• filter:

Pay Off 0% Loans

  • Text Only
  • Search this Topic »
Voting History
rated:
New to this forum so please forgive me for probably a previously posted topic. Nevertheless, here's my situation/question:

I'm being advised to re-fi my house with a cash out mortgage of 4.125% 0 points to cover my existing mortgage of $140K (7-year ARM at 3.375% that I'm 4 years into), my car loan with a balance of $18K at 0.9% 50 months remaining, and two smaller loans totaling $8,500 at 0% with 24 months remaining. I have enough cash in my checking/savings to pay off the car and the two small loans but it would reduce those accounts substantially. Thinking I might use my cash to pay off the two smaller loans and do the refi to cover the mortgage and the car.

Theory then is to take the freed up cash and invest in something (ETF's??) with a history of 8-11%. Sound reasonable?

Thanks,

Dave

Member Summary
Most Recent Posts
You don't sound a day over 40!

scripta (Jul. 24, 2017 @ 5:09p) |

He's 46.

Bend3r (Jul. 24, 2017 @ 5:31p) |

Well, that last post kind of put a "stopper" on things, didn't it?

fw9999 (Jul. 27, 2017 @ 5:36p) |

Staff Summary
Thanks for visiting FatWallet.com. Join for free to remove this ad.

rated:
daveboilermaker said:   New to this forum so please forgive me for probably a previously posted topic. Nevertheless, here's my situation/question:

I'm being advised to re-fi my house with a cash out mortgage of 4.125% 0 points to cover my existing mortgage of $140K (7-year ARM at 3.375% that I'm 4 years into), my car loan with a balance of $18K at 0.9% 50 months remaining, and two smaller loans totaling $8,500 at 0% with 24 months remaining. I have enough cash in my checking/savings to pay off the car and the two small loans but it would reduce those accounts substantially. Thinking I might use my cash to pay off the two smaller loans and do the refi to cover the mortgage and the car.

Theory then is to take the freed up cash and invest in something (ETF's??) with a history of 8-11%. Sound reasonable?

Thanks,

Dave

  You are asking if you should borrow at 4.125% and invest in the market for a potential 8-11% return. Very risky IMO. Dont do it.

That said, who is advising you to refi a 0% and 0.9% loan into a 4.125% HELOC (plus transaction costs). I bet it is someone who will profit from this refi transaction. Dont take any financial advise from them.

rated:
Yeah I don't know why you'd want to cash out refi a mortgage at 4.125% to pay off loans at 0%. That doesn't make a ton of sense.

Are you struggling to pay your bills and spending more than you earn? Thats the only situation where I think it might make sense to consolidate debt and lower your payments.

rated:
jerosen said:   Yeah I don't know why you'd want to cash out refi a mortgage at 4.125% to pay off loans at 0%. That doesn't make a ton of sense.

 

  sure it does, the interest of the former is deductible, the latter isn't

 

rated:
rufflesinc said:   
jerosen said:   Yeah I don't know why you'd want to cash out refi a mortgage at 4.125% to pay off loans at 0%. That doesn't make a ton of sense.

 

  sure it does, the interest of the former is deductible, the latter isn't

 

  
you should put in a when you're joking
 

rated:
It's a financial advisor. He says the money would serve me better in an ETF than using it to pay these loans.

rated:
Nope, not struggling at all to pay bills. I make and save good money but the advisor simply thinks my money could do better than paying off these loans.

rated:
daveboilermaker said:   the advisor simply thinks my money could do better

ending up in his pocket instead of yours. Ditch the guy. His crystal ball doesn't work any better than yours.
  

rated:
Find another advisor. Preferably not recommended by your current one. This one looks for his interests not yours. How does it ever make sense for OP to replace a 0% or 0.9% loan by a 4.125% loan?

If you want to invest in EFTs, you do NOT want to pay off the 0% and 0.9% loans. If you pay those loans off from the cash out refi, you'll have $26.5K less to invest. That makes no sense.

As far as investing, by doing refi, you're also guaranteed to lose the 0.75% extra interest on the total balance of your loan ($140K) by moving from a 3.375% to 4.125% APR (~$1050k per year extra interest paid). Plus of course the interest on the cashed out amount (say $50K).

Assuming EFTs on the $50K earn 6.2%/yr (which is anything but certain), that'll earn you $3.1K/yr. You're gonna pay $2050 interest on the $50K plus the $1050 listed above for higher APR on current balance). So ignoring tax considerations (extra tax deduction from mortgage interest but getting taxed on EFT gains), you break even if EFT returns 6.2% after expenses. Of course, this is not a risk-adjusted wash since losses in interest are guaranteed and market returns are anything but.

To illustrate how bad paying off the car and small loans, redo the calculation with the same $50K cash out in which you only have $23.5K ($50K-$26.5K loans pay off) for investing. Break even returns become about 13%!

rated:
OP - What pert of BAD IDEA is unclear?

rated:
So your financial advisor is recommending that you borrow money at 4.125% (tax deductible, possibly) to invest in something that may earn 8-11% (taxable I'm assuming)?  

Is this person an actual CFP or licensed at all?  What types of fees are they planning to charge you for their advice?

After evaluating the situation as a whole, if you feel they are providing advice that is against their requirement to act as a fiduciary, please feel free to file a complaint at
https://www.sec.gov/oiea/Complaint.html

rated:
Thanks everyone for your advice. Pretty much what I expected as I told the advisor I have a hard time getting past the paying off the 0% loans (and even the 0.9% one). His fees are a straight 1.9% of my total investments with them.

rated:
bassmanben said:   So your financial advisor is recommending that you borrow money at 4.125% (tax deductible, possibly) to invest in something that may earn 8-11% (taxable I'm assuming)?  
  That's not a bad trade by itself.  4% is fixed and 8%(plus inflation) is long term historical averages - so it's a nearly 3:1 arbitrage.  If OP's 60yrs old it wouldn't make sense due to short term risks, but if ~30yrs old.....

The parts that don't add up is the cash out refinance to pay off ~0% loans and raise interest rate from existing mortgage.  And the adviser is probably suggesting putting the funds into a managed portfolio with high fees going to the adviser and poor investments.
edit: hadn't seen the 1.9% fees.  Ouch!  You're not a "doctor" by chance?

rated:
daveboilermaker said:   ... His fees are a straight 1.9% of my total investments with them.
  Ditch him. That is really expensive and he gives bad advice.
If you are not sure where to invest your savings, get a Target date fund (Vanguard and Fidelity are good choices) or look up 3 or 4 fund lazy portfolios at bogleheads.

rated:
The advisor is saying mutual funds are not the way to keep my portfolio. He says to go into annuities and ETF's. And I'm 67.

rated:
With him skimming 1.9% off the top, it's no surprise he wants you to park every available cent with him. Don't waste another second on this useless, expensive crook. Run away.

P.S. I bet he gets a great commission on the annuities he's recommending also, and that they aren't great.

rated:
daveboilermaker said:   Thanks everyone for your advice. Pretty much what I expected as I told the advisor I have a hard time getting past the paying off the 0% loans (and even the 0.9% one). His fees are a straight 1.9% of my total investments with them.

Holy crud. Run away now.

rated:
daveboilermaker said:   The advisor is saying mutual funds are not the way to keep my portfolio. He says to go into annuities and ETF's. And I'm 67.
Most tar get retirement funds are exchange traded with very low expense ratios.  If he's telling you not to buy vanguard funds because mutual funds are bad, he doesn't know what he's talking about.   

rated:
 RUN Dave.....RUN!

rated:
Bend3r said:   
bassmanben said:   So your financial advisor is recommending that you borrow money at 4.125% (tax deductible, possibly) to invest in something that may earn 8-11% (taxable I'm assuming)?  
  That's not a bad trade by itself.  4% is fixed and 8%(plus inflation) is long term historical averages - so it's a nearly 3:1 arbitrage.  If OP's 60yrs old it wouldn't make sense due to short term risks, but if ~30yrs old.....

The parts that don't add up is the cash out refinance to pay off ~0% loans and raise interest rate from existing mortgage.  And the adviser is probably suggesting putting the funds into a managed portfolio with high fees going to the adviser and poor investments.
edit: hadn't seen the 1.9% fees.  Ouch!  You're not a "doctor" by chance?

  Problem is its not a riskless arbitrage, and the OP is still responsible for making payments on the loan.  Also, the OP's tax situation affects the potential deduction from the interest being charged, and he needs continuous cash flow to pay off the loan (which cannot be ascertained from the details given).  Its not a cut and dried situation and the FA's duty is to evaluate the entire financial picture before making a recommendation.  1.9% is pretty much on the upper end of AUM fees that I've seen (let's say I work for a regulatory agency, and I evaluate these specific situations in my day to day work).

I think the FA is definitely pushing the envelope on his fiduciary duty based upon the risk factors of the OP, and a complaint may be warranted based upon what I've read so far.

To the OP: you may also want to look up your advisor on the IAPD database to see if he has any history of this type of behavior as well.
https://www.adviserinfo.sec.gov/
 

rated:
daveboilermaker said:   It's a financial advisor. He says the money would serve me better in an ETF than using it to pay these loans.
  
If he's so sure, tell your financial advisor to guarantee you 5% returns on your investment and anything above that he can keep.  If he says yes, let me know cause I'd like to be smoking the same stuff he is.

rated:
I looked up the firm on your link, bassmanben. They are legit. I'm thinking I might just send them a small chunk of my retirement money I have with another firm and watch how it works for a year or so. Speedracer714, I like your strategy and if I was back in Woodstock, I'd smoke it too.

rated:
The average annuity charges you a premium to give you an income stream because you're too dumb to manage your own money.

The average financial advisor charges you a premium to give you investment advice because you're too dumb to manage your own money.

So you're going to pay someone a premium to tell you to pay someone a premium because you're too dumb to manage your own money?

rated:
daveboilermaker said:   It's a financial advisor. He says the money would serve me better in an ETF than using it to pay these loans.
  wow. the advisor is for sure advising his retirement plans....hey look I found a dave the boiler maker that is now gonna make my retirement home's boilers free to me and on top of it he will pay the utilities...wink wink...I found a dumb dave boiler maker. Pun aside, Listen to this...when you borrow the money (going by this new convoluted scheme) someone is going to profit off of that transaction - it's definitely NOT YOU. But what you are left with is, that money invested in whatever ETF...there is zero guarantee that you will profit off of this. There is a risk that you may loose.

rated:
daveboilermaker said:   Thanks everyone for your advice. Pretty much what I expected as I told the advisor I have a hard time getting past the paying off the 0% loans (and even the 0.9% one). His fees are a straight 1.9% of my total investments with them.
 

  
daveboilermaker said:   The advisor is saying mutual funds are not the way to keep my portfolio. He says to go into annuities and ETF's. And I'm 67.
1. 1.9% fee for "managing" your portfolio
2. At 67, your portfolio needs to be more conservative. 8-11% returns in the long run are possible but carry considerable risk; This is particularly important for a 67 year old who does not have time to ride out a long-term decline in stock prices.
3. Annuities: Another good way to get money into the FA's pocket. Depending on your overall financial situation/risk tolerance, the only thing that might make sense is a single pay immediate annuity. Most other annuities are likely going to only help line the FA's pocket.

To repeat what has been said, RUN away from this FA.

rated:
daveboilermaker said:   The advisor is saying mutual funds are not the way to keep my portfolio. He says to go into annuities and ETF's. And I'm 67.
Wow. I cringed at the 1.9% skimmed off the top for the ETF, but annuities?  With some annuities, the first-year commission that goes to the "adviser" can make 1.9% seem like chump change!  Annuity salespeople have quite often told prospective customers "don't worry about those commissions - they'll be taken out of the picture before you ever even see your investment returns - so, no problem!"  And they may not even tell you what these percentages are, unless you press hard.  (I'm absolutely not joking about that - we've been told that more than once.) 

Far better if you read up on how to determine your (and your family's) retirement needs, and your risk tolerance.  You'll then be in a position to create a diversified portfolio consisting of some low-cost mutual funds, ETFs, etc..

One more thing - you may have heard stories about how people who held indexed annuities with "floors" were "saved" from severe market losses in 2008 - 2009.  This is kinda', partially true.   Good for them, bad for you or anyone else currently considering annuities.  Those policies are no longer available.  In the policies that are available today, the insurance companies have significantly changed the playing field to protect themselves to a much greater degree.


 

rated:
Holy crap. So explain to me again why regulating the behavior of the financial industry is bad?

rated:
Within limits - it's not bad.  Above those limits - it's not good.
Kind of like that old Neil Young song (Jackson Browne also sang it) - "It's such a fine line - I hate to see it go".
Of course, they were singing about something else....
 
 

rated:
ganda said:   Holy crap. So explain to me again why regulating the behavior of the financial industry is bad?
  because free market and capitalism

rated:
daveboilermaker said:   I'm thinking I might just send them a small chunk of my retirement money I have with another firm and watch how it works for a year or so. 
 


Please at least consult with a different advisor first.  Even if you only give him a small chunk, the fees/commission he takes guarantees HIS profit and guarantees YOU absolutely nothing.

From personal experience, it's hard to admit to yourself that this person is playing you.  "But he's friendly, he knows what he's doing, he knows more than I do..."  All of these types of thoughts will work against you.  

Focus on one cold hard fact - he's telling you to pay off 0% loans with money that would come at a 4.125% cost.  Even new math can't make that work to a point it constitutes good advice.

Resist the temptation to take the easy route.  Nobody will care about your retirement security as much as you will.

rated:
While I completely agree with all of the advice above (RUN from your "advisor" -- he's not working for your best interest and charges you way more than he deserves; learn to manage your money), I need to address something that hasn't been addressed yet:
daveboilermaker said:   I'm being advised to re-fi my house with a cash out mortgage of 4.125% 0 points to cover my existing mortgage of $140K (7-year ARM at 3.375% that I'm 4 years into)
You should have refinanced shortly before the election, when 30-yr FIXED mortgage rate was 3.375%. You're taking a huge risk with the ARM, because rates are most likely going to be higher when it resets.

Cash-out refinance is more expensive than without cash-out. The no cash-out rate right now are closer to 3.875% (no fees, no points). "0 points" does not mean there are no fees -- what you want is something where the lender credit exceeds any lender origination fees.

rated:
ganda said:   Holy crap. So explain to me again why regulating the behavior of the financial industry is bad?

I think some regulation is absolutely necessary.  

The problem with the recent controversial regulation was that it wasn't clear and set up a lot of stuff for opinion and interpretation.  An example is: rules like "don't charge too much" without defining what "too much" is.  What is too much?  A safe thing to do would be to charge less than average.  If everyone did that, the average would keep dropping until they make nothing.  That can't be it.  Then what is it?  One can only guess.  

rated:
I'll give you much better investment advice and I only charge 1.8% of total investments.

rated:
riznick said:   
ganda said:   Holy crap. So explain to me again why regulating the behavior of the financial industry is bad?

I think some regulation is absolutely necessary.  

The problem with the recent controversial regulation was that it wasn't clear and set up a lot of stuff for opinion and interpretation.  An example is: rules like "don't charge too much" without defining what "too much" is.  What is too much?  A safe thing to do would be to charge less than average.  If everyone did that, the average would keep dropping until they make nothing.  That can't be it.  Then what is it?  One can only guess.  

What federal regulation says, "don't charge too much"? Citation, please. 

rated:

rated:
samko said:   
riznick said:   
ganda said:   Holy crap. So explain to me again why regulating the behavior of the financial industry is bad?

I think some regulation is absolutely necessary.  

The problem with the recent controversial regulation was that it wasn't clear and set up a lot of stuff for opinion and interpretation.  An example is: rules like "don't charge too much" without defining what "too much" is.  What is too much?  A safe thing to do would be to charge less than average.  If everyone did that, the average would keep dropping until they make nothing.  That can't be it.  Then what is it?  One can only guess.  

What federal regulation says, "don't charge too much"? Citation, please. 

  
It's part of the DOL fiduciary rule.  You can google it.  "DOL Fiduciary Rule Reasonable Compensation"
https://www.google.com/search?q=DOL%20fiduciary%20rule%20reasona...

rated:
riznick said:   
samko said:   
riznick said:   
ganda said:   Holy crap. So explain to me again why regulating the behavior of the financial industry is bad?

I think some regulation is absolutely necessary.  

The problem with the recent controversial regulation was that it wasn't clear and set up a lot of stuff for opinion and interpretation.  An example is: rules like "don't charge too much" without defining what "too much" is.  What is too much?  A safe thing to do would be to charge less than average.  If everyone did that, the average would keep dropping until they make nothing.  That can't be it.  Then what is it?  One can only guess.  

What federal regulation says, "don't charge too much"? Citation, please. 

  
It's part of the DOL fiduciary rule.  You can google it.  "DOL Fiduciary Rule Reasonable Compensation"
https://www.google.com/search?q=DOL%20fiduciary%20rule%20reasonable%20compensation

  I had googled, "don't charge too much" and didn't come up with anything useful. 

"Reasonable Compensation" has some precedent. If you are the owner of a business you have to give yourself a "reasonable compensation" and expenses must be "ordinary and necessary." Though these laws are murky, they have been on the books for a very long time and though they might be argued about, they still exist and will be enforced in court. We have Congress and Courts to decide on these matters. Do you propose doing away with all laws that have gray areas? 

rated:
daveboilermaker said:   The advisor is saying mutual funds are not the way to keep my portfolio. He says to go into annuities and ETF's. And I'm 67.
  The vast majority of EFTs are managed mutual funds.  MOST annuities are a form of mutual fund with the diversified investments, take out commissions first, investing less than you think they are. Many have heavy surrender fees for the first 7 to 15 years on top of expensive management fees. Borrowing money to do any of this is CRAZY.
Make sure you have an emergency fund outside of this guy.  At least six months expenses and more is a better idea at our age. There are places if you read the find print that you can have up to 5% FDIC insured on funds safely that are not locked up and without advisor fees.  BUT you need to study so YOU UNDERSTAND what you are doing and never borrow to fund these.

If it matters, I am age 70.

rated:
JW10 said:   
daveboilermaker said:   The advisor is saying mutual funds are not the way to keep my portfolio. He says to go into annuities and ETF's. And I'm 67.
  The vast majority of EFTs are managed mutual funds.  MOST annuities are a form of mutual fund with the diversified investments, take out commissions first, investing less than you think they are. Many have heavy surrender fees for the first 7 to 15 years on top of expensive management fees. Borrowing money to do any of this is CRAZY.
...

If it matters, I am age 70.


  •   Age 70!  You gotta be in the top decile if not top (whatever the word is for 1/20th-cile) at FWF... although we're all getting older everyday... 
  • Absolutely agree on the comment about borrowing for funding any of the stuff the "adviser" mentioned.  Bad idea.
  • Absolutely agree on the comment about annuities, high fees associated with them, surrender charges, etc.  It is almost always a bad idea unless you really can't understand other options, don't have the self-control, etc
  • WRT debt in general, just a devil's advocate / contrarian view to add...  I would be pleased as punch to die with a zillion dollar debt.  I'm not talking about leaving my heirs or the state holding the bag, that is just wrong for someone like me.  What I'm talking about is paying zero, 1%, 2%, 3% on money while I'm making more than that on pork bellies or tulip bulbs (sorry, sarcasm mixed with truth there...) If I were the OP, I would be fine doing a refi to a low fixed rate 20 or 30 year mortgage in this situation if he is going to stay in the house long term.  At his age and apparent level of investment knowledge, I agree with other posters here, run, don't walk away from this "adviser" and DO NOT BORROW MONEY TO PUT IN HIS ETFs &  ANNUITIES.  

I can sleep very well at night with my last bullet.  Some can't.  For them, I encourage them to pay down their debt quickly and in that way enjoy life more.  

Skipping 4 Messages...
rated:
Well, that last post kind of put a "stopper" on things, didn't it?

  • Quick Reply:  Have something quick to contribute? Just reply below and you're done! hide Quick Reply
     
    Click here for full-featured reply.


Disclaimer: By providing links to other sites, FatWallet.com does not guarantee, approve or endorse the information or products available at these sites, nor does a link indicate any association with or endorsement by the linked site to FatWallet.com.

Thanks for visiting FatWallet.com. Join for free to remove this ad.

While FatWallet makes every effort to post correct information, offers are subject to change without notice.
Some exclusions may apply based upon merchant policies.
© 1999-2017