# Paying down mortgage strategies



## Egret1986 (Jul 9, 2009)

Is it better to make an extra payment each year and be able to deduct the interest on taxes?

Is it better to put that same amount towards principal instead?

Is it better to put that money in a CD and let the money build up?  I know savings rates are lower than my mortgage rate of 5.5%, but this would allow for a nice cushion to fall back on if something were to happen to a job in the future or some major unforeseeable financial crisis befell us.

I'm most interested in which is the best as far as the first two, since the third one would basically be a personal choice based on financial security (we do have other funds to fall back on for a six month time period).

We refinanced 14 months ago to a 15 year loan with a lower rate from a 30 with 21 years left on it.  I will have the opportunity to retire in 10 more years from my employer.  I think that if my mortgage was closer to being paid off in 10 more years that I would feel a whole lot better than knowing that if I decided to retire that I would still have 4 more years to pay off a mortgage.


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## ScoopKona (Jul 9, 2009)

Without any numbers -- your monthly payment, your combined taxable income, etc., there's no way to tell you.

And this is one that I would take to a professional -- an accountant who specializes in Real Estate and tax issues.

DW and I are doing the same thing -- paying this house off ASAP. We're hoping interest rates for next year are still in the 4% range, and the real estate market doesn't bounce back much. If necessary, we can pull equity out of this property and buy another if rates start skyrocketing or the market starts to bounce back. (I doubt it, but stranger things have happened.)


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## djs (Jul 9, 2009)

If you are going to pay extra, do not engage the services of some company to help with the process.  Also w/o saying you should or shouldn't; there are a few ways you can go about this.  One is, as you suggested to make an extra payment at the end of the year; another would be to send in 1/2 of your mortgage payment every two weeks (this results in 13 payments a year).  Another method would be to pay an extra $100 each month towards principal.


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## ScoopKona (Jul 9, 2009)

djs said:


> If you are going to pay extra, do not engage the services of some company to help with the process.  Also w/o saying you should or shouldn't; there are a few ways you can go about this.  One is, as you suggested to make an extra payment at the end of the year; another would be to send in 1/2 of your mortgage payment every two weeks (this results in 13 payments a year).  Another method would be to pay an extra $100 each month towards principal.



We did it another way. We use 50% of our after-tax income for the mortgage, then live on the rest. Paying down the mortgage to the point where we can buy rental property after three years makes more financial sense to us at this point in our lives -- especially when we can buy a bank-owned 4-bedroom, 2,200-sqft house in Las Vegas for $77,000. Here's one, if you're interested. We're six months away from being able to do this the way we want. 

With $10,000 down, that's only $400 per month on a 20-year note. Rent for $1,000 and there's a free house with cushion. Once the houses go back to the $400K they were selling for three years ago, we sell all the rentals an live off an annuity.


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## Beverley (Jul 9, 2009)

Interesting ideas....

Years back we had a 30 year fixed and from the first payment paid an extra $250 a month which brought our projected payoff down to 18 years.  The P&I was approx $1500, so a little less than 20 % of our P&I.  

We later refinanced again to a 15 year.  Five years after that we refinanced again dropping the interest rate this time to  4.75% 15 year fixed which dropped our payment $700 per month.  We plan to pay the $700 saved into the new mortgage to drop the years to 10.   

We like the monthly extra principal payment the better than a yearly payment.  Not all mortgage companies allow the bimonthly payments although that is a good way to pay up earlier without paying anything additional.  

Have fun.  

Beverley


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## Egret1986 (Jul 9, 2009)

*We've got one rental property and I agree....*



ScoopLV said:


> We did it another way. We use 50% of our after-tax income for the mortgage, then live on the rest. Paying down the mortgage to the point where we can buy rental property after three years makes more financial sense to us at this point in our lives -- especially when we can buy a bank-owned 4-bedroom, 2,200-sqft house in Las Vegas for $77,000. Here's one, if you're interested. We're six months away from being able to do this the way we want.
> 
> With $10,000 down, that's only $400 per month on a 20-year note. Rent for $1,000 and there's a free house with cushion. Once the houses go back to the $400K they were selling for three years ago, we sell all the rentals an live off an annuity.



that now would be the time to invest in real estate where markets have drastically declined.  My husband's GM just shared with him that she's buying a home back in her old stomping grounds in Florida before coming to our area.  The real estate has declined dramatically and she can now buy twice the house for half the money that she sold her house for a couple of years ago.  In our area real estate has not dropped that much.  Plus, one rental property is just about all we're cut out for if even that.  We're not landlord material.  The house has already appreciated a great deal (just got the letter today that we met the requirements to drop mortgage insurance). The plan is to sell it in three years when the kids are ready for college.


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## DonM (Jul 9, 2009)

Egret1986 said:


> Is it better to make an extra payment each year and be able to deduct the interest on taxes?.



Not sure what you mean here. An extra payment will be accounted for as a payment against the principal, and therefore reduce the interest going forward.



Egret1986 said:


> Is it better to put that same amount towards principal instead?.



You don't have a choice- any payment above interest goes against principal- you can't prepay interest.

One example of how banks may calculate interest (check your mortgage to see how your bank does it):

outstanding principal at the begining of the month x # of days in that particular month divided by 360 days in the year x annual interest rate. The principal payment depends on the amortization term. Any payment above the scheduled principal payment will also be applied against the outstanding principal balance.

Does this help?

don


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## Fern Modena (Jul 10, 2009)

Scoop,
Did you ever wonder WHY this house was priced so low, and advertised on Craigslist, no less?  I'd guarantee that the last owner trashed the place.  Count on paying $30K to $50K to fix it up, even if you do most of it yourself.  And then there's the location...how well do you know that area?  I wouldn't live there if they paid me.

Fern



ScoopLV said:


> We did it another way. We use 50% of our after-tax income for the mortgage, then live on the rest. Paying down the mortgage to the point where we can buy rental property after three years makes more financial sense to us at this point in our lives -- especially when we can buy a bank-owned 4-bedroom, 2,200-sqft house in Las Vegas for $77,000. Here's one, if you're interested. We're six months away from being able to do this the way we want.
> 
> With $10,000 down, that's only $400 per month on a 20-year note. Rent for $1,000 and there's a free house with cushion. Once the houses go back to the $400K they were selling for three years ago, we sell all the rentals an live off an annuity.


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## ScoopKona (Jul 10, 2009)

Fern Modena said:


> Scoop,
> Did you ever wonder WHY this house was priced so low, and advertised on Craigslist, no less?  I'd guarantee that the last owner trashed the place.  Count on paying $30K to $50K to fix it up, even if you do most of it yourself.  And then there's the location...how well do you know that area?  I wouldn't live there if they paid me.



It was an example. I see $75K houses of all shapes, styles and conditions every day. I picked that one because it was the first one I saw on CL. Also, you can't "guarantee" anything. There are some serious deals being snatched up left and right in this town. Not all of them have had the pipes and wiring ripped out by disgruntled owners.

If I recall correctly, that house is fairly close to the area where that kid (Puffenberger, wasn't it?) was kidnapped by the Mexican Mafia. But I happen to _like_ Sunrise Manor. It has a lot going for it. (I think Summerlin and Anthem are boring -- cookie cutter neighborhoods.)

But with investment property, none of that matters -- the main concern is  "Can the property be rented out at a profit." Every week, hundreds of houses in this city are listed where the answer is an unequivocal "yes." The goal is to acquire them while they're still nickles on the dollar.

But all of this has little to do with overpaying a mortgage. I would probably look into refi first, especially if the current note has an interest rate of more than, say, 6% (assuming the borrower can qualify for a 4% loan). Then, depending on the local housing market, I would do whatever it takes to buy as much quality real estate as practicable. A lot of people hear talking heads shrieking about how bad things are. I hear opportunity knocking.


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## teepeeca (Jul 10, 2009)

*egret1986*

"MY" opinion, would be to pay extra "every month" on the mortgage.  Make sure the extra $$$ goes ONLY toward the principal.  (Why do you care if there would be an extra savings on taxes, etc.???)  For example, if you could come up with an extra $200 per month on your current mortgage, it should reduce the "payoff time" from 15 years to about 10 1/2 years, or less.

Of course I don't know about your mortgage,, but if you could increase the payment on a $135K mortgage and extra $600 per month, it would be paid off in about 6 1/2 years.

Tony


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## Egret1986 (Jul 10, 2009)

*Thanks, Tony*



teepeeca said:


> "MY" opinion, would be to pay extra "every month" on the mortgage.  Make sure the extra $$$ goes ONLY toward the principal.  (Why do you care if there would be an extra savings on taxes, etc.???)  For example, if you could come up with an extra $200 per month on your current mortgage, it should reduce the "payoff time" from 15 years to about 10 1/2 years, or less.
> 
> Of course I don't know about your mortgage,, but if you could increase the payment on a $135K mortgage and extra $600 per month, it would be paid off in about 6 1/2 years.
> 
> Tony



I'm not sure why I would care if I reduced my taxes.  Now that you have put that question to me---my goal is to shorten the number of years left on the mortgage.  I believe I know what I need to do now.


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## JeffW (Jul 10, 2009)

teepeeca said:


> "MY" opinion, would be to pay extra "every month" on the mortgage.  Make sure the extra $$$ goes ONLY toward the principal...Tony



You need to specific about that.  After I refinanced our home 5+ yrs ago, I wanted to put some extra money towards the loan (mortgage).  Even though it's deducted automatically from my bank account, and there's an online option to make additional payments, it treated it as additional monthly payments!  Instead of it showing, "... next automated withdraw: June 25", it was like October.

I called up Customer Support, who said I needed to come into a branch to correct it.  Took them a while to do that.  I asked, and they told me, to make additional principle payments in the future, I'd always need to come into the bank and have a teller do it.  Major pain.  Never did is since then (partly because with instability in the economy, and with a less tha 5% loan rate, I was happier having cash at hand than saving some interest money).

Jeff


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## GadgetRick (Jul 10, 2009)

First of all, mortgages are NOT in the 4% range, not sure where anyone is getting that. I sell mortgages so I can tell you, yesterday rates on a 30 year fixed were (around 5.25%).

Second, I'd first ask the OP how much they owe on their mortgage. If they owe $400,000, an extra payment a year isn't going to do much to knock that balance down anytime soon. You need to do something drastic.

If, on the other hand, you owe $100,000, an extra payment per year can help. It's about the amount of debt as well.

How to do this? A couple of different ways which have been mentioned here. DO NOT sign up for bi-weekly payments!!!!!!!!! It's another way for the bank to make money (they charge you a heft fee to set this up, btw). You can accomplish the same thing by dividing one of your principle/interest payments by 12 and just adding that to your payment each month. Won't cost you a dime to do that (other than the extra payment of course).

Someone mentioned you can't pre-pay interest. This is not true. You can, in fact pre-pay interest (you do this every time you do a mortgage, btw). I wouldn't suggest it as you cannot get that pre-paid interest refunded (you can read that by reading your Truth-In-Lending statement).

I wouldn't suggest just paying an extra amount once a year if you can do it throughout the year. Why? The amount of interest you pay each month is based on the remaining principle balance. So, if you're paying an extra $500 a month towards principle ($6,000 extra over 12 months), you're lowering the principle balance by that much each month and lowering the amount you're paying interest on which lowers the amount of interest you're paying.

If, instead, you do one lump sum of $6,000 each year, you'll still pay down an extra $6,000 each year, however, you'll pay interest on the higher principle balance throughout the year until you make that big payment.

As far as buying investment properties, just be careful. On paper it always looks better than it is. Ask yourself these questions before buying an investment property:

-Can you afford to make the payment on the property if there is no rental income? If so, for how long?
-Are you prepared to become a landlord with people calling you to fix stuff?
-What happens if you get a bad tenant who destroys the property? Do you know the laws in the state where the property is located? Do they protect the owner or the renter? In NJ, they protect the renters pretty well.
-Is the property truly a good deal? What are values doing in your area (i.e. trends)?
-Are you prepared to put 25-30% down? That's about the minimum on an investment property. You may get away with 20% down but that's harder to do and you'll pay much more for it (if you qualify for it).
-Are you prepared to pay (approximately) .75% to 1% more in rate? That's what you'll pay for an investment property.
-It's much much harder to get qualified for an investment property mortgage.
-Do you really want to pull money out of your home to buy a (potentially) risky investment property?

It's not that I'm not a fan of investment properties, rather, you need to be more informed before buying one. I've done too many purchases of investment properties for people over the years who didn't heed my advice and are now in a bad situation. They make it seem so easy to do on those commercials/tapes/websites. However, if it's so easy, why am I not doing it (I'm in the business remember)?


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## Htoo0 (Jul 10, 2009)

I'm not an expert on the subject but we paid down our mortgage paying off a 30-year note in 15. There were no prepayment penalties so that was not a concern.  A few years ago when there was a big refinancing craze, we had people practically knocking down our door trying to convince us to refinance. However, perhaps because our balance was pretty low, I explained to them I would save more by putting their 'fee' ($2-3K) towards my mortgage than I could possibly save by lowering my interest by a few points. Most didn't believe me but surprisingly one actually called me back about a week later to tell me he ran the numbers because he thought that couldn't be right.  He was amazed to find I was correct. Something more to consider- "always do the math".


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## geekette (Jul 10, 2009)

djs said:


> Another method would be to pay an extra $100 each month towards principal.



That's what we do - pay extra on it.  We did not want to commit to a 15-year, so have a 30-year that we just pay extra towards.  

Because of compounding interest, we'd far rather pay towards the house than invest that money.  The savings interest at the end of our 30 years (or the targeted 20) should be significant.

While making an extra payment at the end of the year is not a bad strategy, for us, chipping away all thru the year works far better and decreases the principal all through the year.


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## caribbeansun (Jul 10, 2009)

Egret1986 said:


> Is it better to make an extra payment each year and be able to deduct the interest on taxes?



If you tax rate was say 40% and you pay $1,000 in interest you've lost 60% ($600) of your money to the bank after your tax deduction.  Therefore, you are always better off paying down the debt so that you can keep the $600 in your pocket.  Why spend $1,000 to save $400 in taxes?



> Is it better to put that same amount towards principal instead?



Only if your alternate spending opportunity would yield you more after-tax than $600



> Is it better to put that money in a CD and let the money build up?  I know savings rates are lower than my mortgage rate of 5.5%, but this would allow for a nice cushion to fall back on if something were to happen to a job in the future or some major unforeseeable financial crisis befell us.



You've mixed two entirely different issues in this and they should be dealt with separately.

Should you have sufficient resources to get you through a personal financial crisis?  Simple answer is yes.  How much - no way to know what you are comfortable with or would need.

Should you invest and pay tax on investment income so that you can pay more interest and save taxes on a mortgage?  No.  Say you can earn 2% on an investment, you pay 40% tax so you net 1.2%.  You pay at 5.5% so you net 3.3% - you've lost 2.1% (3.3-1.2)


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## GadgetRick (Jul 10, 2009)

Oh, one other thing I will say. Someone mentioned talking to an accountant. I would say do NOT talk to an accountant. An accountant's job is to crunch numbers, not know about investments. I'd say talk to a (trusted) financial advisor instead. You'll get much more useful info but just know, the advisor makes money when you invest with them (simplifying here). That's why I say use a, "trusted," advisor.

I can't tell you how often people I've done business with asked their accountant about things like this and I just scratched my head when I heard the reply. Heck, I'm very good friends with my accountant--he's an EXTREMELY smart guy--but some of the advice he's given me (and others) regarding things like this just doesn't make sense. YMMV


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## Rose Pink (Jul 10, 2009)

*Credit Union*

When we refinanced our home we went with our credit union.  We didn't have to pay any points or fees of any kind.  I can make payments on it any time from the comfort of my own home computer.  I make payments twice a month.  I decide how much principal I want to pay down each time and then just add the accrued interest to that amount (the interest is automatically displayed in the payoff amount).  Then I transfer the total from my checking account to my loan account.  Easy as pie and I always can see my balance and how much I pay in interest.


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## 3kids4me (Jul 10, 2009)

GadgetRick said:


> First of all, mortgages are NOT in the 4% range, not sure where anyone is getting that. I sell mortgages so I can tell you, yesterday rates on a 30 year fixed were (around 5.25%).



We just signed the papers yesterday on our refi at 4.125% (conforming).


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## csalter2 (Jul 10, 2009)

*4% Loans are out there*



3kids4me said:


> We just signed the papers yesterday on our refi at 4.125% (conforming).



I know someone who recently received a 4.5% loan. They asked me to read over the paperwork for them. However, it was a stimulus package loan to keep their home.


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## Rose Pink (Jul 10, 2009)

Our credit union is at 4.625% for a 15 year.


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## Mel (Jul 10, 2009)

GadgetRick said:


> Second, I'd first ask the OP how much they owe on their mortgage. If they owe $400,000, an extra payment a year isn't going to do much to knock that balance down anytime soon. You need to do something drastic.
> 
> If, on the other hand, you owe $100,000, an extra payment per year can help. It's about the amount of debt as well.


If you're in the mortgage business, you know this isn't true.  That monthly payment is based on the mortgage amount.  The monthly payment on a $400,000 loan is going to be 4 times the monthly payment of a $100,000 loan.  That extra payment will in fact knock the larger loan down an equivalent amount - about 4 times as much as an extra payment will knock down the smaller loan.

Even if you're talking a single set extra payment, it will still pay the principal down by the same amount - and if the interest rates of the two loans are the same, will save the same amount of interest.  It just won't shorten the length of the loan as much.

As for making extra payments, it all depends on the bank.  When WaMu was bought out last year, they had one month where they credited our double payment as 2 monthly payments instead of applying it to principal, and really messed up our account, but we had been up to that point (and every other month after that) had the extra applied to principal correctly every other month.  We do this as a single larger payment each month, and the bank is able to handle it easily.


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## applegirl (Jul 10, 2009)

Egret,

My husband and I pay an extra 1/12 of our mortgage each month adding up to an extra payment each year.  I think paying off your mortgage by the time you retire is a great idea.  Would this strategy meet your goal of paying it off in 10 years or would you need to more or less to achieve that?  Some math will be required here.

Knowing that you already have a 6 month living cushion, I say go for it!  It will give you much peace of mind to know that you will retire with no mortgage!

Just my .02

Janna


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## stevedmatt (Jul 10, 2009)

GadgetRick said:


> First of all, mortgages are NOT in the 4% range, not sure where anyone is getting that. I sell mortgages so I can tell you, yesterday rates on a 30 year fixed were (around 5.25%).
> 
> Second, I'd first ask the OP how much they owe on their mortgage. If they owe $400,000, an extra payment a year isn't going to do much to knock that balance down anytime soon. You need to do something drastic.
> 
> ...



A friend of mine just closed on a refi at 4.25 on a 30 year by paying 2 points.

Your point about not getting much out of making an extra payment on a larger loan is untrue. Proportionally, an extra payment on either of the loans you exampled above will have the same result. The extra payment on the 400,000 loan is 4X that of the 100,000 loan.

And finally, I guess I am silly for setting up biweekly payments through my mortgage company. I paid the hefty fee of $0 up front. They added $1.50 to each payment to set this up for me. Yes, I could have saved about $1000 over the life of my loan making these payments myself, but this was too convenient. And my 30 year loan which I started making biweekly payments on the first month, was turned into a 24.8 year loan, saving me about $45,000 in interest over the life of the loan. 2% over 25 years is a very small price to pay for this convenience.


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## ScoopKona (Jul 10, 2009)

GadgetRick said:


> Oh, one other thing I will say. Someone mentioned talking to an accountant. I would say do NOT talk to an accountant. An accountant's job is to crunch numbers, not know about investments. I'd say talk to a (trusted) financial advisor instead. You'll get much more useful info but just know, the advisor makes money when you invest with them (simplifying here). That's why I say use a, "trusted," advisor.



I could not disagree more.

Give me a numbers guy any time. I take my real estate tax questions to an accountant who specializes in real estate and taxes. I am not interested in hearing how investing in Cuban Sugar Futures or Krugerrands is a better "deal" right now than paying down my mortgage. DW and I have made the decision to pay down our mortgage so we can invest intelligently in real estate. We are only interested in tax advice. The Alpaca farm will have to wait.

(Oh, and we currently pay 4.65%. No points. No federal programs. We'll be done with our 30-year mortgage next year -- 36 months after we closed on this house. I'd say we're doing the right thing financially.)

Our plan is to make our final payment, AND have enough cash on hand to make three or four 20% down payments on rental properties in early 2010. Once that cash pump is primed and flowing, we'll buy a vacation house in the mountains while prices are still low.


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## Egret1986 (Jul 10, 2009)

*I like your $.02*



applegirl said:


> Egret,
> 
> My husband and I pay an extra 1/12 of our mortgage each month adding up to an extra payment each year.  I think paying off your mortgage by the time you retire is a great idea.  Would this strategy meet your goal of paying it off in 10 years or would you need to more or less to achieve that?  Some math will be required here.
> 
> ...



You can't beat peace of mind!


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## SDKath (Jul 11, 2009)

We just refi'd a super jumbo loan for 4.625% 7 year fixed, 30year loan.

Since we owned our first house, we have always done the monthly autopay (so we don't forget and get a hefty late fee) AND overpay by a few hundred dollars.  I think there are great calculators at bankrate.com where you can enter your mortgage, your interest rate and the amount you pay each month and it will tell you exactly how many years of interest you will save!

Katherine


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## bogey21 (Jul 11, 2009)

GadgetRick said:


> DO NOT sign up for bi-weekly payments!!!!!!!!! It's another way for the bank to make money (they charge you a hefty fee to set this up, btw).  QUOTE]
> 
> I have the bi-weekly payments and like it for a number of reasons.  My Credit Union charges me next to nothing for the privilege.  So if the idea appeals to you, check and *see what it will cost.*  Many Banks outsource this to third party providers with high fees.
> 
> George


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## GadgetRick (Jul 11, 2009)

3kids4me said:


> We just signed the papers yesterday on our refi at 4.125% (conforming).



15 year loan? I'd doubt it's a 30 year for sure. Most people cannot afford a 15 year loan these days.


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## GadgetRick (Jul 11, 2009)

csalter2 said:


> I know someone who recently received a 4.5% loan. They asked me to read over the paperwork for them. However, it was a stimulus package loan to keep their home.



Much different situation. That's a subsidized rate and not what the general public is getting.


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## GadgetRick (Jul 11, 2009)

Mel said:


> If you're in the mortgage business, you know this isn't true.  That monthly payment is based on the mortgage amount.  The monthly payment on a $400,000 loan is going to be 4 times the monthly payment of a $100,000 loan.  That extra payment will in fact knock the larger loan down an equivalent amount - about 4 times as much as an extra payment will knock down the smaller loan.
> 
> Even if you're talking a single set extra payment, it will still pay the principal down by the same amount - and if the interest rates of the two loans are the same, will save the same amount of interest.  It just won't shorten the length of the loan as much.
> 
> As for making extra payments, it all depends on the bank.  When WaMu was bought out last year, they had one month where they credited our double payment as 2 monthly payments instead of applying it to principal, and really messed up our account, but we had been up to that point (and every other month after that) had the extra applied to principal correctly every other month.  We do this as a single larger payment each month, and the bank is able to handle it easily.


You missed my point. What I'm saying is, let's say you owe $400,000 in principle (i.e. the mortgage amount). If your rate is 5.25% (about what a 30 year fixed rate is today) and you make one extra payment per year. The total payment is approximately $2,208, $1,750 of which is interest with the remaining $458 being applied towards principle. The next month, you're principle balance would be $399,542 and your next monthly payment would pay down, exactly $2 more in principle.

Ok, where am I going with this? Well, at the end of the day (assuming no extra payment yet) you're knocking off less than $6,000 in principle. If you make an additional payment (towards principle), you'll knock off $2,208ish dollars off the total principle amount. That isn't exactly knocking the principle down terribly quickly.

Now, on the other hand, at $100,000 although the payment numbers are lower, knocking off another $550ish (approximate payment on 30 years at 5.25%) you're still not making a huge dent in the overall principle but, if you say, took $2,000 of your tax return and plunked it down on your principle balance, that's making a dent in the balance.

Not saying it's a bad thing to do but, with a larger balance, it's tougher/takes longer to make a significant dent in the balance. This is one reason my parents were always like, "I must own my home!" When they bought their first home (in the early 1970s) I believe they paid something like $15,000. When I bought my first home (in the early 2000s), I paid $275,000. A little different situation.

I'm just saying, if you're planning on living in your home forever, then yeah, go ahead and work to pay it down that way. If you're not planning on staying there forever, what's the point? I plan on moving in the next 5 years. I'm not going to make a significant dent in my (now) $400,000+ mortgage balance in 5 years without TOTALLY strapping me. Not worth the effort since I'll be selling sooner rather than later.


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## GadgetRick (Jul 11, 2009)

stevedmatt said:


> A friend of mine just closed on a refi at 4.25 on a 30 year by paying 2 points.
> 
> Your point about not getting much out of making an extra payment on a larger loan is untrue. Proportionally, an extra payment on either of the loans you exampled above will have the same result. The extra payment on the 400,000 loan is 4X that of the 100,000 loan.
> 
> And finally, I guess I am silly for setting up biweekly payments through my mortgage company. I paid the hefty fee of $0 up front. They added $1.50 to each payment to set this up for me. Yes, I could have saved about $1000 over the life of my loan making these payments myself, but this was too convenient. And my 30 year loan which I started making biweekly payments on the first month, was turned into a 24.8 year loan, saving me about $45,000 in interest over the life of the loan. 2% over 25 years is a very small price to pay for this convenience.



Yes, if you pay 2 points--something most people aren't interested in doing thanks to the media--you can get a low rate. Most people pay (at most) 1 point which isn't getting you down that far. We're talking apples and oranges here.

And you're correct about the ratios, just read my previous post where I'm explaining what I'm saying.

You're also the exception on the bi-weekly setup rather than the rule. I work for the largest bank in the country, we charge. I used to work for the #4 largest bank in the country, they also charged. Some smaller banks may not charge and that's great. You're still paying $1.50 each time for something you could do on your own for free. Not that you're losing a lot of money there but I think you get the point.


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## GadgetRick (Jul 11, 2009)

ScoopLV said:


> I could not disagree more.
> 
> Give me a numbers guy any time. I take my real estate tax questions to an accountant who specializes in real estate and taxes. I am not interested in hearing how investing in Cuban Sugar Futures or Krugerrands is a better "deal" right now than paying down my mortgage. DW and I have made the decision to pay down our mortgage so we can invest intelligently in real estate. We are only interested in tax advice. The Alpaca farm will have to wait.
> 
> ...



Ok, here are a few scenarios. Tell me what you'd do...

First, someone paying 5.875% on a home they bought at the height of the boom (3 years ago). Perfect borrowers. Could have gotten 4.5%, however, the property under appraised and they now needed to pay PMI. Total payment was still a savings of about $400 a month. They decided not to refi because they didn't want to pay PMI (they could have written that off as they made less than the allowable limit). They were saving money, lowering their monthly payment and their rate. They plan to live in the house (basically) forever. They were told they shouldn't refi at that time due to PMI by the accountant.

Another one, this one's a while back, a borrower has 7.25%. Bought the house a year earlier. Could have gotten 5.5% (0 points, minimal closing costs) at the time with no PMI, etc. Was saving them something like $500ish a month (I don't remember the specifics but it was a good amount of money.). Accountant told them, and I quote, "Don't do it unless you can lower your rate by 2%. Just not worth it for less."

A borrower did an FHA loan a couple of years before. Was at 7.5% (again, this was a while ago). Borrower could do a streamline refinance with 0 closing costs. They only had to pay for an appraisal (like $300ish at the time). Accountant told them not to do it, didn't make sense.

Three different accountants. The first one is a VERY good friend of mine and a VERY good accountant.

Accountants are great at crunching numbers but not always great at giving advice. By their nature they're (usually) very conservative. You may have a great accountant for this type of thing and that's great, however, in my experience of writing quite a few loans over 8 years and listening to bone-headed advice from many accountants given to customers, I wouldn't ask an accountant for this type of advice. I'd let them crunch the numbers for me all day though.


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## Elan (Jul 11, 2009)

GadgetRick said:


> Ok, here are a few scenarios. Tell me what you'd do...
> 
> First, someone paying 5.875% on a home they bought at the height of the boom (3 years ago). Perfect borrowers. Could have gotten 4.5%, however, the property under appraised and they now needed to pay PMI. Total payment was still a savings of about $400 a month. They decided not to refi because they didn't want to pay PMI (they could have written that off as they made less than the allowable limit). They were saving money, lowering their monthly payment and their rate. They plan to live in the house (basically) forever. They were told they shouldn't refi at that time due to PMI by the accountant.
> 
> ...



  My advice to anyone would be to learn how to run the numbers of a refi on your own.  It's not rocket science, and the internet is littered with mortgage calculators.   Most of the common questions regarding tax consequences can be answered either via the internet or a quick call to any competent accountant.  Obviously, when dealing with rental properties and/or second homes, etc, the issue is more complex, but for most primary residence refi's the math is quite simple.


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## ScoopKona (Jul 11, 2009)

GadgetRick said:


> Ok, here are a few scenarios. Tell me what you'd do...
> 
> First, someone paying 5.875% on a home they bought at the height of the boom (3 years ago). Perfect borrowers. Could have gotten 4.5%, however, the property under appraised and they now needed to pay PMI. Total payment was still a savings of about $400 a month.
> 
> ...



The first one may be a very good friend, but he's close to incompetent as an accountant. The other two are equally bad. "This will save you $4,800 per year. But don't do it. Why? I dunno. It just doesn't seem like a good deal to me." 

A good accountant will run numbers eight ways from Sunday for you, then give you a dispassionate assessment of 1) Which strategy will save you the most money. 2) Which strategy is least likely to get the attention of the IRS.

My advice, find better tax professionals. My accountant called me last year out of the blue and told me we could save an extra $250 per month (after costs) by doing another refi. _That's_ a professional.


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## MULTIZ321 (Jul 11, 2009)

ScoopLV said:


> The first one may be a very good friend, but he's close to incompetent as an accountant. The other two are equally bad. "This will save you $4,800 per year. But don't do it. Why? I dunno. It just doesn't seem like a good deal to me."
> 
> A good accountant will run numbers eight ways from Sunday for you, then give you a dispassionate assessment of 1) Which strategy will save you the most money. 2) Which strategy is least likely to get the attention of the IRS.
> 
> My advice, find better tax professionals. My accountant called me last year out of the blue and told me we could save an extra $250 per month (after costs) by doing another refi. _That's_ a professional.



Hey Scoop,

I enjoy reading your posts but always strain my eyes to do so.

For us visually-impaired readers, would you use a larger font size to make it easier to read?

Thanks

Richard


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## AwayWeGo (Jul 11, 2009)

*How Big Is Big ?*




MULTIZ321 said:


> I enjoy reading your posts but always strain my eyes to do so.
> 
> For us visually-impaired readers, would you use a larger font size to make it easier to read?


Shux, he already switched to Size 3. 

-- Alan Cole, McLean (Fairfax County), Virginia, USA.​


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## ScoopKona (Jul 11, 2009)

MULTIZ321 said:


> Hey Scoop,
> 
> I enjoy reading your posts but always strain my eyes to do so.
> 
> ...



Font size 3 looks great on my screen. How's this (font size 4) instead?


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## AwayWeGo (Jul 11, 2009)

*The Accountant's Sworn Duty.*




ScoopLV said:


> Which strategy is least likely to get the attention of the IRS.


Upon receiving certification, the C.P.A. candidates all swear solemnly to do just that -- stay under the I.R.S. radar, that is. 

That professional vow is known as _The Hip Accountants Oath._ 

-- Alan Cole, McLean (Fairfax County), Virginia, USA.​


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## AwayWeGo (Jul 11, 2009)

*Size 3 Is Better.*




ScoopLV said:


> Font size 3 looks great on my screen. How's this (font size 4) instead?


Size 4 is just a whisker too big. 

Too bad they don't offer Size 3½. 

-- Alan Cole, McLean (Fairfax County), Virginia, USA.​


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## ocowner (Jul 11, 2009)

Quote from Scoop... "We'll be done with our 30-year mortgage next year -- 36 months after we closed on this house. I'd say we're doing the right thing financially.)"


We are in this same scenario.  We've paid down aggressively starting 5-6 yrs ago to avoid market turmoil with mutual fund investing for education.  Now, we have moved the remaining balance to our HELOC at prime - .5%.  The downside?  Our interest deduction has continually dwindled and will be very minimal this year (and next year, nothing).  For the peace of mind of having the debt paid off, that is a good thing - and we've been able to free up some cash to help with higher education costs on the horizon.


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## 3kids4me (Jul 11, 2009)

GadgetRick said:


> 15 year loan? I'd doubt it's a 30 year for sure. Most people cannot afford a 15 year loan these days.



20 year.

I think most people are refinancing at this point in order to lower their payments through an interest rate deduction, rather than by stretching out their loan over more years than they currently owe.  In our case, our payment will be the same but the years we have left will be fewer.


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## MULTIZ321 (Jul 11, 2009)

ScoopLV said:


> Font size 3 looks great on my screen. How's this (font size 4) instead?



Scoop,

Font size 3 was great. Thanks a bunch.


Richard


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## Talent312 (Jul 11, 2009)

I'm waiting for MultiZ to tell us how Alexander Hamilton would approach this issue.


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## Egret1986 (Jul 11, 2009)

*Thank you, Katherine!*



SDKath said:


> We just refi'd a super jumbo loan for 4.625% 7 year fixed, 30year loan.
> 
> Since we owned our first house, we have always done the monthly autopay (so we don't forget and get a hefty late fee) AND overpay by a few hundred dollars.  I think there are great calculators at bankrate.com where you can enter your mortgage, your interest rate and the amount you pay each month and it will tell you exactly how many years of interest you will save!
> 
> Katherine





That should be helpful!


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## Egret1986 (Jul 11, 2009)

*We still plan to be in this house when it is paid off, hopefully in 10 years*



GadgetRick said:


> I'm just saying, if you're planning on living in your home forever, then yeah, go ahead and work to pay it down that way. If you're not planning on staying there forever, what's the point? I plan on moving in the next 5 years. I'm not going to make a significant dent in my (now) $400,000+ mortgage balance in 5 years without TOTALLY strapping me. Not worth the effort since I'll be selling sooner rather than later.



Last May (2008) was when we refinanced our 30 year mortgage to a 15-year, took $100,000 out to remodel.  We have lived in the house for 12 years, absolutely love the house, property it sets on, the neighborhood, the area.  So that is why the consideration for paying off early.  Sure we can't predict the future, and may need to downsize in the distant future; but for what we see and can consider; this is where we plan to be for many years.


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## caribbeansun (Jul 12, 2009)

Given that you seem to want to slag the entire accounting profession you might want to consider the quality of your own advice first.  The logic you've used below is badly flawed.

Consideration of whether you are going to stay in a place or not has no business whatsoever in the decision making around whether or not you should pay down debt.  The logic used is that the debt is attached to the property when in reality it's attached to you as a result of your equity relative to the property you are living in.  You carry that equity with you AND the debt as you go from property to property - your physical address has nothing to do with it.

The only way that this logic could even marginally make sense is if the plan is to downsize each time you move, thereby reducing your debt load as you go - I suspect this isn't the scenario we are talking about though. 

Using the fact that you can't make a sizable dent in the debt as justification for not paying down any extra would frankly be true forever in the absence of a windfall.  Most of us don't get windfalls so by extension you'd suggest never paying down debt, just trickle along on a 30 year mortgage - good deal for the mortgage company but not so great for the one paying the freight.

"It's not worth the effort" - seriously? 




GadgetRick said:


> I'm just saying, if you're planning on living in your home forever, then yeah, go ahead and work to pay it down that way. If you're not planning on staying there forever, what's the point? I plan on moving in the next 5 years. I'm not going to make a significant dent in my (now) $400,000+ mortgage balance in 5 years without TOTALLY strapping me. Not worth the effort since I'll be selling sooner rather than later.


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## stevedmatt (Jul 12, 2009)

caribbeansun said:


> Given that you seem to want to slag the entire accounting profession you might want to consider the quality of your own advice first.  The logic you've used below is badly flawed.
> 
> Consideration of whether you are going to stay in a place or not has no business whatsoever in the decision making around whether or not you should pay down debt.  The logic used is that the debt is attached to the property when in reality it's attached to you as a result of your equity relative to the property you are living in.  You carry that equity with you AND the debt as you go from property to property - your physical address has nothing to do with it.
> 
> ...



I have to say I completely agree.


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## Htoo0 (Jul 12, 2009)

One thing they do recommend is to not spend money (or points) to refinance if you don't plan to stay in the house. Believe the reason is that you need time to recoup the costs which may take 3-5 years depending upon the total cost and your monthly savings. Again, always important to do the math.


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## GadgetRick (Jul 12, 2009)

caribbeansun said:


> Given that you seem to want to slag the entire accounting profession you might want to consider the quality of your own advice first.  The logic you've used below is badly flawed.
> 
> Consideration of whether you are going to stay in a place or not has no business whatsoever in the decision making around whether or not you should pay down debt.  The logic used is that the debt is attached to the property when in reality it's attached to you as a result of your equity relative to the property you are living in.  You carry that equity with you AND the debt as you go from property to property - your physical address has nothing to do with it.
> 
> ...



Hmm, obviously, you missed my point. I never said it's not worth paying down debt. However, if I'm moving in say, 4 years, and I'm making exactly one extra payment each of those 4 years (i.e. 4 extra payments) and my mortgage is $400,000 then I would absolutely suggest someone NOT struggle to pay the debt down. If it's not a stretch at all, then all bets are off. If you're planning on moving, it's better to save that money in case you need it for your next move. You're assuming I'm saying to blow the money you'd pay down, which I never said either.

Now, if I were paying a lot more down in that time, then yes, it may make more sense. Either way, it's never a cut and dry (black and white) answer to the question like you're implying. When it comes to money, it never is.

People also have to consider, most scenarios others are speaking of around here assume a perfect scenario/perfect borrower (e.g. lots of extra reserves in the bank, lots of equity in the property, etc.). Let me tell you, MOST people are neither in a perfect scenario nor are they a perfect borrower. That's not a knock on anyone, just a fact.

The point I've been trying to make is this is not as easy of a question as it seems at first.


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## GadgetRick (Jul 12, 2009)

ScoopLV said:


> The first one may be a very good friend, but he's close to incompetent as an accountant. The other two are equally bad. "This will save you $4,800 per year. But don't do it. Why? I dunno. It just doesn't seem like a good deal to me."
> 
> A good accountant will run numbers eight ways from Sunday for you, then give you a dispassionate assessment of 1) Which strategy will save you the most money. 2) Which strategy is least likely to get the attention of the IRS.
> 
> My advice, find better tax professionals. My accountant called me last year out of the blue and told me we could save an extra $250 per month (after costs) by doing another refi. _That's_ a professional.


I agree it was flawed advice however, the one accountant I know is actually one of the best accountants in the state so I'd hardly say he's a bad accountant. He's just bad at giving this type of advice.

I agree your accountant is better at this than others. I've dealt with lots of people asking their accountants about these kinds of decisions. When they get this kind of bone-headed advice, they don't know any better. Remember, they went to the accountant for advice. So, if I tell them to get another accountant they look at me like I'm the wrong person as I do have a vested interest in the situation.


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## SDKath (Jul 12, 2009)

When I spoke to my accountant last year about paying extra on our home loan, he actually crunched the numbers and told me to pay down all of our other "more expensive" debt first, before refi'ing and paying down the mortgage.  

Something interesting he said stuck with me...  he said home loans are "cheap money."  You really can't get too many loans for 4-6%.  Most are 10-20% (ie credit card, equipment, car, school loans, etc).

So he said to pick the loans that are most expensive and get rid of those first.  If it's a small loan relative to a home loan ($20,000 timeshare loan for example, for 8.5%), pay it off quickly by making larger extra payments each month or paying the lump sum off.  Only after those are gone should be pay off the home loan.  Good advice I thought.

Just another perspective...

Katherine


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## ScoopKona (Jul 12, 2009)

GadgetRick said:


> I agree it was flawed advice however, the one accountant I know is actually one of the best accountants in the state so I'd hardly say he's a bad accountant. He's just bad at giving this type of advice.



Nope, I'm still not buying this. This person is not one of the best accountants in the state just because you say he is. Not if what you've said about him is true, at least.

A CPA's job is to save their clients money (so long as it's worth the time and effort to save that money).

For instance, it is not worth filling out loan paperwork and taking a credit ding to save $1,000, when the client earns $500K per year.

But for someone earning $100K per year or less, $5,000 in annual savings is worth at least a two weeks of filling out paperwork and meeting with loan officers. And it's worth at least a 20-point credit score hit. Any CPA knows that. Hell, any LAYMAN knows that. Based on what you've said, this accountant friend of yours is not only pound foolish, he's also penny foolish.


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## vacationhopeful (Jul 12, 2009)

Katherine-
Exactly why I pay ONLY the payment on my truck loan as it is 0% interest rate.  I pay extra on every other payment depending on interest rate.   Some financial gurus say to pay off the smallest balance, so you feel that you are reaching you goal. 

Pay off where it is costing you the most in interest rate ... called the cost of money.  Plus, remember, house interest is tax deductible; credit card is NOT.


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## Egret1986 (Jul 12, 2009)

*I just love that 0% interest!*



vacationhopeful said:


> Katherine-
> Exactly why I pay ONLY the payment on my truck loan as it is 0% interest rate.  I pay extra on every other payment depending on interest rate.   Some financial gurus say to pay off the smallest balance, so you feel that you are reaching you goal.
> 
> Pay off where it is costing you the most in interest rate ... called the cost of money.  Plus, remember, house interest is tax deductible; credit card is NOT.



Whether it is a credit card or auto loan, it's awesome to be using someone else's money for free.  I use the credit card for the purchase, get the rewards points, put the money in savings until the teaser rate is up and then pay it off. 

I know the credit card companies offer these teaser rates for those who spend, spend, spend, and then when the rate is up have a balance and get socked with the possible 21+% interest rate on the balance.  I make sure I know when that 0% rate will expire and make sure that every thing is set to pay the balance off before it ends.


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## caribbeansun (Jul 13, 2009)

No, I'd say I quoted you directly and your point seemed fairly clear.



GadgetRick said:


> Hmm, obviously, you missed my point.



As to the issue of what debt to repay - it seems kind of obvious that you should pay down more expensive (after-tax) debt regardless of what it's registered against - after-tax is very important.


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## AwayWeGo (Jul 13, 2009)

*A Penny Found Is A Penny Earned.*




ScoopLV said:


> For instance, it is not worth filling out loan paperwork and taking a credit ding to save $1,000, when the client earns $500K per year.


It is also not worth doing 2¢ worth of work to bend down & pick up somebody's lost penny off the sidewalk -- but still I do it anyway. 

Tax free. 

By contrast, the Chief Of Staff won't bother with a penny, but she will still pick up a found nickel. 

-- Alan Cole, McLean (Fairfax County), Virginia, USA.​


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## GadgetRick (Jul 13, 2009)

ScoopLV said:


> Nope, I'm still not buying this. This person is not one of the best accountants in the state just because you say he is. Not if what you've said about him is true, at least.
> 
> A CPA's job is to save their clients money (so long as it's worth the time and effort to save that money).
> 
> ...


First of all, I'm talking about more than one accountant here, in fact, quite a few who've given crappy advice. Just because you happen to have a good one doesn't mean everyone has a good one. I base my suggestions on experience with many different people and that tells me most accountants really aren't terribly good at figuring out things like this unless it's a cut and dry black and white sort of question. Most accountants do NOT think outside of the box as they can get themselves in trouble if they do and go too far outside of the box.

And why, exactly, is it NOT worth saving $1,000 per year? It's not hard to apply for a loan, the most work anyone does is sign the paperwork at closing. If someone says to you, "Sign this paperwork and I'll save you $1,000," why wouldn't you (unless, of course, it was some kind of scam)?

Also, you mention a credit ding for checking credit. You're under the same impression so many other people are--just because someone runs your credit it doesn't mean it's going to lower your score. In fact, in 99% of the instances it does absolutely NOTHING to your score. You're also not going to take a, "20 point," hit for someone running your score. Never seen it happen and I've run (literally) thousands of credit reports in my years in this business.


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## ScoopKona (Jul 13, 2009)

GadgetRick said:


> Also, you mention a credit ding for checking credit. You're under the same impression so many other people are--just because someone runs your credit it doesn't mean it's going to lower your score. In fact, in 99% of the instances it does absolutely NOTHING to your score. You're also not going to take a, "20 point," hit for someone running your score. Never seen it happen and I've run (literally) thousands of credit reports in my years in this business.



No, I mention a credit ding for refinancing a loan, assuming a new loan, and generally monkeying with loans mid-stream.


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## stevedmatt (Jul 13, 2009)

GadgetRick said:


> First of all, I'm talking about more than one accountant here, in fact, quite a few who've given crappy advice. Just because you happen to have a good one doesn't mean everyone has a good one. I base my suggestions on experience with many different people and that tells me most accountants really aren't terribly good at figuring out things like this unless it's a cut and dry black and white sort of question. Most accountants do NOT think outside of the box as they can get themselves in trouble if they do and go too far outside of the box.



What exactly is outside the box? Basically, everything mentioned here other than personal finances or lack thereof, are math issues. Math is very cut and dry, and accountants are very good at that. I would agree that if you are looking for financial investing information, the accountant shouldn't be your first choice. You do however seem to have an issue with a few accountants and are making a very poor generalization about their abilities. On this issue, 90%+ of accountants can do the math, figure the tax ramifications, and give you a hard number on what you will save. You make it sound like the opposite is true.


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## GadgetRick (Jul 14, 2009)

stevedmatt said:


> Math is very cut and dry, and accountants are very good at that. I would agree that if you are looking for financial investing information, the accountant shouldn't be your first choice.



So, in essence, you are agreeing with me. This is exactly what I'm trying to say.


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## rapmarks (Jul 14, 2009)

I have a related question.

Some people believe in never paying off their mortgage.
Our friends are 63, they brag that their mortgage (on a second home) will never be paid off, their son will have to take care of it.  Don't know the set up of their first home.  

What is the thinking behind this strategy, and is it a good strategy to still be paying off a mortgage at 80? 90?


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## Passepartout (Jul 14, 2009)

rapmarks said:


> Some people believe in never paying off their mortgage.
> Our friends are 63, they brag that their mortgage (on a second home) will never be paid off, their son will have to take care of it.  Don't know the set up of their first home.
> What is the thinking behind this strategy, and is it a good strategy to still be paying off a mortgage at 80? 90?



This seems to run counter to the prevailing thinking. Why don't you ask your friends?
My plan is to spend my last nickel while on my death bed and for the kids to give the undertaker a bad check. Seems that this plan has just about the same chance of success.

Jim Ricks


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## Elan (Jul 14, 2009)

rapmarks said:


> I have a related question.
> 
> Some people believe in never paying off their mortgage.
> Our friends are 63, they brag that their mortgage (on a second home) will never be paid off, their son will have to take care of it.  Don't know the set up of their first home.
> ...



  It's all dependent on what return one is capable of getting on the money that they would be otherwise paying into their mortgage.  It's hard to argue with having a fixed rate loan for a period of 30 years at around 5%.  Historically, that's cheap money.  Sure, right now we can go get 0% car loans and CD returns are in the 1% range.  But that's not always the case.  How about when auto loans are 12% and CD's are paying 10%?  At that time, one would rather have cash than home equity.  Remember a house will appreciate the same amount whether it's paid off or not.  Also remember when a home is paid off, it's often not going to be easy to tap into the equity in a cost effective manner.  

  I've always viewed my mortgage as part of my total investment portfolio.  Any additional money I apply toward principal I'm "making" 5ish percent on.  Sometimes that's favorable compared to the alternatives, and sometimes it's not.   The equation to determine whether it's best to pay off a mortgage is multivariate and can only be solved on a case by case basis.

  I'm not advocating not paying off one's mortgage, but rather just stating that it's something that may not be in everyone's best interest.


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## Brett (Jul 14, 2009)

Elan said:


> It's all dependent on what return one is capable of getting on the money that they would be otherwise paying into their mortgage.  It's hard to argue with having a fixed rate loan for a period of 30 years at around 5%.  Historically, that's cheap money.  Sure, right now we can go get 0% car loans and CD returns are in the 1% range.  But that's not always the case.  How about when auto loans are 12% and CD's are paying 10%?  At that time, one would rather have cash than home equity.  Remember a house will appreciate the same amount whether it's paid off or not.  Also remember when a home is paid off, it's often not going to be easy to tap into the equity in a cost effective manner.
> I've always viewed my mortgage as part of my total investment portfolio.  Any additional money I apply toward principal I'm "making" 5ish percent on.  Sometimes that's favorable compared to the alternatives, and sometimes it's not.   The equation to determine whether it's best to pay off a mortgage is multivariate and can only be solved on a case by case basis.



sounds logical


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## rapmarks (Jul 14, 2009)

RE: the friends that plan to never pay off their mortgage.

Three years ago, they were going to refinance.  they were told their villa could be refinanced for up to $360,000.  He was going to buy a municipal bond fund, which he claimed had a really high rate of return (but my advisor said did not have that return).  
Anyhow, Dave m.  pointed out an IRS rule that would have negated that decision and i passed that on to them.  as it turns out it is really good that he didn't refinance.  The same villas are now selling for between $125,000 and 150,000.  

As to why I don't ask them,  they get really touchy if you ask them anything like that.  AS we have discovered over the years, the rest of us are stupid and they are smart and there is no possibility of us ever being on their level.


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## AwayWeGo (Jul 14, 2009)

*Trying To Keep Up With The Joneses.*




rapmarks said:


> AS we have discovered over the years, the rest of us are stupid and they are smart and there is no possibility of us ever being on their level.


We know some folks like that. 

While we're living debt-free in a paid-off suburban home, on lifetime federal retirement annuity, they're still out there scrambling after another star to hitch their wagon to. 

But we're still dumb & they're still smart. 

Go figure. 

-- Alan Cole, McLean (Fairfax County), Virginia, USA.​


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## Beverley (Jul 14, 2009)

Whether it is better to payoff or not payoff really does depend on what your plans are for your money ... 

A few years ago we were focused on paying off all our timeshares and car loans.  Done that.    Now we are focused on two things: accumulating more savings, and paying off our mortgage by the time I retire which is approx 12 years from now.  So, we just refinanced our mort to a low 15 year fixed and plan on paying it down a couple of years and then forgetting about it and letting it pay itself off.  In the mean time the government underwrites our mort to the tune of 33 - 38% (tax bracket).  If that changes we will develop an alt plan.  

While the mort takes care of itself, we will be saving a few extra dollars.  Once I am retired, our goal is to live like "Away-we-go" sitting back without any major bills living on our pensions debt free in a paid off suburban home on two lifetime State retirements.    

Beverley


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## DeniseM (Jul 14, 2009)

Right now we have no debts except for our mortgage and we are making double payments to have it paid off in 6 years when I turn 58 - and then we'll both retire.  Yeah, the interest rate is only 4.25%, but considering what we lost in the stock market in the last year, I'd rather pay it off!

I know some people would take that extra payment and invest it, and don't get me wrong, we have investments too, but with the current economic conditions,   I would rather be debt free when we retire.


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## Beverley (Jul 14, 2009)

I'm with you ... retire debt free.  That is the way to go.

Beverley


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## BevL (Jul 14, 2009)

We're working hard for that as well.


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## Elan (Jul 14, 2009)

I think it's pretty obvious that as one moves toward retirement, the objective becomes capital preservation, not growth.  By all means anyone that is looking at living on a fixed income near term should be trying to rid themselves of debt.  I have a quite a few more years before I get to that point, so if we're headed toward a hyper-inflationary period (which seems likely given the way the gov'ts $$ printing presses have been running), I'd be unwise to use my savings to pay off my house.  As I said previously, it's a multivariate equation, and one of the variables is age and/or proximity to retirement.


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## rapmarks (Jul 15, 2009)

I guess that is the crux of the question I was posting.  Is it better to retire as near to debt free as possible, or better to have a long term mortgage?  
Last year, FEMA deemed our subdivision a flood plain, never had been before.  Those with mortgages have to buy the insurance, at least $600 extra a year.  Most without mortgages are not buying it.  Most of the retired people in the subdivision have no mortgages, as they sold a house and bought here after retirement.


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## Rose Pink (Jul 15, 2009)

Some people think it is unwise to have your money tied up in equity when you could be investing or spending it on a grander lifestyle.   

What happens if you are unable to pay back the mortgage loan?  (Illness, loss of income, falling home prices)

Some say they rest easier being debt-free.  I am one of those.  I don't like risk.

I think it is a personality issue as much as it is a mathematical one.


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## BevL (Jul 15, 2009)

For me personally, it's not strictly an investment strategy question.  And for me personally, paying off our home will be personally satisfying for myself and my husband.  

Although we also put as much money as we can away for retirement, the sense of accomplishment at paying off our mortgage is a big factor in the question.


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## Egret1986 (Jul 15, 2009)

*Indeed!  Very satisfying!*



BevL said:


> For me personally, it's not strictly an investment strategy question.  And for me personally, paying off our home will be personally satisfying for myself and my husband.
> 
> Although we also put as much money as we can away for retirement, the sense of accomplishment at paying off our mortgage is a big factor in the question.



Truly a sense of accomplishment! I can't wait to experience that!


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## Htoo0 (Jul 15, 2009)

It certainly frees up some money each month. (Which we're investing while prices are down [we hope ]).  Should we have been investing more long ago rather than paying down the mortgage? Maybe, but truthfully we have an IRA, 401K's, and some other thing with the state, and overall, we really haven't gotten the kind of returns consistently high enough to offset the interest on our mortgage. One of our financial advisers didn't believe us but again, when he ran the numbers he agreed we could very well be right even though it went against conventional wisdom. Of course if we were smart enough to pick the right investments all the time, time the market consistently and all that then our strategy would be really dumb. (And congratulations on those who have done very well with their investments, I know it happens, it just didn't seem to ever happen to us.   )


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## GadgetRick (Jul 16, 2009)

rapmarks said:


> I guess that is the crux of the question I was posting.  Is it better to retire as near to debt free as possible, or better to have a long term mortgage?
> Last year, FEMA deemed our subdivision a flood plain, never had been before.  Those with mortgages have to buy the insurance, at least $600 extra a year.  Most without mortgages are not buying it.  Most of the retired people in the subdivision have no mortgages, as they sold a house and bought here after retirement.



When you put it that way, as long as you can do it, pay it down. The less debt when retired the better. When you're retired you're, typically, on a fixed income. Your property taxes will increase each year (usually) and other costs will increase annually so you may find yourself in a squeeze at some point down the road.

If something drastic happens, you can always sell the house quickly (with no mortgage on it) if you price it correctly.


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## Big Matt (Jul 16, 2009)

I've spent my entire career in the mortgage and mortgage securities industry so I know a lot about this topic, the math, the good advice and bad.

My take is that without question, you are better off not having debt.  Your money is yours to do with what you please after you have no debt.  

You are also free to move whenever you want without worry about whether you are "under water" on your loan.  You can also rent out the property.  

I'll be about 48 or 49 when my mortgage is paid off, and I plan on investing every penny that I would have paid in P&I in other things.  By the time I'm done working at 60, that money will probably be enough to buy a second home with cash if I choose.  I could have also had a 30 year mortgage that I'd still be paying well into my 60s.  I think the decision is pretty simple.



Rose Pink said:


> Some people think it is unwise to have your money tied up in equity when you could be investing or spending it on a grander lifestyle.
> 
> What happens if you are unable to pay back the mortgage loan?  (Illness, loss of income, falling home prices)
> 
> ...


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## JeffW (Jul 16, 2009)

Big Matt said:


> ...My take is that without question, you are better off not having debt.  Your money is yours to do with what you please after you have no debt...




Of course, all else being equal, "not having debt" is better.  I didn't think that was the question though.  I thought it was more like, "I have $30k in money market funds, earning 3%.  Is is better to leave it there (providing ready access to cash), or should I take $25k of it to pay down my 6% mortgage (reducing my debt)?"  

Myself, I could easily pay off my remaining home equity (mortgage refinance) loan.  But that would take a significant dent out of my cash reserves, something in an uncertain environment, I'm not sure is the best thing.  Having a paid off house does nothing for me if I need to put on a new roof or have some other big expense I don't want to finance (since no way is that going to be at the ~5% my H/E loan is at).  

I'm not a financial expert, but I really think it's perhaps more about the spread:  what interest your cash can earn, vs how much you'd save by using it to pay off loans.  As a reverse example, I used to do a lot of "0% transfer checks" from credit card companies.  On the cost side, it was no interest, max $50-$75 balance transfer fee.  On the gain side, I could put that money into a M/M that paid 4%-5%.  On $10k-$20k, you easily made enough interest to offset the fee.  
Now though, the interest rate is maybe 3%, and most credit card companies have gotten rid of a max transfer fee, instead it's often a flat 3% of the transfer fee.  The spread beween what I gain, and what it costs, is basically zero, making it a horrible proposition.

Back to mortages. For me, interest rate on savings around 3%, interest rate on loan less than 5%, not enough spread to make paying off attractive.  Now, if I had a mortgage that was 7%-8% (because I was too lazy to refinance when rates were low), then that's enough difference that it's probably worth doing.

Jeff


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## Beverley (Jul 16, 2009)

JeffW said:


> Of course, all else being equal, "not having debt" is better.  I didn't think that was the question though.  I thought it was more like, "I have $30k in money market funds, earning 3%.  Is is better to leave it there (providing ready access to cash), or should I take $25k of it to pay down my 6% mortgage (reducing my debt)?"
> 
> Myself, I could easily pay off my remaining home equity (mortgage refinance) loan.  But that would take a significant dent out of my cash reserves, something in an uncertain environment, I'm not sure is the best thing.  Having a paid off house does nothing for me if I need to put on a new roof or have some other big expense I don't want to finance (since no way is that going to be at the ~5% my H/E loan is at).
> 
> ...



Good point.  Well put.

Beverley


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## Elan (Jul 16, 2009)

JeffW said:


> Of course, all else being equal, "not having debt" is better.  I didn't think that was the question though.  I thought it was more like, "I have $30k in money market funds, earning 3%.  Is is better to leave it there (providing ready access to cash), or should I take $25k of it to pay down my 6% mortgage (reducing my debt)?"
> 
> Myself, I could easily pay off my remaining home equity (mortgage refinance) loan.  But that would take a significant dent out of my cash reserves, something in an uncertain environment, I'm not sure is the best thing.  Having a paid off house does nothing for me if I need to put on a new roof or have some other big expense I don't want to finance (since no way is that going to be at the ~5% my H/E loan is at).
> 
> ...



  Couldn't have said it better!

  I am in a similar position.  I _could_ pay off my house, and I certainly can appreciate the "sense of accomplishment" of doing so.  But I also get a sense of security knowing that I could live 10+ years on my savings if I lost my job.  I'm not sure how much value one places on that, but in these uncertain times, for me it's immeasurable -- worth far more to me than having no mortgage.  I think the implication that it's "risky" to not pay off a mortgage if one's capable, is a mischaracterization.  In fact, just as strong of argument could be made in the other direction, again dependent upon individual circumstances.


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## Big Matt (Jul 16, 2009)

I was commenting on Rose Pink's post and not the original post.  I was agreeing with his/her statement about living debt free and not having to worry about the risk.

I understand the math and why you may want to play the spread.  

Nobody ever mentions home price appreciation in these calculations, but it is there.  Homes have historically gone up an average of about 5.4% annually over the last 80 years and it makes a nice investment choice.  The past several years show why you can't rely on a huge price run up (2002-2006) without a drop (2006-2009).




JeffW said:


> Of course, all else being equal, "not having debt" is better.  I didn't think that was the question though.  I thought it was more like, "I have $30k in money market funds, earning 3%.  Is is better to leave it there (providing ready access to cash), or should I take $25k of it to pay down my 6% mortgage (reducing my debt)?"
> 
> Myself, I could easily pay off my remaining home equity (mortgage refinance) loan.  But that would take a significant dent out of my cash reserves, something in an uncertain environment, I'm not sure is the best thing.  Having a paid off house does nothing for me if I need to put on a new roof or have some other big expense I don't want to finance (since no way is that going to be at the ~5% my H/E loan is at).
> 
> ...


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## Danburg (Jul 17, 2009)

Well, I've got one of those 80/20 mortgages, and my "first" mortgage was about 353K and the "second" mortgage was $92K (I live outside DC, where the prices were incredibly inflated).  My "first" mortgage (Countrywide) was taken over by BofA.  I asked about refinancing my home, and I'll be able to do that with an appraisal (my home depreciated about 100K in the real estast bust) to 125% of the market value after August 1st, using the Stimulus Package.  The problem is, I've got to get the Mother May I from the "second" mortgage company (National City), and they are going to charge a $100 subordination fee for an approval for that (you don't pay if it's not approved).  I asked about combining the two mortgages under the stimulus plan - nope, not allowed by the law.  I asked about refinancing the "second" mortgage (it has a balloon payment) - again, NO because they don't make those types of loans anymore.  I pay a little more each month on my first mortgage, and I pay about $250 more each month on the second mortgage, and every time I pay off another bill (cars, only, acquired with my husband of two years), I put the extra cash towards that second mortgage.  My current interest rate is 6.5%.

Any ideas of how I can combine the two mortgages and get rid of that balloon payment?  It comes due in 8 years.  Been in the house (and the mortgage) for 2 years.

C'mon you financial wizards, help me out here.


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## lanalee (Jul 17, 2009)

A year ago, we took out a Homeowner's Accelerator Loan.  It was the best thing we could ever have done!  Our mortgage is going down significantly each month and our spending habits haven't changed at all.

Basically every penny we earn is applied to the principal of the mortgage.  When we need money for every day expenses, we simply "borrow" it back.  It's a simple concept, but it really works!

This loan type if very common in Australia - but it's not for everybody.  You have to have discipline, and earn more money than you spend each month on a consistent basis.

You can read about it here:
High speed mortgage payoff

.


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## GadgetRick (Jul 18, 2009)

Danburg said:


> Well, I've got one of those 80/20 mortgages, and my "first" mortgage was about 353K and the "second" mortgage was $92K (I live outside DC, where the prices were incredibly inflated).  My "first" mortgage (Countrywide) was taken over by BofA.  I asked about refinancing my home, and I'll be able to do that with an appraisal (my home depreciated about 100K in the real estast bust) to 125% of the market value after August 1st, using the Stimulus Package.  The problem is, I've got to get the Mother May I from the "second" mortgage company (National City), and they are going to charge a $100 subordination fee for an approval for that (you don't pay if it's not approved).  I asked about combining the two mortgages under the stimulus plan - nope, not allowed by the law.  I asked about refinancing the "second" mortgage (it has a balloon payment) - again, NO because they don't make those types of loans anymore.  I pay a little more each month on my first mortgage, and I pay about $250 more each month on the second mortgage, and every time I pay off another bill (cars, only, acquired with my husband of two years), I put the extra cash towards that second mortgage.  My current interest rate is 6.5%.
> 
> Any ideas of how I can combine the two mortgages and get rid of that balloon payment?  It comes due in 8 years.  Been in the house (and the mortgage) for 2 years.
> 
> C'mon you financial wizards, help me out here.


Unfortunately, at the moment, you're not going to be able to combine both mortgages. You're lacking the equity needed in order to do this at the moment--like so many other people I speak with.

Yeah, the government came out with these programs, however, like everything else they've done to try and, "help," us, it's not really helping the people who truly need the help. Helping big business for sure but not the PEOPLE. But I digress...

Sorry for the hijack.


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## TerriJ (Jul 18, 2009)

I agree with several posts; living without debt is the best option when possible.  We should have our mortgage paid off by the end of next year and I can't wait.  I will be 51 at the time.  I just wish I had a better focus on this earlier.  At the time we were building a household it was almost ingrained in you to borrow, borrow, borrow and I can see now that it does not have to be that way.


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## Egret1986 (Jul 18, 2009)

*That's awesome!*



TerriJ said:


> I agree with several posts; living without debt is the best option when possible.  We should have our mortgage paid off by the end of next year and I can't wait.  I will be 51 at the time.  I just wish I had a better focus on this earlier.  At the time we were building a household it was almost ingrained in you to borrow, borrow, borrow and I can see now that it does not have to be that way.



I'll be 51 next month.  I wish I could say that my mortgage will be paid off.

Congratulations!!!   You obviously had some focus going on (and sometimes one has to borrow to get where they're going).


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## TerriJ (Jul 18, 2009)

Thank you.  Circumstances helped us a lot, we were young parents, now kids are grown and on their own, which makes a huge difference, as all parents know.  I also have followed the philosophies of Dave Ramsey, which has also helped.


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## Talent312 (Jul 19, 2009)

TerriJ said:


> I agree with several posts; living without debt is the best option when possible.  We should have our mortgage paid off by the end of next year and I can't wait.  I will be 51 at the time...



We have enuff money in various pots to pay off both our mortgage and car loan, but it'd take a serious chunk out of our retirement savings.  In theory, it'd save us a substantial amount of interest (4.75% and 3.75%, respectively).  But in my mind, these uncertain times, I'd rather have a stash to fall back on, should the need arise.


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## Egret1986 (Jul 19, 2009)

*It definitely gives one a better sense of security.*



Talent312 said:


> We have enuff money in various pots to pay off both our mortgage and car loan, but it'd take a serious chunk out of our retirement savings.  In theory, it'd save us a substantial amount of interest (4.75% and 3.75%, respectively).  But in my mind, these uncertain times, I'd rather have a stash to fall back on, should the need arise.



Yeah, I've got the various pots also.  If those pots were to overflow, I'd pay off the house, but I don't see that happening.   Currently, they are doing a low simmer with the economy.


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