Time To Refinance Or Get A Loan

Actually it’s a little too late, but better late than never.

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.


Frugal at My 1st Million At 33 .com

My Market Based Solution To The Housing Market Mess

I think few people realize that America/the world is facing the biggest financial storm ever, and how dangerous it is for investing in stocks before a full implosion. The housing-induced credit crisis has gone far beyond anyone can potentially control, probably not even the Fed.

Reading over so many current/future proposals from politicians and bloggers, I have my own thoughts in this. For sure, there simply isn’t a solution without pain. But there can certainly be solutions that are more fair and less pain.

One of the most fair and easiest way to help propping up the housing market is to subsidize all the buying or holding cost for primary residences. Instead of helping on the sell-side directly, the government can help the buy-side. Of course, the subsidy will indirectly go into sellers. But the solution is market-based.

Why is this a fair solution? For sellers, there is simply no direct bailout. For anyone who chooses to buy, the buying decision is done on the open market where everyone else is competing on the same ground with subsidy, and existing real estate investors will also be helped with a more stable housing price. For any renters who choose not to buy and take up the subsidy, their decision is solely of their own based upon their evaluation of the current housing market and personal circumstances.

What kind of subsidy will make sense? The easiest way is certainly done through mortgage interest reduction or tax deduction. The tax deduction cannot be limited by the amount of adjusted gross income, and has to be actually beneficial on top of the existing standard deductions. By reducing the overall housing cost, government will encourage more of it, and prop up the housing market.

Since 65% to 70% of the Americans are home owners, most of this housing aid will effectively become a tax cut for middle class. I suggest that 50% of the total amount of both property tax and mortgage interest from primary residence can be used as a tax credit (rather than tax deduction in the itemized section). Here are some examples of the housing aid scenarios, with loan interest at 6%:

1. $700K home in California with 20% down for someone with tax bracket at 28%:
Because loan amount is $560K, the interest is $42K a year, and the additional tax subsidy amount will be roughly (50% – 28%) * $42K / 12 months = $616 a month. This monthly subsidy will effectively lower the interest rate from 6% ($3357) to 4.25% ($2755). That will be a tremendous stimulus.

2. $500K home with 20% down for someone with tax bracket at 15%:
The additional tax subsidy amount will be roughly (50% – 15%) * $500K * (1-20%) * 6.00% / 12 months = $700 a month. This monthly subsidy will effectively lower the interest rate from 6% ($1852 payment) to 3% ($1686 payment). This is an even better deal for lower income people.

Effectively speaking, this tax cut will target middle-class home owners specifically. Using the assumption of a median home value of $240K, and an average tax bracket of 15%, this tax aid comes to be about $4032 dollar per family household, 110 million US households, with 70% home owners, it will be about $300 billion annually. I’m not going to re-do my numbers here, but probably instead of 50%, one could go for 40% of the interests as tax credit. This will adjust this bill from $300 billion to about $214 billion. I hesitate to go to much lower, simply because in California, where most of the housing problems are, you have to be at 25% to 28% tax bracket to afford the homes. Since one is already getting existing tax benefits at 25% to 28% through itemized deduction, the 40% as tax credit will only give 15% to 12% additional benefit.

Bottomline, this printing of tax money will be truly the best way of distributing the helicopter money, since it goes to the homeowners directly without discrimination, AND it is also tax-progressive. The rich who has a bigger loan do get a lot more, but only because they are paying a lot more for their home. But the middle class will not be left out at all, and will enjoy the biggest piece of the tax reduction. This will effectively encourage home purchase/consumption, and props up housing market. The solution is also market-based without ANY bailouts to those people who abuse the mortgage markets.

In respect to Republican tax position, this is a market-based solution. In respect to Democrat tax position, this is a tax aid for most of their incumbents. In respect to stock markets and US economy from Keynesian economics, this is a huge positive. Tax cuts stimulate economy. On the other hand, money from direct taxpayer bailouts go into the pockets of these fraudulent bankers and homeowners, and continue to encourage moral hazards and speculation.

Frugal at 1stMillionAt33.com

Networth Review: My Year To Date Performance

Usually I do a monthly review on my networth, but I have been too busy to do this (and anything else). So I will just keep this short as a quick update.

So what has happened to my net worth (from Feb 14 closing to Dec 31st 2007 closing prices)? Bad news first.

First, let me say that my home value has gone down significantly (10% to 20%). That has not been reflected in my net worth page. When I get some time, I will start to mark it to market, and smooth out the losses in several chunks.

Now the really bad news, even worse than my home value going down is that my company options have pretty much gone into nothing. I’ve suffered close to 90+% in this category. Year-to-date (since Jan 1st) the value of my company holdings have gone down by 59.4%.

My net worth has gone down by 7.43% (without counting the dropping home value) mainly because of the huge loss in my company stock.

My own investment however has fared much better. My total stock portfolio has gone down by 3.44% (about 30% of which is contributed by my money manager), while including cash, my cash+stock portfolio has gone down by 1.86%. This compared to a gain of 3.6% in HUI index, 10.9% loss in OIH, 8.4% loss in XLE, 7.6% loss in SPY, 14.2% loss in QQQQ. I guess a loss of 3.44% is probably satisfactory, given that I have incurred some small trading losses, plus some hefty losses in junior mining stocks. Certainly, my cash+stock portfolio compared to the overall market is doing pretty okay, since my loss is less than 2%.

Unfortunately, I simply have not taken enough hedges against my company and real estate holdings. Those positions are so out-sized that I’m usually afraid of taking a big bet. My inaction has certainly caused my overall net worth to suffer tremendously.

In any case, what’s gone is gone. I’m pretty sure that given enough time, I can make those money back. It’s just going to cost me 10 to 15 extra years of my working life, yak!

I was going to do a year-end review for 2007, but it’s probably too late to be meaningful. I know my portfolio was up about 16%, but my net worth was pretty much flat, due to a huge loss of 50+% in my company stock options. I’ve made up quite a bit of those losses through investment gain and savings for the entire year. However, if I count from the peak, I’ve only made up some 40% of the losses in company stock options.

Actually, come to think of it, I probably should start account for the capital gain taxes that I need to pay on my investment gain. I haven’t counted those, but the amount of capital gain tax that will be due is getting so big that it’s actually going to affect my net worth. I would never imagine that this is going to be an issue when I started logging my net worth on this blog (only 2 years ago). For now, I’m just going to leave it at that. I just have too much that I need to take care and I don’t have time yet to account for everything in the last details.