very heated discussion with the husband this morning regarding this. My question to him : What good is the fore eg. $50,000 sitting in a CD earning 5% or less interest, which we pay income tax on, and $50,000 to pay the the 15/20 year amortization work (to even out the cash flow). </p>
<p>As for money for emergencies - we have other sources of funds we can tap into if necessary, eg. liquidation stocks, mutual funds, an existing Helloc. He said Hellocs can be canceled any time 
So we checked into the contract and all we could find is that the absolute max interest is prime + 5% (ceiling) but should always be available. We are still fighting about that. </p>
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<p>I am working on amortization tables right now as I type. We are getting ready to make some offers as well so there is a lot of numbers flying around in my head. I started doing it yesterday but got sidetracked by the CMAs and cash flow analysis. </p>
<p>The reason I want lesser amortization period is that, twice in our lives we were hurt by money not put into real estate … very badly. The last time just happened last year. If I didn’t commit money into the stock market last year, we won’t be even looking at any mortgages or looking at buying a much more expensive real estate - or the kids’ grad schools would have been all taken care of. :rolleyes: I don’t want to ever make this kind of mistake thrice. </p>
<p>My husband cedes that point but said that over the course of our lives overall we did ok… despite our mistakes so he wants to continue… ie. keeping the “cash” around and have as long an amortization period as possibe - 30 years.</p>
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<p>It’s not quite so simple… </p>
<p>Personally I would say make a traditional down payment (eg 20%) with a 30 year mortgage and then make extra principal payments. By paying just a little extra principal each month you can easily turn a 30 year mortgage into a 15 year mortgage, but you don’t have to make those extra payments if you don’t want to. </p>
<p>There’s nothing wrong with putting a lot more principal down up front but you’ve got to consider the balance of your assets between cash, property equity and other investments. If, for example, making that extra big down payment means that you’re spending all your cash then I wouldn’t do it.</p>
<p>If the recent course of events in the economy has taught us anything it’s that having a nice healthy chunk of old fashioned cash available (eg savings or CDs) is a very smart thing and the only thing that has real value when other investments go sour.</p>
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<p>Your husband is totally correct on this front. Helloc, stocks and mutual funds are NOT emergency funds. Your emergency money must be in cash… period. A lot of people had this attitue about their portfolios and Helloc then when the downturn hit found their Helloc was effectively canceled and their portfolios were worthless from an emergency fund standpoint. If you must eat up more cash to make this bigger down payment then don’t do it.</p>
<p>Agree that stocks/mutual funds are not emergency funds. You may have to sell your stocks at the bottom of the market, which is NOT what you want to do. The point of having emergency money is so that you won’t have to liquidate your investments at the worst time.</p>
<p>We’ve always thought of our heloc as our “emergency fund.” Thankfully never had an emergency before it expired and we never got another one. There have been instances in this latest real estate deflation where banks have frozen helocs. </p>
<p>I wouldn’t want to tie up emergency cash in a house. If the money you’re putting in as a downpayment is part of this cash needed as an emergency fund, I wouldn’t do it. </p>
<p>As an earlier poster said–right now, cash is king!</p>
<p>I know cash is king. But “too much” cash burns a hole in my pocket… I start itching to do something with it :o</p>
<p>I think the usual recommendation is to have 8 months living expenses of “cash” reserves ? We have always kept more than the usual recommendation. </p>
<p>What I am saying is, I <em>think</em> I have all my emergencies taken care of, and I see no need to keep more than that. My husband’s view is that we have to be prepared for “black swan” scenarios. He used to be a nuclear engineer (safety systems) so he can dream up all kinds of doomsday scenarios for anything. </p>
<p>I just realize my husband comfort level is different from mine. Our disagreement may not be an issue of dollar and sense at all.</p>
<p>I have more than 8 months of living expense, more like 24 months. In this economy, you just can’t be too sure, people are out of work longer. Put your extra money in a CD so you can’t have access to it.</p>
<p>^Would you believe it that my husband’s comfort level is more like 3-4 years ??!! Not in this particular climate and now that we are older, always !! </p>
<p>My own is more like 18-24 months - anything more and I start getting antsy. </p>
<p>So whose standards are more reasonable ?</p>
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<p>Remember that as you increase you’re investment base in real estate you must also increase your emergency reserves. If this rental property goes unoccupied for an extended period (not out of the realm of possibility in this market) then you’ve got to cover all those costs in addition to your normal expenses. </p>
<p>You’re already making an additional investment and, in the long run, purchasing property during this time period will likely turn out to be a very good investment. It’s obviously not what you want to hear, but your husband is right in this situation. Conservative is the name of the game in this new world and as such there is no such thing as “too much” cash.</p>
<p>How much emergency money to have may be different depending on how long it would take you to find the next job. When H was young, he could probably find another job in months. Now that he is older, more senior in rank–his level of job doesn’t come up that often. He estimated that it might take him a year to find a suitable job if he were laid off. And that was before this economic downturn.</p>
<p>For us, 8 months would be too short of a time.</p>
<p>I was reading in a Money Magazine interview with financial planners’ strategies of how to help their clients cope. One planner advised his retired clients to always have 2 years of emergency money–one year in cash, the other year in bonds. He said that his clients have never had to sell their stocks at the wrong time of the market. Selling your stocks at the low point of the market to fund living expenses is a sure fire way to run out of money before you die.</p>
<p>munchkin, the options for investing are not limited to stocks, mutual funds or low return CDs. There are all sorts of other options with low risk and decent returns. Tax free municipal bonds, high yield bonds from solid companies with good fundamentals, a variety of ETFs. You should talk to an investment consultant that is not a broker with a vested interest in selling product. With mortgage rates as low as they are now, I think it makes a lot of sense to put down as little as you can and keep your cash for other uses.</p>
<p>Repeat: We have 18-24 months cash. </p>
<p>My husband wants to have 3-4 years cash. </p>
<p>We do not depend solely on salary income for our living expenses(already semi-retired), and on top of that job security is good for the next year (contract).</p>
<p>In addition there are asset moves I am hoping to make in within the next 36 months which will greatly increase our cash position. </p>
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<p>I am not knowledgeable but in the last 20+ years our experience with consultants were not good. In 2007 we thought we can try a paying adviser - and the results are not that great - returns (whatever they did) tracked the stock indexes. 
What bothered me most of all from that experience was that I distinctively asked the adviser at one point, whether it was a good time to put money into the markets - I had a bad feeling at that time and wanted to hold off and have it sit in cash first, and he convinced us to put “the portfolio to work”. :mad:</p>
<p>I had some municipal bonds mutual funds on my own, at its worst, it went down 50% too !! I never understood them but was told they were stable and “safe”. The last year was most traumatic for me because it was the first year we were transitioning into retirement, and changing investment directions and taking a more active role. </p>
<p>I guess it was from the last year’s experience that I just want to own a place as much as possible. I would have paid for it outright if I didn’t lose all that money last year. Thank you for suggestions about bonds and etf (?) . I will look into them. I have to share this little story about corporate bonds. Our friends are all about the same age and in same situation - retired and minding their little nest egg. One friend thought he was being very safe and bought into HSBC (big bank) bonds - he told us, in one very bad period, he lost 25% in two weeks. He was in very very bad shape for a bit. The poor guy also had a lot of faith in Warren Buffet, and bought some Berkshire shares. I hope what happened last year will never happen again in my life time. </p>
<p>Someone also suggested a fixed payment - auto-prepayment ? I think that may be a good compromise as well for us as well. Since so many very smart people seem to favor 30 years - I have to give it serious consideration. Honestly I always thought Dh is crazy to want to keep 3-4 years worth of cash around.</p>
<p>3-4 years seems to be a lot of $$ to have in cash, as a normal rule. But sure would be great to be able to ride out this recession without much worry on the basis of that hoard.</p>
<p>Munchkin, municipal bond mutual funds are not the same as buying A rated individual tax free munies. In the mutual fund, you may have tax advantages with respect to the earnings but are still subject to the vagaries of the market with respect to the value of your shares. With individual tax frees, you own the bonds. The principal is secure as long as you hold the bonds to maturity or until they are called and you collect the interest tax free. You can elect to sell the bonds if market conditions make it favorable to do so but you can also sit tight and know that at the end of the day, you will receive back 100% of your principal and during the life of the bond collect tax free interest.</p>
<p>You have got to be real careful with investment consultants. If they work for an investment brokerage, even though they may claim to be an “independent” consultant to whom you pay a fee for investment advice, you need to ask whether they or their company receive any commissions, 12(b)1 fees or any revenue sharing from the products which you buy. If the trades are going through the company for whom the consultant works or a related entity, the consultant is really not “independent”. If the consultant is recommending mutual funds, ask to see Morningstar or other rankings of how the fund compares to its peers, what the internal expense ratios are and the commissions and other fees/revenue sharing that are generated by the fund in question and its peers.</p>
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<p>Fine, then in 36 months take that money and convert it into additional equity in this new property. It’s far better to be conservative now and plan to use future cash to increase your equity stake than use up cash now and “hope” that future events will “greatly increase our cash position.”</p>
<p>I spent sometime working with amortization tables this afternoon, and decided to do it the same way as anxiousmom. </p>
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<p>I think I am now comfortable going for a 30 year, with a auto-pay prepayment option. The interest rate for a 30 year is higher than the 15 by 0.5 % but that is acceptable to me for the flexibility as noted by various posters. </p>
<p>Thank you everyone. </p>
<p>Now I will have to go off and tell the husband he made sense and we will do it his way. 
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<p>I have no /very little knowledge regarding munis but thought I want to diversify and be “safe” so therefore bought into a highly rated (as reco by FA) fund. I don’t know what do in the future yet.</p>
<p>The adviser we used in 2007 do not use mutual funds - it’s called “private client investing” and they charge a fee of about 2% of the portfolio. There is a minimum to the portfolio size. The selection is done, as far as I can tell, by investment services/advisers that run mutual funds, like Smith Barney. I don’t mind paying for services but they have to have some value, else I should stick with some kind of Index fund and pay less fees.
Anyway, this is another topic for another day.</p>
<p>I agree with Endicott!! Get the lowest rate possible, for a 30 yr mtg…and pay it off early! Hubby has been a developer for 28 yrs…we’ve moved several times to “catch the wave”. I’m the sick of it!! We won’t do it anymore cause his health won’t allow it…but, what you are talking about is almost like “flipping” a house. Get it cheap, sell it at its highest value…make it a good deal for all, and you will end up with a good rep. </p>
<p>As to the college tuition etc. You will actually be building equity in ur home. You will have the luxury of deciding if the equity loan vs. student or other loans are equal. It is always best to save as much $$ as u cant or invest it into ur actual possessions. We own all 5 of our cars…15 yr mtg…no equity loans, and 1 cc …amex, lol
being sort of “debt free” is a good feeling. We don’t owe everyone we look at in our town. It eventually does matter. My husband has a heart condition which limits his earning ability right now. But, we’ve managed to get into a position that we can carry ourselves. We are not wealthy…but, we are grateful, that we can carry our load.</p>