About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

36 comments:

  1. 1
    HappyRenter says:

    Nobody has been commenting today?

    I voted for probably. I’m still renting but if I buy I would like to go for a 15 years fix rate mortgage. It can all change though.

  2. 2
    Ray Pepper says:

    Pay off your Mortgage? At these rates? Its the CHEAPEST MONEY you can get!! Plus the Mortgage Interest Deduction.

    The question should be “Instead of paying off your Mortgage where are you placing your money?” …………….

    http://money.msn.com/home-loans/do-not-rush-to-pay-off-that-mortgage-weston.aspx

    http://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2011/01/18/dont-rush-to-pay-off-your-mortgage

  3. 3
    HappyRenter says:

    RE: Ray Pepper @ 2
    What the article does not say is, where else do you put your cash? Assuming that you are maxing out your retirement funds. The stock market has not really returned a lot in the last 10 years. I’m not sure about the bond market either. Forget about money markets and savings accounts with 0.01% interest. So, the encouragement is, if I understand it correctly, do not pay your mortgage, invest the money instead, but how?

    It goes back to one of Tim’s polls: how do you best hedge against inflation? Actually, in order to make up for that 4.5% mentioned in the article, you need an investment that yields at least 4.5% per year. What is that?

  4. 4
    Krystal says:

    Mortgage Deduction? While I embrace it now, it wouldn’t motivate me to hang on to my mortgage–I rather have no mortgage, and a lot less risk. I wouldn’t borrow at 4.5% on my home to invest it, so why would I hang on to my mortgage for the deduction?

  5. 5
    Ray Pepper says:

    Krystal and Happy Renter there are FAR better returns out there then 4.5% and losing your MI reduction but if paying off your Mortgage gives you financial peace then go for it.

    I have always been of the opinion that you never really OWN a home. Ownership comes with so many associated bills that when deciding to BUY and NOT rent its ALWAYS an investment. With taxes , insurance, dues, maintenance, assessments, utilities, and upkeep having one extra bill of paying a mortgage with a low interest is not worth paying off especially while we still have the MI deduction.

    Staying liquid in a depreciating asset environment is economic power..While the value of your asset declines the value of your money in buying assets increases.

    However, we all have different financial goals and live at different ages in our life………….Peace of mind, for many, and the feelings of a paid off mortgage makes people feel GOOD so I’m all for it…..just not for me…

  6. 6
    AlanFord says:

    Ray, I call BS on that. Show me specific safe investments that returns 4.5% .

  7. 7

    RE: AlanFord @ 6 – Keep in mind that the first $5-7k of your home mortgage interest won’t get a deduction. (I’m using a reduced figure to account for real estate taxes and other likely deductions). While the first $1 of your investment income will be taxed each year. Thus, if you’re paying 4.5% you’ll need to earn more than 4.5%, unless maybe you can find a municipal bond paying that amount.

  8. 8
    Ray Pepper says:

    RE: AlanFord @ 6

    Since it appears you like real estate how about a rental in a desirable location near a K-6 or college? Homes in Tacoma locally and so many more in other areas out of state consistently return 15%+ returns because the homes can now be purchased BELOW 60k.. They all rent for 950+…The assets pay for themselves in less then 5 years in rent and are CASH COWS..They can also be Lease optioned for far more in % returns!

    Once again if you like the sub 5% performance and paying off your Mortgage gives you happiness and financial security then PAY OFF THAT MORTGAGE.

    But, I know I know..So many people do not want to be a landlord…I understand

  9. 9

    RE: Kary L. Krismer @ 7

    Very True Kary

    I’ve also notices in a HOA, once the mortgage is paid off, they seem to treat you with less potential audits….I’m sure they know the unit’s risk is way down now.

  10. 10
    doug says:

    I voted ‘absolutely’. I entered a 30-year fixed at age 30, and have been making double principle payments most months. Bonuses and tax returns will be dumped right back into principle. I’m optimistically hoping to retire at 55, and I’d like to have the house paid off by the time I’m 52-53 to save extra towards that nest egg.

    That, of course, depends on my and my wife’s 401k’s amounting to more than a hill of beans. I guess it’s hard to go wrong with matching contributions.

  11. 11

    RE: Ray Pepper @ 8

    GREETINGS Ray:

    Its not just the 4-5% you’re not paying the banks if you pay off your mortgage, the monthly payments come out of your checking account’s net pay, not your gross pay….so 4-5% is like 6-7% out of gross pay.

    Its tax free interest too when you don’t pay it anymore, so the 6-7% is more like 8-9% interest before income tax.

    BECU just reduced Money Markets another 0.1%, albeit the 0.5% they pay on savings is a complete joke anyway….

  12. 12
    David Losh says:

    RE: Ray Pepper @ 8

    I’ve been interested in your rental claims. It seems that you are correct for the short term.However I’m noticing some rental price reductions in many areas.

    The article in Sunday’s paper points out that many people own homes free, and clear or have masive equity, like in Tacoma. houses in Tacoma have always been $50K, so how is it that just today that price is a bargain? Just because prices spiked for three years out of the past thirty doesn’t mean the value of the property changed.

    The price of houses in Tacoma seems to be going back to normal.

  13. 13
    m-s says:

    Definitely not. It took until I was 63… But I started late.

  14. 14
    Ray Pepper says:

    RE: David Losh @ 12

    The homes in Tacoma I refer to hit a high of about 200k. They are now back to 50ish. Cost to build far exceeds 130k currently. The rental rate is the same as Burien, Edgewood, parts of Federal way, Puyallup, etc. Some are absolute GEMS but go quick because of the rental returns.

    Placing one add for a home in Tacoma at lets say 990, 3 bed, and it yields an incessant amount of phone calls and you can be as picky as you want as the homeowner……Tacoma is GEM-Like now but you have to pick your areas (zip codes) correctly..

  15. 15

    By David Losh @ 12:

    The article in Sunday’s paper points out that many people own homes free, and clear or have masive equity,

    That article suffers from the same issue as those other research pieces which try to claim X% of houses are underwater.

    But what caught my eye yesterday on that one is they claimed that 33% of houses are owned free and clear. I really doubt that, unless maybe that statistic is being skewed by the houses in the middle of the country were values are very low.

  16. 16
    bubblebuyer says:

    My answer is defintely. We have paid off 54% of the price we paid back in 2007 while at the same time mortgage rates have declined from 6.5% to 3.75%. I have refinanced 3 times in this period and paid down the mortgage each time. With my current rate, my mortgage is dirt cheap but the question is where to invest money without getting a negative return even in nominal terms. I have chosen to take the guaranteed return I get every time I prepay my mortgage even though that return is small. At the same time, I don’t want to pay back the loan too quickly as I expect high inflation from the fed printing trillions of dollars if the US economy ever reverses its death spiral.

  17. 17

    RE: bubblebuyer @ 16 – Good point. Having debt is a hedge against inflation.

  18. 18

    My house is paid off, but it was more a matter of dumb luck than skill or smarts. My wife and I bought a major fixer duplex in Leschi in 1986 and fixed it up. We lived upstairs with the kids and rented out the downstairs. At that time rents were much higher relative to mortgage payments than they are now, so our living expenses were pretty low.
    Thirteen years later we got an offer to buy our house, even though it wasn’t on the market, and it was one of those ” an offer you can’t refuse”. We accepted the offer and bought a smaller home in Renton on 1/2 an acre with the profit from the 1st house, paying cash. I was 42 at the time. I’ve always hated debt, always disliked banks, and even with mortgage rates at 4% still don’t like them. It’s a very liberating feeling not having a debt albatross around one’s neck.

  19. 19
    m-s says:

    RE: Kary L. Krismer @ 17
    I still have a problem seeing where inflation will come from. We’ve lost $4-6T in wealth. It went into buying mouldering houses, obsolescent electronics and gas-guzzling SUVs. Its gone. Evaporated. Kaput. No mulligans.
    We’ve replaced a paltry ~$1-2T of that, maybe. Not enough to cause inflation, IMO. It looks like the world still wants our money rather than euros, for the moment, so there goes even more of it. Money here is still scarcer than stuff. When there is more money than stuff, THEN we will have inflation. We’ve got another $3T to go.

  20. 20

    By Ira Sacharoff @ 18:

    It’s a very liberating feeling not having a debt albatross around one’s neck.

    Even though it doesn’t make any sense, car payments bother me more than house payments.

  21. 21

    By Kary L. Krismer @ 20:

    By Ira Sacharoff @ 18:

    It’s a very liberating feeling not having a debt albatross around one’s neck.

    Even though it doesn’t make any sense, car payments bother me more than house payments.

    Especially since cars depreciate a lot faster than houses. But at least car loans don’t last 30 years.

  22. 22

    RE: Kary L. Krismer @ 15

    The Census Bureau is Gathering Data on Paid off Mortgages Right Now

    We’ll know more when they complete their audit [probably by year’s end or so]….the bureau is collecting confidential information on incomes and homes, like how big are all the costs for shelter [even with paid off mortgages]. I was selected randomly to survey, that’s how I know.

  23. 23

    RE: bubblebuyer @ 16

    Refinancing Forever????

    One of the BIG problems with refinancing for lower payments is timing. If you have a 30 year loan at like 6.5% interset from 2000 should you flush 11 years of paying off the loan for a fresh 30 year loan at 3/4’s the monthly payment, say about 4-5%?

    Hades no. Most of your 30 yr mortgage payment is INTEREST [regardless of the INTEREST rate] and the last 10 years of the 30 yr loan is when you pay off most of the principle…..refinancing at “30 yr chunks addiction” not only stretches out INTEREST payments forever….you just shot yourself in the principle portion “foot” of the old 19 years left 6.5% loan.

    Most of ’em add 2nd mortgages too when they refinance [if they can] for another 30 yrs, so they can buy another SUV with their cash machine [a lot have a 2nd and a 3rd SUV from a decade ago that they still haven’t paid off either].

    Going into mortgage debt on a depreciating investment like a house is a hedge against inflation? How about a “curse noose” around your neck while home prices chronically continue depreciating [forever???]. Use some common sense.

  24. 24

    RE: Ira Sacharoff @ 18

    Yes Ira

    And an added benefit, you don’t have to worry about pulling out the extra cash you saved on the side, by keeping a mortgage, when it goes “underwater” to sell it in the future.

  25. 25

    RE: m-s @ 19

    Yes M-S

    Inflation occurs in foreign deficit spending, if we print too much money and devalue our dollar….things like $83/bbl oil and $90K Audis….or food dependent on oil and the dollar. Used cars are DRASTICALLY inflating because we stopped buying new cars and now we don’t have enough units for all of us, new or used. College education is inflating with bubble demand for student loans. Medical expenses are inflating as insurance goes up to cover uninsured.

    Deflation occurs on all other things, like services dependent on deteriorating wages, as population density chronically increases with no end. Remodeling labor is a good example. BOGOs at restaurants is a good example too. Eventually, as population keeps increasing and wages keep decreasing, everything will have to deflate….that’s called a depression. I’d call today’s quagmire a mixed depression/stagflation scenario.

    Home prices are linked directly to wages and hence, credit ratings too [BTW, credit ratings are getting more stringent and lowered, as food and oil, etc eat up more household income and cause more distress]….so home monthly payments with a “bad credit rating and no down payment” may seem close to your rent, but so what, until you save the money and develop a credit rating, you’ll rent forever….even paying more to rent than to buy [not in Seattle though, not even close].

  26. 26
    David Losh says:

    RE: Ray Pepper @ 14

    I talked with another guy today who owns four rentals free, and clear. His place is vacant, and he is having to do major cosmetics to get it to rent. This is the second house of his I have been to. Rents are at a point where it would make just as much sense for his renters to make him an offer to buy.

    His equity is dropping like a rock. His are well maintained properties, they just aren’t pretty.
    He’s working on getting those properties into a trust for his kids so he can sell them, with owner financing.

    The construction cost argument is a non starter for me. Just because we could build, sell for a profit, and go onto the next sucker doesn’t mean that will continue without some adjustments.

    Houses in Tacoma have always been $50K, and may go below that in the next decade. All that new construction will look like low income housing by then.

    I know a guy who sold his Capital Hill properties to invest heavily in Tacoma before the spike in prices. We talked in 2003 about how much he regretted the move. In 2007 he sold what he could, but had to wait out the market. He still wasn’t happy with the returns.

    What it came down to is that Tacoma has an element that has always been rough. Tacoma never gentrified, after 6PM.

  27. 27
    bubblebuyer says:

    RE: softwarengineer @ 23

    I don’t get it? Why wouldn’t I refinance into a lower interest rate if the payback is 12 months or less and I am not upside down on the mortgage? Especaily if paying off my mortgage is going to take 5 to 10 years and you can use the reduced interest on the new loan and apply it to principle? It doesn’t cost you anything if you’re smart about selecting the right timing and rate to lock in at. As to extending the term of the loan, just because the term is 30 years doesn’t mean you cannot pre-pay. I’ve pre-paid over $287,000 of principle on my initial mortgage balance over a 4 year period. Assuming I had not pre-paid my mortgage, just reducing my interest rate from 6.5% to 3.75% would have reduced my mortgage payments by $1,161 a month. The combination of refinancing and pre-paying my mortgage has reduced my monthly mortgage payment from my original mortgage by $2,491 a month. All this can be applied to principle pre-payments. The other benefit, is the enormous sense of relief I get knowing our mortgage payment is such that we could now rent our house out and cover mortgage, tax, insurance and maintenance or that we could still easily afford the house if my wife or I lost our jobs.

    What you’re saying makes sense if you’re an idiot that has no intention of paying off the loan and keep refinancing into 30 year mortgages paying high origination fees and buying loan discounts. But today (or at least recently) the fact is you can get a 3.75% 30 yr FRM today for a total of $1,400 in origination and other fees.

  28. 28
    Ray Pepper says:

    RE: David Losh @ 26

    What works for some doesn’t work for others….As with anything it takes timing and lots of DD.

  29. 29
    David Losh says:

    RE: Ray Pepper @ 28

    You make no sense what so ever. Let me say again, houses in Tacoma have always been $50K. There is no due diligence about that. Playing into the bubble prices of property or rents makes no sense.

    It’s not a bet any one should be making.

  30. 30
    Kilen says:

    RE: Kary L. Krismer @ 17

    Debt isn’t the hedge, it’s possessing an asset that may appreciate at the rate of inflation that’s the hedge. (as to whether housing does appreciate at the rate of inflation, that’s another question entirely)

    Once you have a mortgage, you have legal possession of the housing asset. So, the question of whether to pay off the mortgage comes down to whether you can invest and outperform the interest costs you’re paying on your loan.
    (of course, you could invest in other inflation-protected commodities.)

    I’m in the market for buying a house (and likely will be for years; I’m waiting ’til I see something perfect), and if I remember right, I calculated that I’d need to manage around a 3% return to outperform paying down the mortgage.

  31. 31

    By Kilen @ 30:

    RE: Kary L. Krismer @ 17 – Debt isn’t the hedge, it’s possessing an asset that may appreciate at the rate of inflation that’s the hedge. (as to whether housing does appreciate at the rate of inflation, that’s another question entirely)

    Both are a hedge, because you’re paying back the debt with dollars which are worth less. If you had $150k of cash and $150k of debt, you wouldn’t care about inflation of deflation. If you had $150k of cash, $150k of debt and $150k of real estate, you would care.

  32. 32
    gardener1 says:

    Absolutely not.

    I will not have a mortgage here nor a mortgage there, I will not have a mortgage anywhere. Not in a box not with a fox.

    I intend to remain a renter for the rest of my days. I am free. I can go anywhere I want, pay the rent for as long as I wish to stay there, and then leave. I own nothing and I intend to keep it that way.

    Goodbye house. Goodbye stuff. I don’t need you anymore. I am free.

  33. 33
    Chuck C says:

    Many great reasons listed above for paying off your mortgage early. One not listed (at least directly): in order to stop giving the filthy banks any MORE of my money. I can’t control how much of my tax $$$ the gov’t gives them, but dammit I sure can control how much “I” give them! Bank CEOs – find your golden parachute elsewhere!

    The highest return on my free cash? Maybe, maybe not. But as they say – flipping the bird every time I drive past a BofA branch….priceless!!!!!!

  34. 34
    Kilen says:

    By Kary L. Krismer @ 31:

    By Kilen @ 30:

    RE: Kary L. Krismer @ 17 – Debt isn’t the hedge, it’s possessing an asset that may appreciate at the rate of inflation that’s the hedge. (as to whether housing does appreciate at the rate of inflation, that’s another question entirely)

    Both are a hedge, because you’re paying back the debt with dollars which are worth less. If you had $150k of cash and $150k of debt, you wouldn’t care about inflation of deflation. If you had $150k of cash, $150k of debt and $150k of real estate, you would care.

    I’m not sure if I buy that. First, the monetary sums in your two examples are different — that makes comparisons less clear.

    Here’s my example:
    1) $150k of cash stored in your mattress, $150k of debt on a $150k real estate property
    2) $0 of cash, $0 of debt on a $150k real estate property

    With any amount of inflation, scenarios 1 and 2 are identical — you can always use that $150k to pay off the debt, no matter how much inflation (or deflation) happened. So, I claim it’s not the debt that’s the hedge — it’s the $150k in real estate property.

    The assumption you’re making is that in an inflationary environment, you can invest that cash in some asset (TIPS, perhaps) that hedges against inflation — hopefully yielding a larger nominal rate of return than the cost of paying the interest on the loan.

  35. 35

    By Kilen @ 34:

    Here’s my example:
    1) $150k of cash stored in your mattress, $150k of debt on a $150k real estate property
    2) $0 of cash, $0 of debt on a $150k real estate property

    Those are two identical examples as far as inflation/deflation is concerned, because in both your cash equals your debt and you have one other asset.

    What’s assumed with the debt/inflation scenario is that your earnings will eventually increase too. So wages will increase, etc. If you have inflation rise 10% and your wages rise at all, paying your mortgage will be easier.

  36. 36
    Kilen says:

    By Kary L. Krismer @ 35:

    By Kilen @ 34:

    Here’s my example:
    1) $150k of cash stored in your mattress, $150k of debt on a $150k real estate property
    2) $0 of cash, $0 of debt on a $150k real estate property

    Those are two identical examples as far as inflation/deflation is concerned, because in both your cash equals your debt and you have one other asset.

    What’s assumed with the debt/inflation scenario is that your earnings will eventually increase too. So wages will increase, etc. If you have inflation rise 10% and your wages rise at all, paying your mortgage will be easier.

    I think we’re in agreement now. The original comment I disagreed with was that “having debt is a hedge against inflation”, and my example (while being identical examples wrt inflation) had differing debt loads.

    Anyway, time to let this thread fall into disuse!

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