I owe, I owe, So It's Off to Work I Go….

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I owe, I owe, So It’s Off to Work I Go….

Another great post title 🙂

It appears that all things Jeff-related are on a sky-high trajectory; but, when it comes to debt and liabilities is that a good thing: when is ‘good debt’ too much debt? I’m keen to hear your thoughts – as, I’m sure, is Jeff …

Jeff’s post also shows how far our expectations have changed when we consider 8% ‘expensive’ debt – and, compared to today’s rates, it is!


…well, that’s not the only reason.

I’ve never been a big debtor.  At least not in terms of credit card debt nor in terms of total numbers of creditors that I owe money to.

Presently I have three liabilities which I’ve discussed at length here on 7m7y.

Home: $500,861 at 5.5% with 29 yrs and 11 months to go.  🙂

Rental Property: $235,380 at 5.375% with 25 yrs left to go.

Short term bridge loan (secured by one of my vehicles): $17,650 @ 8% with four years and 11 months left to go.

Total debts: $754,802  Ok, so maybe that is a lot of debt.  I just don’t consider it bad debt.

My plans are to continue to pay only the minimums on the home and rental mortgages.  I do not intend to pay either down early, although I’ve been very intrigued by some of the equity accelerator programs I’ve seen advertised recently.  But I digress and that flies in the face of Adrian’s advice.

As for the short term bridge loan, I do intend to tackle that one in short order.  That loan was necessary to force my recent home purchase through.  The property was a foreclosure and required more cash than I had on hand in a rapid manner.  This loan will be paid in full no later than May 2009 at which point I’ll be back to only having debt that is associated with real estate.

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I looked into those early mortgage payoff programs early on too Jeff and What I figured out is that regardless of whether or not you juggle a heloc and do, pay it when the moon is full or not, or anything, all it does is forces you to make one extra payment or so per year, instead of the usual 12 payments, hence, you pay it off early. And, you pay the company a fee for the service, or the software(that isn’t necessary either).

It’s not worth it. I mean of course with what we’ve learned here so far, we know now why it’s not wise to send an penny extra to your mortgage, so I certainly wouldn’t pay someone else money to make me pay my mortgage off early and make it take longer for me to reach my number by my date 😉

Good luck!

I don’t plan to pursue the equity acceleration programs, so this point is academic, but I’m still trying to understand the math in those programs.

Having it come out to only an extra payment each year doesn’t seem like all that great a deal to me. Especially with the fees that are involved.

The only reason I was considering it was as a tool to speed up equity accumulation in the homes so that it could be pulled out faster. However, the more I think about it, it’s probably easier to just stash the cash you’d use for this program and then invest it directly.

What happens if they change the rate on the bridge loan? is the bridge loan fixed?

@ MoneyMonk – Good question!

… to which I’ll add:

How flexible is the loan (i.e. can you put money in/out like a HELOC)? Can you pay it off early, Jeff?

@ Money – They can’t change the loan, it’s 5yrs fixed at 8%. Although “never say never,” right? 🙂

@ Adrian – It’s not flexible and not like a HELOC. It’s a secured collateral loan which means its basically a car loan at a higher rate.

The only difference between this loan and one you’d get on a new (or used car) is that I already owned the car free and clear and had to pay a higher interest rate to get the loan.

I just walked into my credit union with the pink slip and said “How much will you loan me on this vehicle?” They told me $14K, after which I politely asked for $18K and they said, “Sure.”

This wasn’t my preferred method of quick funding, but it was fast and cheaper than using my credit card for a cash advance.

I’m sure there are some of our readers that think I’m nuts. I mean, who buys a house by taking the title of their car to “Pink Slips R Us?”

This was not a decision made lightly. I don’t normally fund my purchases with loans on my vehicles.

However, when I ran the numbers on the loan it was only going to cost me $600 to make use of the bank’s $18K. Remember, this money was used to help make the house deal go through.

As a quick recap, the home is (was) a foreclosure that I bought for close to $200K less than its value.

Over to you? Would you pay an extra $600 to have an opportunity for $200K?

That seemed like a “no brainer” to me, but maybe I’m foolish.

Oh, and the reason I chose the van was because I couldn’t get as much money from the bank for the boat. 😉

On a foreclosure, I would have expected to pay 25% of the appraised value, not 75%. Particularly since so many appraisals have yet to come down (least I haven’t heard of any, have you?) as the market has been.
Hope it was in immaculate condition, or close to it. And congrats on finding the money to swing it. I think the rates are all good, thinking back to what Adrian said about how rates have changed our way of thinking what is good. 8% used to be good for a house and cars were higher. Never thought of using the pink slip at the credit union to refinance my van- might have been a better way of paying for a new transmission than using the CCs, tho I have managed to finagle better rates so far on the CCs by juggling them.

@Di – I think 25% of appraisal is probably well below reality. Maybe in a different market, but I don’t know.

I’ve never bought a foreclosure before, but I’m having a tough time believing I over paid on this one.

I paid only $30K more than what the home sold for when it was “new” in 2000.

One of the neighbors told me they tried to buy my home as a short sale about 10 months ago. Their offer was $140K MORE than my purchase price. In the end they bought a smaller home in the neighborhood for only $105K more than I paid for my home. 🙂

Whether 25% or 75% is a rule of thumb, I don’t know. Either way, I think I’m in a good position on this one.

Di – I almost forgot. It’s not immaculate, but my realtor told me that as far as foreclosures go, she’s never seen one in as good a condition as this one.

That’s kinda like saying you’ve got the best turd of the bunch. 🙂

The home wasn’t not turn key, but rather was move in acceptable. I have some issues to deal with over time…the carpets should be replaced, and the wood floors will need to be refinished. I’ll also be painting A LOT. But nothing that isn’t cosmetic or easy to handle over time.

Jeff, I think you did great on that house purchase. If I were in your shoes, I would have jumped at the same chance and done exactly what you did.

When the opportunity ship comes cruising in near your boat, even when we ‘think’ we are not ready, sometimes we have to simply jump a little farther out to land in that ship and that’s what you did.

You have a fantastic income and an aggressive saving nature, so making a decision like that is a no brainer for someone like you, who will simply pre-pay that loan off in a couple of months vs. someone who hasn’t mastered there skills with money and would keep living a life of debting.

Congrats on finding a sweet deal, taking action and reaping the rewards! 😉

@ Jeff – I’m with Scott on this one: often it’s enough to find A deal rather than sitting on the sidelines looking for the BEST DEAL.

“As for the short term bridge loan, I do intend to tackle that one in short order … This loan will be paid in full no later than May 2009 at which point I’ll be back to only having debt that is associated with real estate.”

… it sounds to me like all of your loans already ARE associated with real-estate. So the question that I would ask you is: what/when do you intend to invest next?

If nothing is on the radar, then I would compare the after tax benefit of: (a) cash in the bank, (b) pre-paying one of the mortgages, or (c) paying down the ‘pink slip’ loan … my guess is that (c) will give you the best ‘bang for buck’.

However, if you do intend to invest – or start a business, etc. – in the foreseeable future (say, anytime in the next 3 years) then you have to:

i) Think how you are going to finance it when the time comes … it may be best to keep these loans in place, unless you think you can replace one/all with cheaper funds at that time?

ii) Think about where you will keep your cash in the meantime … it has to be somewhere that you can get access to again.

For example, let’s say that you intend to buy a 3rd foreclosure sometime in the next 3 years; you decide that an 8% loan at that point in time will be around ‘market’ … in that case, paying down this loan early (if your loan agreement even allows this) may not be the smartest idea, because then you may not be able to get access to that cash again.

In that case, you may be better off with cash in the bank OR paying down the property with the most equity … one that you are pretty sure that you can refi (or HELOC) when the time comes.

On the other hand, if you feel that the 8% loan will still be expensive in 3 years, then by all means pay it down and hope that you can refi one of the others to buy #3 when the time comes.


@Jeff – Congrats on the great deal. I agree with your move to do a bridge loan to acquire the property. Now that you have all that equity, HELOC it at less than 8% rate and pay off the bridge loan?

@ Scott, Adrian, Mark – Thanks for the votes of confidence. I was beginning to think after our retirement account discussion that I might be the odd man out in this experiment.

I’m trying to change my ways and am rereading Rule #1 while at the same time reading Buffettology. If you liked Rule #1, Buffettology is worth a read as well. It provides more information in some areas and is really rounding out my learning from my first read of Rule #1.

I’m going to switch things up on the investment side. Hopefully before the summer.

@ Jeff – the additional advantage of Mark’s excellent suggestion is that it provides a more flexible way to ‘store’ any excess cash right now, as you can more easily withdraw it later if you need to find a down payment.