On “Valuation of Lots and Raw Land”, IrvineRenter explained in details how the valuation of an investment in raw land would work out. To sum it up, land investment works like a call option on the housing market.

On “Loan Assumption is the Appreciation of the Twenty-Teens“, IrvineRenter gave his best advice (and I concur too) that the best bet in building your home equity is probably by buying with an assumable AND fixed-rate loan. Unfortunately, as far as I know, the only assumable loans these days are FHA loans, which have higher fees in general. Why is that? A good deal to the borrowers is always a bad deal to the lenders. The scarcity of such loans automatically tells you that assumable loans are not good for lenders.

And at last, on “Fundamental Valuation of Houses – Part 1“, IrvineRenter explained in details about the math of home ownership cost. His article almost acts like a companion manual to my online java housing cost calculator. All of the factors that he has mentioned, I have included them in my online housing calculator, plus commute cost difference. But just one caveat, garbage in, garbage out. My calculator is only as good as the validity of your input assumption. If your assumption on the housing parameters such as rent/housing inflation or tax rate, are inaccurate, then the results will be inaccurate as well.

So what’s the buying strategy for the housing market? In case you missed it, it’s using assumable fixed rate loan. On a longer term, I believe that the mortgage rates will be going up. Contrary to all the unscrupulous realtors, the best time to buy real estate is when the mortgage rates are at the highest, not when they’re at the lowest. Lower mortgage rates always cause the housing valuation to expand, while higher mortgage rates will rein in the price. Assuming a forward picture of higher than normal inflation, and mortgage rates trending higher, the inflation force may arrest and balance out the decline caused by higher mortgage rates. Nominal housing prices may stagnate for a decade or even two decades, but inflation-adjusted price will continue to decline. Such picture does not bode well for many participants. The renters will see their rents going up due to general inflation. The new home buyers may still see price declining if the nominal prices have not reached bottom. Worse yet, if the equivalent ownership cost of their home is higher than prevailing rent, then they’re effectively speaking draining any potential savings that they could have built without buying a home. In such picture, the only potential remedy would be to have an assumable fixed-rate loan, so that one could recover the price benefits between future higher mortgage rates and the current lower mortgage rates.

And if you cannot find such loan, make sure you put the least amount of down payment, and borrow as much as you can for 30 years fixed. Forget about adjustable ARM. The only way to short the bond markets and US dollar simultaneously and safely without margin calls is to borrow against your real estate holding.

I definitely thought that things would be worse in the housing markets. Due to various factors that I didn’t forsee, including Obama’s home affordability programs, delays in foreclosure processes by banks, and a dramatic drop in the interest rate curve, things are not terrible as of now. In fact, in 2009, housing markets actually went up (at least in California), sucking in the last bunch of ever-hopeful real estate “investors”. Regardless, numbers won’t lie, and let’s see how the negative amortization or option ARM homebuyers are doing.

Below is a summary from the monthly payment history based on a hypothetical case that I’ve made up for a California home ($500K, 20% down). I think it is pretty representative. You can get the original complete Excel spreadsheet here. All the interest rate data are from X-mortgage. I’m listing both MTA and COFI indexes which are the two most common indexes for option ARM:

Needless to say, an increase of 71% in 5 years will be huge for anyone. Very few family will be able to make it thru a combination of salary increase, second job, and/or having non-working spouse going back to workforce. Unfortunately, refinancing to 30-years loan at today’s 4.75% will not be an option either, since the monthly payment for 30-years is about $2200, the same as the recast option ARM loan, if not more. I originally thought that these people probably would have problems with LTV or loan-to-value ratio. But Obama’s home affordability program has “solved” the LTV problems for these most of these homeowners. The monthly payment issue is still there. One cannot make an unaffordable home in the first place to be affordable.

Looking forward next year, once the home affordability program expires in mid-2010, we will probably get more defaults and walkaways from homes. Due to Bernanke’s cutting of interest rate, and a huge buying program in both treasury and mortgage market, current interest rates are temporarily held down. If the option ARM indexes like MTA and COFI rise up to 3% for example, the monthly adjustable payment will go up by another 25% to 30%. I don’t think the housing markets will recover anytime soon due to this impending supply of homes (from defaults of the option ARM loans).

So what should you do if you are one of the option ARM homeowners? There are many sites & articles that talks about foreclosure options. In my opinion, short sale would be the best choice (if you have this choice), since you won’t be liable for the deficiency judgment, and it will hurt your credit report the least. The second best choice is loan modification, although not many can negotiate a good deal with banks. The rest of the choices such as foreclosures are not ideal, but it’s probably earlier the better under the assumption that it does not affect your job prospects based on a much worse credit report.

Here is some of good sites & articles that I’ve found on foreclosure-related options. Some of the site owners are very helpful, and may be able to provide you with needed advice or services:

• Foreclosure option networtk. Hanna was particularly helpful to me on a couple of nasty legal questions.
• Foreclosure options from MSN
• More info on various foreclosure options from foreclosure university.

1. Case #1: if you are “underwater”, meaning that your loan amount is greater than your home market value, your decisions should be dependent on your loan type.
   1. Case #1A: if your loan was a PURCHASE loan, meaning that you have never refinanced your loan since your home purchase, in many states such as California, where there are laws protecting home buyers from loss of incomes or jobs, you should probably walk away from your home. In such cases, you should be protected by state laws, and you should not be responsible for lenders’ loss. The laws however cannot protect you if you have lied about your income and assets on your loan application. Please make sure that you consult lawyers for specific details, because I cannot be responsible for your legal troubles. Please NOTE that if you have a second loan, but the second loan was a purchase loan which you’ve probably paid PMI insurance on, you should still be okay. However, the same does NOT apply to home equity or piggy-back loan. Home equity loans are recourse loans, and it means that banks can theoretically or legally hunt you down, extract all of your current assets and future salaries, until you file bankruptcy.
   2. Case #1B: if you have more than one loan, and the second loan is home equity loan, you should probably try a short sale first, and then try doing a loan modification. The short sale is better in the sense that your credit is just partially ruined. The banks need to take their deserved losses. If you cannot do a short sale, you should try to modify your loan thru Obama’s home affordability program. With this method, I believe that your credit profile stays the same. However, you’re stuck with your own losses, banks get off the hook, and taxpayers may be stuck with your losses if later down the road, you walk away.

   For both of Case #1A or #1B, you may want to stop or slow down on paying your first loan or the purchase loan, so that you can force bank to come to the negotiation table with you. However, you will be risking a real foreclosure. Also, in case #1B, you should continue paying down your home equity loan regularly because it’s a recourse loan.

   3. Case #1C: if you have refinanced your home loans, then you’re out of luck. Legally, you’re 100% responsible for your loans. Nevertheless, you should try contacting banks for short sales, and doing loan modifications, like in Case #1B. Both will be to your advantages, if they go through.
2. Case #2: if you are at about the same the “water level”, meaning that your loan amount is about the same as your home market value, you should in general try to refinance, and/or short sale if you decide that you don’t want to keep your home.
   1. Case #2A: If the prevailing rent is still higher than your home cost: mortgage payment after tax benefits, plus any property tax, or potential interest credits, then you could try wait out the downturn (although I think the downturn will be much longer than anyone expects). You should at least try refinancing and see if you can lower your monthly cost. The Obama’s home affordability program will allow refinancing of up to 105% of your home value, if your mortgages are owned by Fannie Mae or Freddie Mac. You can check that at the home affordability page.
   2. Case #2B: If the prevailing rent is lower than your home cost, I think you should try to do a short sale, and forget about doing any refinance. Your short sale will be easier to go through bankers. And this way, it will prevent you from suffering further home losses down the road.
3. Case #3: if you still have substantial equities in your home, meaning that your loan amount is smaller than your home value, you are financially sound. I would advise to do refinancing through the normal channels, cash out any equities that you can, and hold on to your cash in 5-year US treasury for another two to three years for better opportunities. The best refinancing time is either now or possibly in Oct/Nov if stock markets take a dive at that time.

Here is the Obama’s home affordability page, in case you don’t know about it. If you follow thru the links, you can find out how to verify that your loans are owned by Fannie Mae or Freddie Mac.

And for potential new home buyers, my advice stay the same: just stay put and wait for year 2012. Your patience should be rewarded (in my opinion). That $10,000 home buying tax credit cannot come close to the amount that you may gain through further home value erosion.

I cannot understand who is selling the bonds, along with $US rising (just a little bit). This is truly a weird combination. Where is the money going?

The only sensible scenario that I can come up with is that Fed is lending all the financial institutions treasury bonds on its book in exchange of toxic mortgage bonds. The financial institutions are selling the treasury bonds in exchange for cash right away to resolve their credit crunch to satisfy cash demands from customers or depositors. Since all the transactions are domestic, $US exchange rate is not affected much. In effect, Fed is indirectly creating these new cash through these financial institutions, and supporting the solvency and liquidity of the financial institutions.

Still, eventually (or immediately) these new cash will find a new home. Apparently, they have blown up the commodity prices.

Fed is obviously trying to prevent housing deflation. Apparently, they have opted to save the greedy bankers and brokerage houses, and dumped the homeowners. To bring down the mortgage rates, Fed should actually buy up treasury bonds and/or mortgage bonds. Reducing the supply of bonds will increase its price, and therefore reduce the yields. Of course, such monetization effort will result in the immediate increase of cash circulation.

I guess Mish’s deflationary thesis has been right on. Cash is in demand. Not bonds, not stocks, not gold (yet) either. Before cash becomes trash, cash is still king. But I don’t think Fed has any ways out of this mess, besides trashing US dollar (or cash).

The recent bond market actions have not been good at all. Whenever stock market falls, bonds tend to rise. But NOT this time. Stocks fell, and bonds fell too. While it is still too early to tell based on just a few days of trading, the trends seemed to be broken already.

Here is the chart for the 30-year treasury bond:

As you can see above, long term interest rates have risen. And with the recent tumbling of stock markets, the yields break new high instead of falling back down. Whatever it is I think for the intermediate term, the yields are probably going up. And that probably means more selling in the bond markets, which probably means that $US will continue to face pressure in the future.

If you want to refinance, probably you should look to lock your interest rates whenever the rates dip again (if it dips at all). I am also referring people to my own mortgage broker, so that you can get $100 cash back in addition to matching the really good rates at www.absolutemortgageco.com. If you are interested in getting a loan, you can email me, and I can forward you the details on the broker.

Certainly I think the best time to refi or getting a loan may be behind us. The implication from the rising interest rates for housing markets is obviously negative.

I will be doing a refinance. My previous loan is a zero-cost loan, meaning that it’s a no-point no-fee nothing-out-of-my-pocket and nothing-added-to-my-loan-balance loan. I paid a slightly higher interest rate, but I think it was worth it.

Anybody who wants to refinance or get a loan along with me, just send me an email at 1stMillionAt33#gmail.com (replace # by @). I think I can collectively bargain a cashback of about $50 to $100 for everyone with the mortgage brokers.

If you are interested, please MAKE SURE you put the subject in your email as “home loan for XXX state”, where xxx is the state that you live in. In the email, please put your first name, a phone number, the loan amount, and the loan terms that you are interested in. If your credit is not that good, please state so. If you know your loan-to-value (LTV) ratio is more than 70%, please state your LTV also. Obviously, I will only give this information to one single mortgage broker/company, and not anyone else. Your privacy will be guarded to my best effort. For the state of California, I already have several mortgage companies in mind. But I can’t promise anything yet for people outside of California.

I think stock markets may go for another dive in March, which means that the mortgage interest rates will be low again. You should be in time to catch and lock in that rate.

Regards.

Frugal at My 1st Million At 33 .com

In any case, the banks are desperately trying to keep the mortgage losses under cover by whatever means. This freeze of ARM rates will definitely postpone the reckoning day. I originally expect a heavy down year in 2008/2009 for real estate prices. Now I am less sure of such. However, home prices definitely won’t be going up in 2008/2009. Lending standards for new loans are still tight.

One thing that I’m most curious of on the details of the freezing plan is that on all these ARMs, there are both payment and interest rates. When the payment rate is less than the interest rate, the loan is negatively amortized. I really wonder whether they plan to freeze both payment and interest rates, or just the payment rate. My initial guess would be that it would simply the payment rate that will be frozen. In that case, no one involved will take an actual accounting loss. The interest money will continue to pile up, despite the fact that those interest money may never get paid by the subprime homeowners. Obviously, if given long enough time (and a good amount of inflation), eventually home value will exceed and allow the paid off of these interest money. However, for these mortgage investors, they are still at the losing end of the stick. The inflation will eat away any of their recovery of the interest money.

If anyone knows somebody who get into such plan, please ask him and let me know that whether both interest and payment rates are frozen. Thanks in advance.

I assume that such modified loans will still be un-transactionable, or illiquid. No one in their right mind will buy such products. But keeping these loans away from foreclosure will prevent the banks to liquidate the homes and assigned the final value to the loan at loss. And so the fairy tales will go on, and the losses can be slowly written off. Banks can then “properly” meet the capital requirement ratio from FDIC.

Certainly, somebody inquired him from reading my blog. Because I was asked by the fund manager Andrew Lahde to removed the proprietary PDF file, even though I had every good intention of promoting his business.

Well, I’m sure he and his clients made out like a bandit. 10X return in one year. That’s probably good enough for the next 10 year.

Were you that lucky? I guess rich does get richer, and I just needed to be a little richer to be in the league to participate and play.

1. Work load on modifying the loan term is additional on a shrinking workforce in mortgage industry.
2. Most of the loans have been sold to different investors, and to modify one loan, you must get all the investors to agree to a loss on the mortgage bond (while homeowners get the gain).
3. Who is going to want to take the loss?

Congress has also passed a law to help out these “poor” homeowners (not sure if all the renters want to cry out FOUL). The forgiven debt by lenders to the homeowners from the “short sale” of the home, normally counts as a taxable ordinary income, will no longer be counted as income, and therefore, tax will not need to be paid.

However, I don’t think Wallstreet and Congress understand the magnitude of the credit crunch. In one sentence, the biggest credit and housing bubble in the human history has BURSTED. It just can’t be reversed anymore. In the capitalism (which tends to generate BIG up and BIG down), the mortgage bond market went crazily up, and now it is simply imploding. Many of the loan products can no longer exist, or at least exist in the same prevalence as before, simply because such loans cannot be sold to investors anymore, who are sitting on a huge loss, and are the main losers in this credit/housing implosion. Definitely homeowners are not the biggest losers. Mortgage bond investors are.

The following quote from FDIC head shows the ignorance of our government officials:

…most likely affect loans that have a low starter rate for two or three years and reset to much higher rates. Many of those loans are adjusting now and have helped push a record number of homeowners into the foreclosure process.

“Keep it at the starter rate,” Ms. Bair said at the Clayton Annual Investor Conference. “Convert it into a fixed rate. Make it permanent. And get on with it.”

Ms. Bair and other federal regulators likely couldn’t force servicers to make these changes, but her message might be interpreted as a warning to loan servicers about potential legislation, said Howard Glaser, an industry consultant based in Washington.

[Boldface, my emphasis]

Now, tell me, if the loan is kept at the starter rate, who is going to keep that loan on their book, since obviously such loans cannot be sold anymore most likely. Ms. Bair, do you want to volunteer and put up your own money to invest in these speculating homeowners?

At the end of the day, it is still about money. Only those loans that make sense to be modified with a minimal loss will be modified. And if the government make laws to force loan term conversion, expect more capital flight out of this increasingly capital-unfriendly country. If I were the investors, I will sell everything when the government force me to eat a substantial losses on my mortgage bond investment and hand it over to the homeowners.

But given the precedence in the oil industry where government repeatedly threaten big oil companies for additional taxes, I suppose that such scenario is definitely a possibility.

Again chances of judicial foreclosures are “usually” small. But you just don’t know what a badly hurt banker will do with a mounting losses on his back, especially with more and more home loan defaults. If it means that it will reduce his losses, he might as well create an off-the-book company to specially deal with lengthy foreclosure process with more money recovered.

I just checked out the mortgage rates offered by the two cheapest mortgage sources that I relied on (only for quoting purpose):
Mtgcapital.com: 15 years fixed at 6.000%, 30 years fixed at 6.375%. Lender’s fee is $1250.
Absolute Mortgage: 15 years fixed at 6.125%, 30 years fixed at 6.375%. Lender’s fee is $399, and both are zero points.
The above rate is based on ^TNX or 10 year treasury at 4.77%, and ^TYX or 30 year treasury at 4.92%.

You won’t find out the effects of increased risk premium + decreased competitions if you don’t have a history. Fortunately, I had a previous post with the exact information that I need:

at Mortgage Capital.com:
1. 30 years fixed: 5.75% APR.
2. 15 years fixed: 5.5% APR.

Both are zero points, $1250 lender’s fee.

at Absolute Mortgage:
1. 30 years fixed: 5.75% APR.
2. 15 years fixed: 5.5% APR.

Both are 0.125 points, $399 lender’s fee (lower interest and/or lower fees). When you make a loan as big as 680K (exceeding conventional conforming loan of $417K already), the 0.125 point will cost you more fees compared to MtgCapital. Therefore, Absolute Mortgage should be cheaper in all cases.

The above rates are quoted when 10 year treasury yield was at 4.509% and 30 year treasury was at 4.65%

So let’s see how much more expensive you need to pay now. From mtgcapital.com, it appears that every 0.50 point will give you 1/8 lower in interest rate. I’m going to use that to adjust the interest rates wherever applicable. The 10 year treasury was 0.261% lower and 30 year treasury was 0.27% lower.

So at mtgcapital.com, the 15 years fixed is now (6.00% – 5.5% – 0.261%) = 0.239% more expensive. The 30 years fixed is now (6.375% – 5.75% – 0.27%) = 0.355% more expensive.

At absolute mortgage, the 15 years fixed is now (6.125% – 5.5% – 0.261% – 1/8% * 0.125/0.5) = 0.333% more expensive. The 30 years fixed is now (6.375% – 5.75% – 0.27% – 1/8% * 0.125/0.5) = 0.352% more expensive.

Conclusion: you and I will be paying about 0.25% to 0.35% more in interest rate for the same loan as before. On the 30 years, the risk premium is higher now also because there is a yield curve steepening effect. If Fed starts to cut interest rates, it may pin down the lower end of the curve, but the longer end (15 and 30 years fixed) may or may not come down in relative terms. Until the inflation appears subdued, the longer end will not come down as much.

Good luck to anyone who wants to get a loan, or refinance their ARM time bomb.

While everyone on Wallstreet is hoping that the subprime loans will recover by delaying the inevitable and postponing the revaluation, you just cannot squeeze a person without sufficient income and without asset and hope to get your money back. You can lock these liars on loans up or threaten them, but no money means no money. Now that housing market is stagnant or falling, the Ponzi scheme of refinancing can no longer continue. With more mortgage resets coming later this year after September, more “subprime” loan supply will come if they can materialize at all.

Eventually someone will be stuck with losses. Make sure it’s not you.

In fact, I have never really fully caught up with the idea of FICO score. Scoring your credit worthiness based on your past payment history? To me, the capacity to repay is equally if not more important than the past payment history. Without considering the capacity to repay is simply asking for trouble. These days I can’t believe the credit lines that credit card companies are giving out. It is almost an invitation to convert your FICO score to junk by running up tremendous debt. If I simply add up all the credit lines that I have, it probably amounts to more than $50,000 dollars. But I don’t think my income level can afford such a high debt.

In any case, you can rent out your credit cards at www.addatradeline.com and www.seasonedtradelines.com if you are interested. But I won’t be renting out mine for sure.

A coincidence on the location of addatradeline.com and many other major subprime lenders all in Orange county, California?? Looks to me that it’s the perfect combination to scam the bank legally.

If you cannot afford to buy a home, then you should not buy to drive up the prices further. Such bailouts are unethical and unfair. It creates moral hazards where speculation is encouraged and prudence is thrown out of window (well, actually this is probably not the first time nor will be the last time). American society has been getting more speculative and materialistic as a result. Being a diligent saver or conservative often gets you nowhere. These subprime borrowers and lenders who have taken excessive risks are not punished but rather rewarded by big gains before blow-up, and then (plan/hope to be) compensated by taxpayers’ money later. In the name of “saving home”, government officials are trying to please these constituents and sounding politically correct.

In all these blowups, government officials even dare to make the investors legally responsible for the entire mess. These investors who provided all the money to make everything possible, will be the biggest losers among all. Once the homes go into default and foreclosure with negative equity, the bond investors will not only lose interest but also principal. And now Chairman (of House Financial Services Committee) Barney Frank, D-Mass., and Spencer Bachus, R-Ala., want to hold bond investors legally responsible. If such legislation passes, it will dramatically make the mortgage-back bonds to be a lot more expensive, making the homes be even less affordable.

Out of all politician in the USA I like Ron Paul the best. He is the only one who sticks to the original spirit of US constitution and can stop the government getting bigger and bigger in increasing the burden on everyone else in the private sector. I will definitely vote for him when/if he runs for president in 2008.

1. Home builders’ confidence falls to 16 years low.

2. Notice of defaults in California up by 23% from last quarter, and up by 148% from last year.

3. New Century goes bankrupt, slimming down from 6000+ employees down to 100+ people, right at Irvine, Orange county, the center of the mortgage fraud so to speak (Impac, Ameriquest, Resmae, Option One are all here).

4. California new home sales down 37% on an annual basis. Slowest total March sale since 1997. You got to remember one thing that if the absolute number of sale is worst than 1997, it is actually much worse than 1997. In these 10 years, California has been growing population at about 1.5% annually. Normalizing the real estate sale by population, the sale would actually be 14% worse.

I have been saying that the bottom of the bubble zone of real estate won’t come until after 2009/2010, which I have arrived by adding 5 years (before negative ARM gets fully amortized) to 2004/2005, plus 1 extra year of time delay for a home to go through the entire foreclosure process. Jim Puplava said in his online radio that he expects the bottom to come at about mid-2008. I personally think that real estate market is still in the denial stage, where sellers are not willing to drop price. That attitude will really take time to change, until the home owner/mortgage holders get burned through monthly negative cashflow for an extended period like 1 to 2 years. If the amount of price drop is more than 2 years worth of the negative cashflow, sellers are more likely to hold out than cutting price.

I didn’t need a chart to convince myself, but above (click to enlarge) is the mortgage resetting “map” going forward. As you can see, the subprime mortgages are not flushed out yet and coming to reset in volume later this year. The next bigger wave is the 5-year period from the loan origination, which will come in 2010 through 2012 for the option ARM. If you use 9 to 12 months for the foreclosure process, the real estate market is likely to have a small break in 2010 before getting hit by mortgage reset again.

I think that the only way to stop the housing deflation is through inflation of everything else. I expect the real inflation (not the one published by government) to stay above normal for an extended period.

I created the following Excel spreadsheet (click here to download the excel) to calculate the money you pay for point after adjusting for tax and inflation:

Pretty much any number you enter from the available lenders, you won’t break even after at least 2 years. However, for 7+ years, it will make sense to pay points.

I hope you find it useful.

Well, if you are purchasing/refinancing, it doesn’t hurt to check Absolute Mortgage out.

Here is the comparison of two internet mortgage companies that I’ve found to be the most economical:
Click here for the current rate at Mortgage Capital.com:

Both are zero points, $1250 lender’s fee.

Click here for the current rate at Absolute Mortgage:

Both are 0.125 points, $399 lender’s fee (lower interest and/or lower fees). When you make a loan as big as 680K (exceeding conventional conforming loan of $417K already), the 0.125 point will cost you more fees compared to MtgCapital. Therefore, Absolute Mortgage should be cheaper in all cases.

The above rates are quoted when 10 year treasury yield was at 4.509% and 30 year treasury was at 4.65%

Best luck. And if you can find a better rate, or you can beat this fixed rate on a zero point, fee ~ $1000 (and preferably less than $700), please don’t hesitate to leave a comment here.

Posted by “Frugal” at My 1st Million At 33.com

The matrix (in A1) makes total sense to me. If I am a mortgage investor, the mortgage interest rate should be dependent on the risk that I would take, which could be roughly measured by FICO & LTV. Although I don’t really understand the difference between A1, A2, B1, B2 tables, the more important message to take home here is that if your lender is not giving you a better interest rate on a lower LTV, your case is probably adding to his or her bottomline. For a FICO of 700, there is a 0.30% interest rate difference between 80% LTV and 65% LTV. A 0.30% on the mortgage rate can translate into a lot of “current” money.

By the way, this matrix is from the recently bankrupt ResMae on 2/13/07. This subprime lender was asked to swallow back $300 million loans purchased by Merril Lynch. Time after time, lenders just don’t realize that you cannot make a deadbeat to pay up when he just doesn’t have any money. You can sue and win, but you will simply lose more money in legal fees.

On the last note, I don’t know whether these lenders who use this matrix has ever thought of the “monetary value” of a FICO score. Anything that you can “quantify” (like a FICO score) you can fake too. Between walking away from a upside down loan worth of $100K and a perfect FICO score, which one would you choose? Despite my strong ethical sense, when $100K increases to one million dollar, I think I may walk away too. If I do that, I would have just “quantified” the monetary value of my ethics/FICO score, worth of a million dollar unpaid debt.

In reality, you can almost always put a monetary value to everything (sorry to be a little cynical here). But of course, I’m glad that my ethics won’t put myself in this situation of owing 1 million today’s dollar of mortgage in the first place.

I do hope that the “monetary value” of my ethics will grow bigger as I grow. But I do know for a fact that when given a real choice, the “monetary value” of people’s ethics is smaller than both the creditor or the debtor thinks. At least, I think this applies to me.

Fremont General just announced that they will not do piggyback loans (80/20). It’s another proof of LTV is a better safeguard than FICO scores.

There are very opinionated people on both sides of this issue. People who are investment gurus in either real estate or stock markets, or unflinching bulls will always advise not to pay down any of your mortgage balance. The more conservative people will always advise to pay down your mortgage and become debt-free if you can. I’m in the more conservative camp, but in general, I will also advise you NOT to pay down your mortgage.

A mortgage is essentially a SHORT position in bond market. Instead of buying a bond and receiving interests on it, you are paying interests on a bond. In respect to Modern Portfolio Theory, your amount of mortgage should count directly against any of your bond allocation. Let’s say if you have $100K in bond, and you have $100K in mortgage, it’s roughly the same as if you don’t have any position in bonds. What’s different in this scenario from having no mortgage and bond at all is that having a mortgage is a leverage action. It is a leverage using your real estate holding. A leverage expands your total size of portfolio using borrowed money.

Given my economic outlook on a heightened inflation going forward, bonds would not be a very good investment (you could read my bond investing series, and my Reasons for Not Investing in Bonds). Certainly, if I don’t like bonds, then SHORTing bonds should be good by default. Therefore, I would advise you NOT to pay down extra for your mortgage in general. Besides, because of inflation, your home is usually your best investment (mainly due to having a mortgage).

However, one thing is obvious. If you have a lot of cash (or bond) that are earning less than your mortgage interest rate, it is obviously a losing deal not to pay down your mortgage. Supposed that you have a mortgage balance that is at 6.25%, and have side cash or bonds lying around earning 5.00%, you are essentially paying an interest expense of 1.25% for having your money in a much more liquid and accessible form. I do believe in the value of having sufficient cash for your emergency needs. But you definitely don’t want to over do it.

I see many financial sites or articles suggesting that one should pay down their debt so that when the economy goes into recession, or deflationary forces are upon us, the house will not go into foreclosure due to miss of the payments. That seemingly makes sense. Except that why would you want to make payments on something that may have a value less than your loan size if housing value also goes down (let’s forget about money ethics for a moment). In a recession, if you could walk away from your loan without triggering deficiency judgment (especially in the event of a job loss), it is probably better for you not to pay down your mortgage so that you could potentially walk away with less loss (and make sure that your money deposits are not at the same bank/institution who owns your mortgage). NOTE: this is just by number-crunching, without any consideration to your long term credit and your own ethics.

Therefore, in both inflation and deflation scenarios, it is very likely that it is better for you NOT to pay down your mortgage. Of course, there are other reasons not related to economy, such as legal reasons and insurance. I will not discuss them here, since they are more obvious than the debate on inflation/deflation.

Does that mean that there is no value of paying down your mortgage? If you can invest in something that has higher return than your mortgage, certainly you should invest. The tough part is to get such return with less risk & volatility. After all, you could have paid something off your mortgage debt. But when your investments don’t work out, your debt obligation still remains as onerous. What one should do is carefully look at the entire picture of one’s net worth and portfolio composition. I will answer the decision between investing and paying down mortgage in a more quantitative way in my future post on Cash Management: Refinance or Accumulate Home Equity?

• Bank of America is providing free online stock trades for any clients who deposit $25,000 dollars, reviving the www.freetrade.com once provided by Ameritrade.
• AlexsCoupons.com providing coupons to over 1000 online stores. It seems to be a quite popular site with quite high alexa ranking. About 7000-10,000 people everyday visit Alex’s Coupons to save thousands of dollars. Furthermore, the site owner recently donate $2000 to Starlight Starbright Children’s Foundation. Quite a honorable deed, and probably not the first time from what I can find.

This compares to Mortgage Capital Associates., providing 30 year fixed at just 0.75% loan point with an okay lender fee of $1250 (was $950 3 years ago, lowest I’ve seen is about $650) at an interest rate of 5.875%. The 15 year fixed is at interest rate of 5.375% of 1.0% loan point.

By the way, paying loan point is usually a stupid idea unless you intend to keep the loan (and not selling your property) for very long time. I’m quoting 1.0% point only because CountryWide by default charges 1.0% point to fatten their pocket while at the same time advertising a seemingly “competitive” rate. Compared to Mortgage Capital, 15 year fixed at CountryWide is 0.625% higher in interest rate (or 11.6% higher), and 30 year fixed is about 0.375% higher (or 6.4% higher). Please do remember that every 1/8 of interest rate worth a LOT more for a longer term loan. That’s the only reason that 30 year fixed seems to have less premium, while in reality, you are probably paying the same 11.6% extra over Mortgage Capital. In terms of actual current dollars (in points), you are probably paying about $5000 for a $300K loan at CountryWide comparing to Mortgage Capital. And all those $5000 goes into CountryWide’s pocket, instead of going towards your retirement or college fund. Maybe they think some 10 (?) hours of loan processing is worth at $500 per hour rate.

You can comparison-shop further at bankrate.com, but do pay attention to the Lender Fee that they will charge (the rest “should” be third-party fee), and sanity-check the customer service experiences at www.bbb.org, and by Google Search with “XXX complaint” or “XXX problem”.

P.S. I personally have not applied to any of the above services. They are merely price quotes, and do not reflect my endorsement to their customer services.

I believe in learning lessons from the economic history. Past is the only thing that we can rely on in the attempt of divining the future. I believe in the historical out-performance of stock markets at , and therefore I have fully expected a lackluster performance of stock market since year 2000. It is my expectation too that housing prices will revert back to the past norm.

The second question that you may ask yourself is that do you really believe that the housing prices in general will fall 50% outright in the terms of nominal prices? If it does happen that way, it will do a big damage to the US economy for sure. What is more likely in my opinion is that the absolute prices will not fall that much, but the inflation-adjusted prices will nevertheless fall fully by 50%. The evidence is in what US Fed has been doing in chart #2, and what they will be doing, and what they don’t want to tell you and me. What does that mean to you and me? It means that the inflation will be higher than usual almost for sure.

If you use 200% as the peak in the chart #1, and assume that it will go back to 100%, then the amount of fall in absolute prices, must be compensated by the amount of inflation. Let’s assume a fall of 25% in the absolute price. In that case, total inflation must be 50% over that period, since 200% * (1-25%) / (1 + 50%) = 100%. How long the housing prices will deflate is hard to say? If the inflation-adjusted price bottoms in 6 years, then the previous numbers are telling you that in the next 6 year, US housing prices on the average fall 25% in absolute prices, but the inflation for the next 6 years will be compounding at 7.0% (to reach a total of 50%). You can use any other sets of number, and crank out a different scenario. But I think housing prices on the average will fall, and inflation rate will be high in general.

Certainly, their intent in all of these is “benign” for the US as a whole and to save all the debtors, whether it’s consumers or US government. When the real inflation-adjusted value of US dollar is reduced, the real value of debt is also reduced. While I don’t know how smooth their operation can be, but historically government’s interventions in the capitalistic system only generated bigger waves of unbalances. The recent lowering of interest rate down to 1% is probably the best example. Yes, US Fed saved the US from any setbacks from a high-tech bubble, by simply creating the biggest housing bubble in the US history. I don’t know where all of these will end, but I think hyper-inflation may be likely towards the end.

So who may be the real losers in all these mess (that are yet to happen)?

I try to look forward 10 years plus. I do know for certain that if we do reach such bottom, I will not be pessimistic at all. At such bottom when I look forward 10 years plus, I will be more optimistic than ever, because after cleaning up, it will be prosperity awaiting for us. History teaches us that things go through cycles instead of a linear development. From excess to shortage, and from shortage back to excess. I try to take the contrarian view to plan and prepare for my future.

P.S. Here is the chart that shows housing market is becoming the US economy. One day if this trend keeps going (when housing reaches 100% of the GDP, wrong, just wasn’t thinking straight) , will everyone become a realtor, and have the illegal immigrants to do all the rest of work, from house cleaning to high-tech R&D, ? Sources taken from www.prudentbear.com.

PS2: Please check out the comment section for some more clarification on “who are the real losers”. Sorry that I didn’t make myself clear.

Most of these kinds of exotic ARMs started in 2002/2003, and really took steam in 2004/2005. The current calm before the big storm is due to the standard 5 year period before these ARM loans get recast into the rest of the 25-years amortization schedule. A recast of option ARM or interest-only loans mean that the payment of the loan is fully re-adjusted without subjecting to any max annual cap increase (usually 7.5%) to make sure the loan will be repaid in the rest of the years in the loan term. Well, like it really matters, if homeowners can just refinance into another option ARM, packaged into securitized “asset”-back bond products, and sold (and hid) in wholesale to another stupid investor who is hungry for “safe” and slightly higher yields.

Here is a partial table of a hypothetical case on option ARM re-payments. The payment shock is shown near the end of the table.

Date	CMT	MTA (%)	Min. Payment	Balance
May-03	1.18	1.5483	1,286.56	399,046.78
Jun-03	1.01	1.4492	1,286.56	399,073.48
Jul-03	1.12	1.3792	1,286.56	399,076.99
Aug-03	1.31	1.3417	1,286.56	399,068.05
Sep-03	1.24	1.3017	1,286.56	399,045.77
Oct-03	1.25	1.2683	1,286.56	399,012.32
Nov-03	1.34	1.2558	1,286.56	398,974.60
Dec-03	1.31	1.2442	1,286.56	398,932.91
Jan-04	1.24	1.2342	1,286.56	398,887.76
Feb-04	1.24	1.2292	1,286.56	398,840.82
Mar-04	1.19	1.2250	1,286.56	398,792.33
Apr-04	1.43	1.2383	1,286.56	398,748.11
May-04	1.78	1.2883	1,383.05	398,623.87
Jun-04	2.12	1.3808	1,383.05	398,529.97
Jul-04	2.10	1.4625	1,383.05	398,462.90
Aug-04	2.02	1.5217	1,383.05	398,415.26
Sep-04	2.12	1.5950	1,383.05	398,391.81
Oct-04	2.23	1.6767	1,383.05	398,395.39
Nov-04	2.50	1.7733	1,383.05	398,431.06
Dec-04	2.67	1.8867	1,383.05	398,504.51
Jan-05	2.86	>2.0217	1,383.05	398,623.06
Feb-05	3.03	2.1708	1,383.05	398,791.58
Mar-05	3.30	2.3467	1,383.05	399,019.22
Apr-05	3.32	2.5042	1,383.05	399,300.14
May-05	3.33	2.6333	1,486.78	399,521.47
Jun-05	3.36	2.7367	1,486.78	399,778.17
Jul-05	3.64	2.8650	1,486.78	400,078.73
Aug-05	3.87	3.0192	1,486.78	400,432.05
Sep-05	3.85	3.1633	1,486.78	400,835.08
Oct-05	style="mso-spacerun: yes"> 4.18	3.3258	1,486.78	401,294.29
Nov-05	4.33	3.4783	1,486.78	401,806.72
Dec-05	4.35	3.6183	1,486.78	402,368.59
Jan-06	4.45	3.7508	1,486.78	402,977.75
Feb-06	4.68	3.8883	1,486.78	403,636.26
Mar-06	4.77	4.0108	1,486.78	404,339.47
Apr-06	4.90	4.1425	1,486.78	405,090.88
May-06	5.00	4.2817	1,598.29	405,781.93
Jun-06	5.16	4.4317	1,598.29	406,527.61
Jul-06	5.22	4.5633	1,598.29	407,322.18
Aug-06	5.25	4.6758	1,598.29	408,159.61
Sep-06	5.25	4.7925	1,598.29	409,041.73
Oct-06	5.25	4.8816	1,598.29	409,959.61
Nov-06	5.25	4.9583	1,598.29	410,909.32
Dec-06	5.25	5.0333	1,598.29	411,890.62
Jan-07	5.25	5.1000	1,598.29	412,900.96
Feb-07	5.25	5.1475	1,598.29	413,934.05
Mar-07	5.25	5.1600	1,598.29	414,978.03
Apr-07	5.25	5.1685	1,598.29	416,031.63
May-07	5.00	5.1760	1,718.16	416,974.69
Jun-07	5.00	5.1620	1,718.16	417,918.91
Jul-07	5.00	5.1473	1,718.16	418,864.04
Aug-07	style="mso-spacerun: yes"> 5.00	5.1338	1,718.16	419,810.49
Sep-07	5.00	5.1215	1,718.16	420,758.67
Oct-07	5.00	5.1104	1,718.16	421,708.95
Nov-07	5.00	5.1003	1,718.16	422,661.71
Dec-07	5.00	5.0911	1,718.16	423,617.25
Jan-08	5.00	5.0827	1,718.16	424,575.90
Feb-08	5.00	5.0751	1,718.16	425,537.92
Mar-08	5.00	5.0682	1,718.16	426,503.56
Apr-08	4.75	5.0620	1,718.16	427,473.07
May-08	4.75	5.0354	3,168.85	426,988.55
Jun-08	4.75	5.0094	3,168.85	426,491.74
Jul-08	4.75	4.9857	3,168.85	425,983.37
Aug-08	4.75	4.9640	3,168.85	425,464.15

Obviously, I don’t think it is likely that anyone can meet such increase in payment, unless their wives go back to work and get high salaries (if not already). The key to whether the homeowners can refi their ways out lies in the credit market in 2008/2009 timeframe. If the lending standard tightens, or the credit market tightens later and force the interest rate spread to get much bigger for lower credit trenches, these homeowners will be looking at only one solution out – sell the home, possibly with a loss, or even come up with additional cash to settle the sale.

Increasingly, these lax lenders are eating their own dirt now. Ever heard of early payment default? How can a mortgage default in 2 or 3 months?! There can be only two reasons: either the loan was a fraud, or the loan shouldn’t be made at all to someone who cannot repay. In either cases, lenders simply have not done their due diligence to check the financial backgrounds of the borrowers. They totally deserved buying back those packaged loans and take losses.

All of the above payment calculations can be found and downloaded in this Excel spreadsheet. The spreadsheet also has the calculation for 3/27 and 5/25 ARM loans for my last article on The Duel of ARM Reset Vs Re-refinancing.

The main reason for me to say this is that through refinancing, it is actually possible to save the homeowners. One of my friends was shopping for mortgage, and the bank was willing to refinance his ARM into another ARM loan at 80% loan-to-value ratio, and another 20% loaned as home equity loan, totalled at 100% LTV. It’s unbelievable how low the lending standards have gone down. I read an article in which the mortgage officer said that anyone who can breathe and can sign their name, can get a mortgage. All of these irresponsible lendings have led to the current overblown housing bubble, and eventually will end badly (unless US government devalue $US to cause inflation to take care of the debt problem). Despite the fact that there are some signs of lending tighting this year both in terms of the regulation advisory and the actual market interest rate, in general lending is still quite lax. With a sufficient home equity to fall back, a successful refinancing deal can be made and save the doomsday of the people in ARM.

Currently, the only bigger ARM problems are the 3-year ARM, since ARM didn’t become very popular until 2002/2003. Supposed that you buy a house of $500K in year 2003 in the state of California. After two years of 15% to 25% of appreciation (possibly more), your property is now worth $780K (25% in 2004, 25% in 2005, 0% in 2006), a $280K gain, or 56% total gain. Assuming that originally, you paid $100K downpay, and took out an ARM loan of $400K.

For a 3/27 or 3-year fixed ARM, the payment will increase from $1686.42 to $2393.54 for an initial interest rate of 3% to 6.25%, or from $1909.66 to $2417.97 for an initial interest rate of 3% to 6.25%. The payment shock is big, about 42% or 27%. Furthermore, because of all the home equity in the house, they can easily refinance (and cash out) into another 3-year or 5-year ARM at an interest rate of about 5.75% right now at a payment of about $2334.29. Assuming that they can somehow fake the income (which is illegal to do) or use low-doc loan, getting approved for a $400 to $650 additional loan should not be a problem. In the extreme case of no-doc cash-out refinance, and using a LTV (Loan-to-value) ratio of 70% (a quite conservative ratio for cash-out refi loan), they can take out about $780K * 70% – $400K = $146K. The refi loan amount will be $546K, with payment of $3186.31 (at 5.75% interest) enough for them to pay out the difference of $1500 to their original payment for 8 years. A truly house ATM machine! The reality is probably anywhere in between the full cash-out, and zero cash-out. As long as the homeowners can get approved or fake through cash-out refinancing process, they are certain to obtain sufficient amount of cash to repay the monthly income difference.

As you can see from the above examples, through refinancing (or re-refinancing most likely), it is possible to delay the ultimate pain by refinancing into a new ARM. This is one of the major reason for arguing that the housing market won’t falling much for another 2 to 3 years in my previous article of Unconventional Strategies in this Housing Market. This is especially true for bubble areas that that have enjoyed substantial appreciations. In my next real estate example, I will look at interest-only and option ARM (negatively amortizing) loans.

For some other views, you can read the followings:

1. Re-refinancing, and putting off mortgage pain. This story from NY Times is no longer free. You can only read a small segment from that link.
2. Will adjustable-rate loans lead to record foreclosures? from USNews.
]]> http://www.1stMillionAt33.com/2006/08/the-duel-of-arm-reset-vs-re-refinancing/feed/ 6 http://www.1stMillionAt33.com/2006/06/a-strategic-trade-in-this-housing-market/ http://www.1stMillionAt33.com/2006/06/a-strategic-trade-in-this-housing-market/#comments Thu, 15 Jun 2006 13:02:01 +0000 Frugal http://www.1stMillionAt33.com/2006/06/a-strategic-trade-in-this-housing-market/ Given the housing market this high, what should the renters do, and what should the home owners do?  Don’t you wonder everyday in life, whether you should sell out to rent for homeowners, or whether you should bite the bullet and buy-in for renters?  Here is what I project for what’s to come in the housing/rental/mortgage market:
1. Near short term in this month or probably less than 30 days window, the 10 & 30 years treasury bond yields may make a temporarily low.  This is the time to refinance and cash-out if you own your house.  I contemplated exactly the same move last October when 10-year bond yields just cracked 4.5%.  I just couldn’t make the move because my cash position was about 25% of my cash+stock porfolio.  Since I didn’t know or didn’t want to invest more of my cash into stock market, I thought getting more cash out of my house will be simply paying useless interest money to banks.
2. Rents may be moving up just as the housing market cools.  This is showing up in yesterday’s CPI figure already.  The owner’s equivalent rent went up by 0.6%, much higher than the rest of the core rate of about 0.2%.  US government is paying for its past sins of tempering the CPI by using rents instead of housing price for calculating the inflation rate.  I project that the rents may be catching up and moving up by a total of some 20% or more in the following 5 years (including this year), averaging probably about 4% to 5% increase annually.  The increase may come at the face of stagnant wage and economic growth.  If you’re a renter, and if it’s possible, I would suggest you to find a place that you like, and lock in your rent for the next 3 to 4 years.  Why 3 to 4 years?  Because in 3 to 4 years, you will be buying your home.  95% of the ARM loans will be recast in 5 years.  Since starting 2003/2004, the ARM loans became popular, adding 5 years to it, gives you 2008/2009.  And that’s 2 to 3 years from now.  Give it 1 extra year for the housing market to fall, I arrived a timeframe of 3/4 years for locking your rent.  How about ARMs in 2005?  I think if those people did 3-year ARM, they will collide with 2003+5 people.  If they did option ARM, then they may “perish” before reaching 2008/2009 due to the rise in the interest rate, or burned by the affordability issues.
3. The big picture going forward is mortgage rates going up, rents going up, and housing prices going down.  The mortgage market is showing increase in the spread to the treasury market already, and further increase may be possible.  From this Washington Post’s article, growth in Fannie Mae and Freddie will be restrained.  What does that mean?  It means LESS money to chase mortgages.  Less demand equals lower price for mortgage bonds, and equals higher rates for mortgages.  I was surprised to see this spread widened so much on 10-year treasury.  Last October, 10-year was at 4.5%, and 15-year mortgage was at 5.125%.  Now 10-year is at 5.0%, but 15-year mortgage is at 6.0%.  I was going to go for 15-year mortgage in last October, but now I will opt 30-year, which is only 0.25% above 15-year mortgage.

So what would be the best moves if you’re a renter, or if you’re a homeowner?

1. For renters: lock in your rents, and save your money for 3 to 4 years later to buy a house.
2. For homeowners with repaying ability: refinance and cash-out your current mortgage into a fixed 30 year mortgage.  Park this cash at a safe place, and you can buy another house in 3 to 4 years using that amount of cash.  At that time, the rental market will catch up somehow.  Renting out your existing home will probably be cash flow breakeven or positive at that time, and the profits will increase along with inflation going forward for the next 26 to 27 years.  And then you can get another house for yourself at a lower price with your refinanced cash for down payment.  Assuming that you can at least breakeven on renting out your current home, you should be able to buy another house, either partially with that loan proceeds at 6.25% (instead of 7.5%?) or financed by your salary.  Got it?  The summary of this strategic move is to borrow NOW for another purchase that is 3 to 4 years later.
3. For other homeowners: Sit tight.  Don’t dream of becoming a millionaire (at today’s dollar) from your home, nor retire upon your piggy-bank house.  I don’t think it’s going to happen.  Just pay down your debts according to the amortization schedule.  And if you have an ARM, refinance it now.  If you can’t afford the refinanced payment, I suggest that you should sell NOW, or you may want to…I don’t really want to share this with you this secret since it’s you who drove up the home prices, but…you should refinance your ARM into another ARM (assuming no pre-payment penalty) which has another 5 years before it recasts.  That way, you won’t collide with the 2008/2009 dumping traffic.  You can postpone your reckoning day until 2006+5=2011.  Unfortunately, the interest rates will surely be higher at that time.  If your income situation doesn’t improve by that time, you will still be a deadbeat.

Of course, you can always sell your home which is the BEST and most simple way of taking advantage of the height of housing market.  But in case you don’t want to go through hassles of moving around, you could consider the above options.

Just my two cents.

P.S. I didn’t expect that when stock market turns around in the last two days, the bond market weakens simultaneously.  Now the interest rates on both 15/30 years mortgage are 1 notch or 1/8 % higher now.  I think 5% yield is probably as low as 10 year treasury bonds will go.

]]> http://www.1stMillionAt33.com/2006/06/a-strategic-trade-in-this-housing-market/feed/ 4 http://www.1stMillionAt33.com/2006/06/faq-on-my-rent-vs-buy-calculator/ http://www.1stMillionAt33.com/2006/06/faq-on-my-rent-vs-buy-calculator/#comments Tue, 06 Jun 2006 09:46:30 +0000 Frugal http://www.1stMillionAt33.com/2006/06/faq-on-my-rent-vs-buy-calculator/ This page will serve as the main page for the Rent vs Buy Calculator for any future update or user questions.  For the most part, you shouldn’t need to read anything from this page, until you get into some very minor details.

Documentation:

1. The following 3 input boxes are co-dependent: Down payment, Down payment %, Loan amount.  Down payment + Loan amount always equals to House price.
2. Marginal fed+state tax bracket is used to calculate the after-tax return from the before tax investing return rate.
3. You should get your Tax benefit average rate on property tax+interest from my tax calculator, plus any additional tax benefits from the state taxes.  The input percentage should be calculated as total tax benefits divided by total amount of the sum of property tax and mortgage interests.
4. All the numbers in the yearly comparison table are ACCUMULATED to that particular year, except Deductibles and House Value columns.
5. The numbers in every column gets increased year after year, using the after-tax investing return whenever applies.
6. The last 5 input fields: Property tax rate, Other property-related tax, Home insurance per Year, Home owner association due per Month, Commute cost difference per Week, will go into the calculation of Other cost column in the yearly comparison table.

Known Problems:

1. You need to use screen capture tools such as SnagIt to print anything for now.
2. Save/Load buttons don’t work (yet).
3. If you use TAB key to goto the next input box, the input field gets changed but the yearly comparison table will not get updated because of the change.  You should press ENTER key once in a while to get the table updated with the latest inputs.
4. You cannot switch between case 1 and case 2 yet, for the yearly table below.  Currently, the table always calculates using the information from case 1.
5. At the end when the mortgage is paid off, the calculator currently has a slight error if the last remaining balance is not exactly zero.  It’s not zero because the mortgage payment is always rounded UP to the nearest cent.  This error is bigger if you put in a non-integer number of years of the loan term.
6. A constant tax benefit average rate is assumed throughout the life of the mortgage.  In reality, this is not true.  Most likely your tax benefit rate will keep decreasing and hit 0% once your itemized deduction is not greater than your standard deduction (which gets indexed to inflation).  Because of this error, the final result is biased towards benefiting the case for Buying.
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