Non RV financial?

[Isaac-1]

I know I am asking this on an RV forum, but I would like your thoughts, I am trying to decide what the smartest move is given the current inflationary market. I have tried searching for information online, but it seems almost all of it was written before this historic inflation hit.

We sold our house last summer to the business next door for what I consider a good price, in a somewhat non-traditional sale, the short version, we are owner financing the sale over 3 years, with 3 lump sump payments, but get to stay in the house until they finish paying. We have used some of the initial payment as a down payment on a new house, and are currently doing some remodeling on it before moving in. Total cost on the new house plus remodeling, etc. will be about equal to the sale of our old / current house.

The new house is financed over 30 years at 3.5% APR fixed rate.

Given the current inflation, and that the average 30 year mortgage rate has risen to 6.5% APR, is it smarter to use the money coming in from the sale of the old house to pay off the new one, or is it better to invest it in a fairly safe investment and take advantage of the current market conditions?

Ike

p.s. We have enough assets / other income that we could take a 100% loss on this and still not loose the new house, though that would not be preferable.

 

[Skookum]

I don't think there is one great answer. Your risk tolerance weighs heavily here, as well as any other financial goals you may have.

If you invest the money and can guarantee better than a 3.5% return, then consider doing that. But it's not that cut-and-dried, right? The investment might tank, and the value of your home might plummet, too.

On the other hand, if you pay off the house, you have a guaranteed return of 3.5% on your money and the security that nobody/nothing can make you move.

Out of curiosity, since I know there are a lot of retirees on this board. At what point does taking out a 30 year mortgage feel a bit hopeful? And what I mean by that is, I personally know people who have taken out very long loans which they will likely never repay, and when they pass--it's someone else's problem. I'm not recommending that as a financial strategy here!

 

[Gary RV_Wizard]

I'm 77 and just took out a 30 year mortgage on a new home for myself & my daughter. There is about zero hope that I will live to pay it off, so she will inherit when I pass. She will probably have to sell it off and get a smaller & less expensive place, but in the interim the mortgage is cheaper than rent.

 

[Jayflight]

Out of curiosity, since I know there are a lot of retirees on this board. At what point does taking out a 30 year mortgage feel a bit hopeful? And what I mean by that is, I personally know people who have taken out very long loans which they will likely never repay, and when they pass--it's someone else's problem. I'm not recommending that as a financial strategy here!

If its to your advantage that your mortgage payment is less than the rent payment in your area, then a shallow answer would be yes. But unlike you paying rent, you do have additional costs involved, like, homeowners insurance, land taxes and maintaining the property unlike when you rent.

Each person's health conditions will guide you in a decision of what is best for you. If you have a mortgaged home and if you are married, if one of you ends up in an assisted or nursing home, then the burden of taking care of the home falls on the other person, whether it be that you farm it out to others that you pay..

I will add that there may be some additional financial costs involved, if one goes into a nursing home. Long term care insurance is avaliable. But READ THE FINE PRINT SEVERAL TIMES OVER. There are a fair amount of if, ands a butts in those policies. Speaking from experience...

 

[Tom]

I don't think there is one great answer. Your risk tolerance weighs heavily here, as well as any other financial goals you may have.

If you invest the money and can guarantee better than a 3.5% return, then consider doing that. But it's not that cut-and-dried, right? The investment might tank, and the value of your home might plummet, too.

On the other hand, if you pay off the house, you have a guaranteed return of 3.5% on your money and the security that nobody/nothing can make you move.

Out of curiosity, since I know there are a lot of retirees on this board. At what point does taking out a 30 year mortgage feel a bit hopeful? And what I mean by that is, I personally know people who have taken out very long loans which they will likely never repay, and when they pass--it's someone else's problem. I'm not recommending that as a financial strategy here!

A parallel to Gary's story ... I previously helped a 90+ year-old neighbor take out a 30-year mortgage, to re-finance a loan her husband had taken out at a 12% fixed interest and left her with a crippling monthly payment. It significantly lowered her monthly payment, and there was clearly no chance of her paying it off. The loan company came back twice and offered refinancing at even lower interest rates, no points and nothing out of pocket. Their offers were taken up. When she passed away, her estranged step-children sold the house and presumably the mortgage was paid off in the process.

 

[jackiemac]

The financial organisation I have a pension fund with, reckon that there will be recovery at some point as there usually is after a form of financial instability. I guess it depends on if you need the cash within a specific timescale.

This type of institution will put money into various things and you choose your risk level. I have low risk but still made about 5% last year.

 

[Lou Schneider]

Out of curiosity, since I know there are a lot of retirees on this board. At what point does taking out a 30 year mortgage feel a bit hopeful? And what I mean by that is, I personally know people who have taken out very long loans which they will likely never repay, and when they pass--it's someone else's problem. I'm not recommending that as a financial strategy here!

Even worse is an elderly couple taking out a 15 or 20 year loan on a depreciating asset like an RV. It's guaranteed to be underwater, worth less than the outstanding balance over most of the loan's lifetime so when they pass and the bank repos the motorhome they and the heirs can argue over whether the estate has to pay off the remaining balance.

 

[Isaac-1]

All of this talk of elderly people financing motorhomes, etc on 20 year payback, makes the assumption that there are heirs involved.

 

[ziplock]

Total cost on the new house plus remodeling, etc. will be about equal to the sale of our old / current house.

When you FIRST decided to sell your house and buy the next one,

trying to break even on the purchase(which is what is sounds like you were trying to do)

What were you going to do with the next 2 payments at that point?

I would go with your original plan, and don't worry about what the economy is NOW. Do what you were going to do when you went into the deal.

What was your original plan?

 

[Jayflight]

All of this talk of elderly people financing motorhomes, etc on 20 year payback, makes the assumption that there are heirs involved.

All of the bankers that I have ever met live in homes many times larger and finer than we have ever lived in, simply because we are simple people and attempt to live within our means. So we do whatever it takes to minimize funding the bankers high cost of living with interest payments. Borrowing for a sitcks and staples camper, fitting our minimal needs of any type is not a smart move, IMHO.

We have an agreement with our youngens after they left home and made their way with marriage and their choices of lifestyle . I will add they are all doing well since they were 18 years old. They told us that they wanted nothing that they left behind and wanted nothing that exist if and when we make our way to our next "boondocking" site for a very long extended stay.


So as the old saying goes, we are spending our kids inheritance, which would not be much anyway and doing what we can to enjoy ourselves. They can sell the house for best offer with a smile and not feel guilty and all the left behind stuff or haul it to the dump with piece of mind that we are perfectly fine with their decision.

Of course we think they all get along even with all the horror stories we hear about siblings battling it out when the folks are gone.

 

[Isaac-1]

The original plan was to pay off the loan with the money coming in from the sale of the old house, but the economy has changed a lot in the last 18 months since the deal originated.

 

[DonTom]

is it smarter to use the money coming in from the sale of the old house to pay off the new one,

There are so many things to consider.

Here is an example. One that will not apply to many, but most would never even think about it.

I have to be sure to NEVER pay off this house here in Auburn.

This is in a very high risk fire area. When I first saw this house, I told the realtor "this is a nice area--until it all burns down". I am in the middle of countless trees. The question is when, not if, it will all burn down.

Anyway, the realtor said I need to shop for my insurance. I phoned every insurance company possible. As soon as I give them my address, they all told me the same line: "Sorry we do NOT insure that area".

Just by coincidence, the very last place to tell me that line was Farmer's Insurance. So I tell the realtor the problem I am having getting insurance. She speaks to the loan officer. She calls me back to tell me I am now ready to go, with Farmer's Insurance!

I think what happens (just guessing) that the mortgage companies force the insurance companies to take a small percentage each of high risk or else they get totally dropped by that mortgage company. That is then the big money talking.

I know a guy (Lee) who has a cabin at Frenchman Lake, CA. He mentioned to me that he could NOT get fire insurance. Had the exact same problem as me. His cabin is paid off. I told him what to do. Take a loan out on the place even if he does NOT need a penny of it (that's the best time to get a loan anyway, when it is NOT at all needed).

He did NOT listen to me. He didn't want to take out a loan that he has no use for. This was about three years ago. He stayed uninsured.

Remember the big CA fires last year? He not only lost everything, nothing insured, he has to pay to clean up his area. Now needs a loan just for the clean-up. He lost big money that could have been prevented with a loan on the place.

-Don- Auburn, CA

 

[ziplock]

The original plan was to pay off the loan

I vote for that.

I can't wake up every morning wondering if my investment is still intact. I don't do well with stress.
With my house paid for I have a sense of security.

-Don- Auburn, CA

Oh my goodness! I hope you have a fire excape plan! I guess you got your California home dirt cheap in that fire zone, how dry is it out there right now?

I guess if you can't get anyone to insure you, it would be best not to live in that house or area to begin with.

But that's just me thinking out loud.

 

[JayArr]

Take a look at the terms of your mortgage. It may be 3.5% on a 30 year mortgage but does it stipulate a 5 year term? It's common for it to last 5 years and then need renegotiating. Not that they will pull the loan or demand payment or anything but the 3.5% may not be guaranteed past 60 months. So, in three or four years your bank could be pushing a paper across the table at you that says your next 5 year term is at 7% or 9% (We have no idea how high this could go.)

The trouble that a lot of people have is that by the end of the first 'term' of their 30 year mortgage they are heavily indebted to credit cards. The first five years of home ownership can be expensive and many people over extend themselves to get the house in the first place. All of your debts reduce your ability to pay the mortgage.

The bank adds up your mortgage, heating, taxes and debt payments (calculated at 3% of the credit card balance per month). To qualify for a new mortgage that number must be less than 42% of your gross income. If you've racked up your cards and have a debt ratio above 42% then no bank will give you a new mortgage but your existing bank will renew your mortgage if you haven't missed payments. The rate they charge you is totally up to them, they know you're against the wall and they will turn you and bend you over. Renewal rates can be as much as 1.5% above new loan rates. At the end of my first term the bank branch officer wanted to resign me at 3.6% but I got my debts paid and a mortgage broker got me a new 30 year mortgage at 2.65% - FROM THE SAME BANK!

So... I'd take the next two payments and stash them somewhere liquid. GICs, term deposits etc. When your five years are up if the bank doesn't give you a great rate pay it off.

 

[DonTom]

I guess you got your California home dirt cheap in that fire zone,

It's the exact opposite. More trees usually means a more expensive area out here. Here, everything is more expensive, including the fire insurance--when you can get it. This is a rather expensive and nice area--at least until it all burns down!

But not anything like the SF area where a million dollar house means it's a dump that should be torn down.

how dry is it out there right now?

It's been raining all week! But a very light rain. Weather should be better here over the next two days. And then more of this.

-Don- Auburn, CA

 

[ziplock]

It's the exact opposite.

Goodness, I am very dumb on the ways of the west!

 

[ziplock]

So, in three or four years your bank could be pushing a paper across the table at you that says your next 5 year term is at 7% or 9%

Around here a 30 year loan stays at the same rate you got the loan.

Back in the 80's they had adjustable loans around here. But a fixed loan mortgage means fixed these days( around here.)

You can go in and get a better rate, but if you signed on to a 2% interest 30 year mortgage, it lasts 30 years.

 

[scottydl]

I'm admittedly a "live debt free" guy and pretty hardline Dave Ramsey follower. My wife and I paid off our house last year (in our mid 40's), have owned everything else free and clear for many years, and never plan to go into debt again. "The borrower is slave to the lender" as the Bible teaches, and I don't enjoy being anyone's slave.

Less dramatic is the idea that when you're in debt and owe repeating payments, that portion of your income (which is your largest wealth-building tool) is automatically gone and unavailable for other things... such as investing in solid investments with a long track record, like growth stock mutual funds (one example). Although this current post-Covid economy is high/low/weird in a lot of ways, it is unpredictable and will eventually correct itself and return to normal. Possibly through some unforeseen dips or jumps, which I would not want to rely on for investment potential. That represents a high level of risk.

One more perspective. Let me reverse-engineer your scenario. You currently have a mortgage on the new house, and you're considering not paying it off early and investing the surplus cash instead. If you already owned that house, would you take out a 30-year mortgage and plunge yourself into debt in order to have borrowed money to invest? (No, of course not.) But that's essentially what you are doing, by investing from one hand -- while keeping the house debt hanging around unnecessarily in the other hand.

 

[ziplock]

YES, that's what I agree with! Thanks @scottydl . I liked this part:

If you already owned that house, would you take out a 30-year mortgage and plunge yourself into debt in order to have borrowed money to invest? (No, of course not.) But that's essentially what you are doing, by investing from one hand -- while keeping the house debt hanging around unnecessarily in the other hand.

And the rest of it.

I still vote to pay the mortgage off!

 

[Larry N.]

Take a look at the terms of your mortgage. It may be 3.5% on a 30 year mortgage but does it stipulate a 5 year term? It's common for it to last 5 years and then need renegotiating. Not that they will pull the loan or demand payment or anything but the 3.5% may not be guaranteed past 60 months. So, in three or four years your bank could be pushing a paper across the table at you that says your next 5 year term is at 7% or 9% (We have no idea how high this could go.)

That describes an ARM (Adjustable Rate Mortgage). A fixed-rate mortgage is just that, a single rate for the life of the mortgage. Since our first mortgage in 1969, we've never had a rate change on ANY mortgage without US originating a request for adjustment (or getting a new mortgage), always for lower interest.