If you want to learn about equity investing, go here http://www.mtgprofessor.com and learn an ethical way of investing.
-J.R.
-J.R.
Home Equity Planning...
- Thread starter rogermask
- Start date
- 2,152
salpro22 said:
Is this your daddy or what? I know this site and the guy is pretty accurate on the facts but he seems to be weak on assumptions. Yet though I must assume you know this site and have studied it, for what it has to offer. I'm assuming about Mortgages and Lending, yes? Now explain to me how the rule of 20% comes from? Its a simple question, obviously your daddy knows why but I can't find it on his website.
James said:
James,
I really have nothing against Option Loans or IO loans in and of themselves. But when some unsuspecting person is duped into taking $50k in equity out of their home and putting it into an EIUL along with the extra $400 per month they are now saving in mortgage payments (which is not really the case right now with rates where they are), I have a problem with it. There are too many variables that can change the dynamics of the "plan" and cause it to blow up.
In your scenario of "todays homeowner", they would NEVER build any equity (with the exception of the increase in value) and thus never be able to be duped by the whole missed fortune scam. If they start their home buying with an IO loan, then they have minimal equity as they move from home to home over the years.
I'm of the mindset that if I owed $250k on a house, I'd rather have $250k sitting somewhere growing than have a home that is paid for. But not everyone is of that mindset. However, I definitely wouldn't tie it up for 15 years in an EIUL.
James said:
>>>>>HaHa, that is quite funny. It is one resource to educate consumers and investors, that is all. Without knowing specifics, I cannot debate what "assumptions" you are talking about. One can never take one source as being complete, that would be to subjective.
I studied the site to expand my knowledge pertaining to real estate investing. If you like his site, check out johntreed.com
>>>>>>>I cannot explain to you how the rule of 20% come from because the sentence is incorrect and I do not know where you need assistance. The only thing that is important is achieving your goals, while limiting your risks, based on "individual" preferences. I am not saying that you advice is wrong, but I will say that it is dangerous to an uneducated person.
-J.R.
Then the OP needs to say what kind of information he is seeking and distinguish it from the hucksters who are peddling the "take equity out of your home & put it in an EIUL" folks.
Option ARM's have 4 payment choices each month. Two of the options are negative am payment schedules.
Most folks marketing these things dont say anything about negative am, how your payment can increase, or how illiquid your EIUL is. They also fail to disclose the tax penalties that may be applied if you pull too much out (causing the policy to collapse shortly thereafter). They seem to overstate the return on the EIUL.
I know, I am shocked too.
This is where we disagree.
Real estate investors (and a home does not qualify as an investment in any manner) put down as little as possible and keep very little equity in their property. There is no reason why homeowners should not be encouraged to do likewise, as long as they are not pulling money out to pay off their Master Card that was used to pay last months house payment.
Home equity is dead money.
Option ARM's + EIUL = future E&O claim and possibly jail time.
- 2,152
salpro22 said:
The main assumption I disagree with is what Sman brought up and that is this:
Now I agree not everyone will agree but for those that do the OI and investing the difference is very prudent choice. Home ownership has change quite a bit since the days of our grandfathers as society has change and the workplace has change.
I can not think of a more unethical and risky investment than that of todays near nothing down and 30 year plus mortgage! I'm sorry but for a middle class family to assume a note that will last 30 plus years is simply bizzare. The very same people that promote the idea of the traditional fix mortgage of thirty plus years will be at the clients doorstep with Home Equity Loans everytime they have any equity at all including that of the 20% margin, banks have even learn that this is prudent for them but lets face it, its not prudent for the homeowner!
In the traditional loan people borrow 80% and pay down 20%, banks refer do it as the 20% Rule, how did that rule become a rule? If you study mortgages its fairly a simple question. It became a rule as a device to protect banks, the bank is not in the business of selling homes, so if they foreclose they tend to sell at a 20% discount of market value and by doing this the property should sell quickly. So they insist that 20% of the loan is protected, either you pay it down or use another device to protect the interest of the bank. In other words the 20% rule is in the interest of the Bank not the Buyer. As in the whole idea of the the fix 20-30-40 year motgage is not in the interest of the consumer but the lending agencies.
The IO loans simply give the consumer a position of strength, more than likely lending institutions will be much friendlier in time of hardhsip if the client has 0% to little equity, as they stand to loose (not gain) if they foreclose on the property. This is a mindset that is now becoming more apparent, and for the experts to suggest people to use traditional fix mortgages is somewhat strange, unless they come from the viewpoint of the lending agencies rather than that of the consumer.
Here is a link I like better than your expert: http://www.themortgagereports.com/
While I agree there is risk I would suggest the risk is no greater or less then that of the family buying into a traditional fix loan for 30 plus years. Obviously the question of equity is not as dry as you put it. The buyer if they are going to use this idea of "Equity Management", has to be a good buyer and has to make choices that may not fit in with those of traditional buyers. Yet though we are moving into a Buyers Market, while the experts suggest "House Flippers" and "IO and Invest" is at stake I suggest this is the very time you implement such ideas. The smart buyer buys in times of depress prices not at the peak of high prices!
Now as far as using Andrew's ideas, I'm no big fan of his nor his so called projections of 9% or greater of the EIUL. That is how it blows up in most cases if the plan is adhere too. Yet I have to say, if the idea works you have to gain a 2-3% margin, so to use a Insurance Contract like the UL or WL one has to project at 6%, if it works with that I see now reason why it should blow up as you suggest. Meaning the interest of the home has to be kept down or real close to 4%, or you have to buy the property at below market values.
James said:
James,
At a 6% return, you are not going to get a 2-3% spread over the long haul. Secondly, there's more than just the return that can cause this concept to blow up.
First and foremost we have investors emotions and lifestyle issues. I don't know many people who won't eventually find something else to spend those extra dollars (from the savings on the house note) on besides an insurance policy. They will get tired of sending $300, $400, $500 per month to the carrier. And the idea of a newer nicer car, new living room furniture, new HD TV, etc makes them change their mind on whether or not to put all this money into an insurance policy they can't get their hands on.
Another area of concern is the assumptions used (current interest rates and COI and with EIUL's you've got Caps, Margins, etc) and surrender periods.
Yet another concern is the simple fact that the "investor" may decide they want to buy another home in the future. With no equity in their existing home, they have to come up with some funds for a down payment on the new home and pay the real estate agent a commission on the sale of the existing home.
If anybody's been in this business long enough (especially on the financial planning side) you know that the "plan" isn't always followed. And when an investor determines that they want to change directions, they're SOL when all their money is tied up in a long surrender charge product like life insurance.
Just one man's opinion.
- 2,152
somarco said:
I agree yet you have buyers like my wife! She beleives strongly in home ownership with 100% equity in the house. She is quite intelligent, has her Masters and a degree in business. Yet the house we now live in is nearly paid off in just 6 years. You have a lot of emotional buyers that any Equity Management is not going to be excepted at all. This house is her Grandfathers house and strictly an emotional buy, plus one that assure our slave like conditions on taking care of them (her grandparents as they live next door) as they are now 88-86 years of age and in failing health. Yet it is something she has to do, don't ask me why the old man has plenty of assets, he can easily hire professional home care but assumes his family does it. As horrified as I am now in the situation, I have to say it is what my wife wants to do.
Our other homes, have zero equity or near zero and on a "Rental Program". Will probably sell them in the next year or two, as our housing prices are not falling like in other places that were more speculative markets around the nation.
Insurance Contract Vs Other Investments in the equity management game, its pretty much a personal decision. One that I don't totally disagree with you about.
- 2,152
sman said:
Well what you are suggesting is true no matter what they do! If they invest in other markets or keep the equity in their home's. Lets face it the Home Equity Line of Credit is being use today to pay off Credit Cards or buy that new TV, Car, Furniture etc etc...
Obviously no plan will work if not followed! Even the traditional plan of paying off the home and having a zero balance at retirement, most retirees are now retiring with mortgages on their homes!
The main assumption I disagree with is what Sman brought up and that is this:
>>>>I can see your point more clearly now. You are saying that having 250K laying around is wasteful because you could be earning returns on that money. If that is the case, I would agree with you, but that is because I am an aggresive investor. However, I think this is just one point of a total investment plan. If somebody is retired and already has reached his financial goal, then from a psychological point it wouldn't matter if the hosue was paid off in full or not.
In the traditional loan people borrow 80% and pay down 20%, banks refer do it as the 20% Rule, how did that rule become a rule?
>>>>Prior to the Great Depression, all home loans were short term IO with a balloon payment due within 2-5 years. It was actually the Federal Government who devised the 30 year loan. This was the benchmark for the VA Loan Program. Banks followed pursuit shortly thereafter.
If you study mortgages its fairly a simple question. It became a rule as a device to protect banks, the bank is not in the business of selling homes, so if they foreclose they tend to sell at a 20% discount of market value and by doing this the property should sell quickly.
>>>>It is used primarily to protect banks, but also investors ROI. Banks do not tend to sell at a 20% discount. Although you can get bargains in foreclosures, both from banks and the VA to name a few, you also have to factor in the condition of a home or investment property, appreciation and the appraisal of a home. Banks try to ALWAYS get as much money from their homes via auctions or through brokerages and/or websites.
Here is a link I like better than your expert: http://www.themortgagereports.com/
>>>>Thanks for the website. I found it informative.
-J.R.
>>>>I can see your point more clearly now. You are saying that having 250K laying around is wasteful because you could be earning returns on that money. If that is the case, I would agree with you, but that is because I am an aggresive investor. However, I think this is just one point of a total investment plan. If somebody is retired and already has reached his financial goal, then from a psychological point it wouldn't matter if the hosue was paid off in full or not.
In the traditional loan people borrow 80% and pay down 20%, banks refer do it as the 20% Rule, how did that rule become a rule?
>>>>Prior to the Great Depression, all home loans were short term IO with a balloon payment due within 2-5 years. It was actually the Federal Government who devised the 30 year loan. This was the benchmark for the VA Loan Program. Banks followed pursuit shortly thereafter.
If you study mortgages its fairly a simple question. It became a rule as a device to protect banks, the bank is not in the business of selling homes, so if they foreclose they tend to sell at a 20% discount of market value and by doing this the property should sell quickly.
>>>>It is used primarily to protect banks, but also investors ROI. Banks do not tend to sell at a 20% discount. Although you can get bargains in foreclosures, both from banks and the VA to name a few, you also have to factor in the condition of a home or investment property, appreciation and the appraisal of a home. Banks try to ALWAYS get as much money from their homes via auctions or through brokerages and/or websites.
Here is a link I like better than your expert: http://www.themortgagereports.com/
>>>>Thanks for the website. I found it informative.
-J.R.
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