Sail Cruising - Finance or Own Boat?

[FlyMeAway]

Finance, finance, finance -- especially if you can afford the boat outright, and especially if you are going to hold it for a couple of years.

1) Interest rates are still near all-time lows. They basically must go up in the long run. Once they go up, your $200k starts making money. You put it in a near-zero-risk government bond fund, and you're close to even from the alternative of buying the boat outright. This is one thing people don't seem to understand. It looks like you are paying the bank a bunch in interest, but remember that *your* money would be earning interest if you hadn't given it to the bank! Even through the recent financial crisis, it made mathematical sense to finance and put the money into a cheap, exchange-traded mutual fund. In 9 years out of 10, you come out ahead.

2) The mortgage interest is tax deductible. To the extent that you earn any kind of income and pay federal income taxes (while cruising), the interest reduces your tax liability considerably

3) Financing is lower risk and affords greater flexibility. If something happens to the boat, the bank will wait to collect on the insurance money, and you can use your money in the meantime to do something else (like buy a house or pay rent elsewhere). You still have to make the boat payments, but it is the *bank* waiting on the insurance to pay off the principal, not you. If the boat is a total loss and the insurer refuses to pay for some reason, you may be able to negotiate with the bank and not have to ultimately pay off the full amount.

Two caveats:
1) Insurance. Likely to limit your cruising range (at first) and be somewhat expensive. But ask yourself -- if you bought the boat all in cash, with your life savings, would you feel comfortable *not* insuring it? Would you feel comfortable without liability insurance, given the assets you have saved up? I would not

2) You have good credit and can get a low interest rate. If your credit is shot, and the best you can get is 10% -- pay cash.


I can't underscore enough the advantages of financing, and -- provided the caveats are met -- I can't understand why anybody would pay outright in cash. The same goes, actually, for almost anything that one would buy. If interest rates are low enough, financing almost always makes sense over a cash purchase.

[Rocketman]

Originally Posted by FlyMeAway

Finance, finance, finance -- especially if you can afford the boat outright, and especially if you are going to hold it for a couple of years.

1) Interest rates are still near all-time lows. They basically must go up in the long run. Once they go up, your $200k starts making money. You put it in a near-zero-risk government bond fund, and you're close to even from the alternative of buying the boat outright. This is one thing people don't seem to understand. It looks like you are paying the bank a bunch in interest, but remember that *your* money would be earning interest if you hadn't given it to the bank! Even through the recent financial crisis, it made mathematical sense to finance and put the money into a cheap, exchange-traded mutual fund. In 9 years out of 10, you come out ahead.

2) The mortgage interest is tax deductible. To the extent that you earn any kind of income and pay federal income taxes (while cruising), the interest reduces your tax liability considerably

3) Financing is lower risk and affords greater flexibility. If something happens to the boat, the bank will wait to collect on the insurance money, and you can use your money in the meantime to do something else (like buy a house or pay rent elsewhere). You still have to make the boat payments, but it is the *bank* waiting on the insurance to pay off the principal, not you. If the boat is a total loss and the insurer refuses to pay for some reason, you may be able to negotiate with the bank and not have to ultimately pay off the full amount.

Two caveats:
1) Insurance. Likely to limit your cruising range (at first) and be somewhat expensive. But ask yourself -- if you bought the boat all in cash, with your life savings, would you feel comfortable *not* insuring it? Would you feel comfortable without liability insurance, given the assets you have saved up? I would not

2) You have good credit and can get a low interest rate. If your credit is shot, and the best you can get is 10% -- pay cash.


I can't underscore enough the advantages of financing, and -- provided the caveats are met -- I can't understand why anybody would pay outright in cash. The same goes, actually, for almost anything that one would buy. If interest rates are low enough, financing almost always makes sense over a cash purchase.

Flymeaway

This might work for you, and in the perfect world it might. But human nature dosen't work this way.

When I went to collage, I had friends that would take out maximum student loans because they didn't have to pay them back and no interest was being charged while they were in school. They would simply put it in the bank and at that time, accure 7-8% interest in a savings account. The problem is human nature took over and by the time school was out, they had managed to spend every dime and then some.

Now at 51, I still have some of the same friends who still are paying on there free student loans, and that $200 dollar party thrown 30 years ago, has cost them a fortune.

I know, it doesn't make since, but if you buy a 200K boat on credit and you have 200K in savings, when the engine has a problem, and they come out with the next new got to have gadget, its going to seem easy to tap the 200K that you promised yourself you were going to invest in something.

Also, don't forget, 200K payment over 10years is going to give you a 2500 dollar payment, then you may have to pay taxs, insurance, boat slip, and maintanace on the boat. So your cost of ownership could very easily be 3500-$4000 a month with all kinds of strings attached.

You might feel ok with this, but my peace of mind is worth too much to go your way. Just my 2 cents worth.

[Doodles]

Originally Posted by scoobert

home equity loans are the cheapest loans out there.
on a quarter of a million dollar boat, you will saves 10's of thousands on the interest.
my boat loan (on my powerboat) is at 6%, i have not found a much better rate.... but i guess if you have an 880 credit score....

But the OP is selling everything so he will have no home to place a home equity loan against. No home = no home equity loan.

What does my credit score have to do with the OP's question? Is 880 a good score?

[TacomaSailor]

Here is a concrete example of what FlyMeAway described:

It is fairly easy to determine if you should finance or pay cash.

WHAT rate of return will the cash needed to pay for the boat earn if left in an investment? You can then compare the net of that investment with the net cost of financing.

Here are some assumptions for a simple example

IGNORE – Inflation and operating costs of boat

15 year mortgage 20% down 4.25% interest (current BofA boat loan)

Cost of boat $160,000
Down Payment $32,000
Amount financed $128,000
Payment = $963 per month

Investment makes 7% above inflation – a rate our investments have exceeded for over 40 years

All interest calculations are compounded monthly.

Assume the boat depreciates 2% annually so the sale price after 10 years is $130,732.

Here is the GROSS cash flow during the first ten (10) years of ownership assuming you sell the boat at the end of ten years:
FINANCE
Ten years of payments = -$115,550
Interest earned on the decreasing balance of the loan amount = + $49,495 (the interest you collect on the amount of the loan you have not yet paid – BIG ASSUMPTION – you leave this money in the investment and do not spend it)
Payoff loan after 10 years $-51,060
Sell boat +$130,732

TOTAL CASH FLOW over 10 years of FINANCING BOAT= +$13,616 (you end up with ~ $13,000 MORE in your pocket than you started with)


PAY CASH FOR BOAT
Buy Boat = -$160,000
Sell Boat = +$130,732
TOTAL CASH FLOW over 10 years of OWNING BOAT= -$29,268 (you end up with ~ $29,000 LESS in your pocket than you started with)

And IF you can deduct your boat mortgage interest (almost any one can - it is a 2nd home) the cost of interest is reduced by your marginal tax rate - typically in the 15% - 25% range.

AND - if you do count inflation you are paying off the loan with less valuable dollars while your investments are making money at 7% above inflation.

The value of financing increases as the loan amounts increase.

[Clipper4730]

Gotta agree with Flymeaway on this one. Why risk your own cash? If your credit score is good, 850 is the max btw, you can get a great interest rate maybe under 6% depending on the down payment. Put your cash to work and you could probably come out ahead on the financing. My IRA averages about 9.5% With fairly low risk. Worse comes worse send em some jingle mail and walk away. Your credit will take a hit, the bank will get the boat, but at least you will still have your cash. And cash is king right? Not saying that you should resort to foreclosure but sometimes you gotta do what ya gotta do. Believe me the banks do not care about you! I have never been in that situation but know some who have. Spent every dime of savings trying to hold on and lost the house in the end, with no cash no house and loads of credit card debt. All I'm sayin is let the bank take the risk. Pay the note deduct the interest and invest the rest. And under no circumstances ever tell them it will be a full time live aboard.

Good Luck

[valhalla360]

Originally Posted by TacomaSailor

Here is a concrete example of what FlyMeAway described:

It is fairly easy to determine if you should finance or pay cash.

WHAT rate of return will the cash needed to pay for the boat earn if left in an investment? You can then compare the net of that investment with the net cost of financing.

Here are some assumptions for a simple example

IGNORE – Inflation and operating costs of boat

15 year mortgage 20% down 4.25% interest (current BofA boat loan)

Cost of boat $160,000
Down Payment $32,000
Amount financed $128,000
Payment = $963 per month

Investment makes 7% above inflation – a rate our investments have exceeded for over 40 years

All interest calculations are compounded monthly.

Assume the boat depreciates 2% annually so the sale price after 10 years is $130,732.

Here is the GROSS cash flow during the first ten (10) years of ownership assuming you sell the boat at the end of ten years:
FINANCE
Ten years of payments = -$115,550
Interest earned on the decreasing balance of the loan amount = + $49,495 (the interest you collect on the amount of the loan you have not yet paid – BIG ASSUMPTION – you leave this money in the investment and do not spend it)
Payoff loan after 10 years $-51,060
Sell boat +$130,732

TOTAL CASH FLOW over 10 years of FINANCING BOAT= +$13,616 (you end up with ~ $13,000 MORE in your pocket than you started with)


PAY CASH FOR BOAT
Buy Boat = -$160,000
Sell Boat = +$130,732
TOTAL CASH FLOW over 10 years of OWNING BOAT= -$29,268 (you end up with ~ $29,000 LESS in your pocket than you started with)

And IF you can deduct your boat mortgage interest (almost any one can - it is a 2nd home) the cost of interest is reduced by your marginal tax rate - typically in the 15% - 25% range.

AND - if you do count inflation you are paying off the loan with less valuable dollars while your investments are making money at 7% above inflation.

The value of financing increases as the loan amounts increase.

Except:

2% depreciation per year for the first 10yrs suggests a boat that loses hardly any value. At 10 yrs, I would expect closer to 30-60%. So the sell boat nets you significantly less.

7% long term return sounds great if you are talking long term. 10 yrs is getting marginal to count on it. If you hit a downturn, odds are you won't make your 7% average for the period.

If everything goes perfectly, it works. If it doesn't go perfectly (and if never does), you wind up on the short end. And as the other poster suggested, it's just too tempting to spend that money on "must have" items.

[sepeteus]

Gotta ask.... How can I own a yacht without insurance? Haven't been out of Aussie waters yet but most marinas here ask proof of insurance to visit even over night.

[scoobert]

Originally Posted by Doodles

But the OP is selling everything so he will have no home to place a home equity loan against. No home = no home equity loan.

What does my credit score have to do with the OP's question? Is 880 a good score?

let me rephrase.
but i guess if someone has an 880 credit score....

i think 880 is the current top credit score in the USA.

[boatman61]

Originally Posted by FlyMeAway

Finance, finance, finance -- especially if you can afford the boat outright, and especially if you are going to hold it for a couple of years.

1) Interest rates are still near all-time lows. They basically must go up in the long run. Once they go up, your $200k starts making money. You put it in a near-zero-risk government bond fund, and you're close to even from the alternative of buying the boat outright. This is one thing people don't seem to understand. It looks like you are paying the bank a bunch in interest, but remember that *your* money would be earning interest if you hadn't given it to the bank! Even through the recent financial crisis, it made mathematical sense to finance and put the money into a cheap, exchange-traded mutual fund. In 9 years out of 10, you come out ahead.

2) The mortgage interest is tax deductible. To the extent that you earn any kind of income and pay federal income taxes (while cruising), the interest reduces your tax liability considerably

3) Financing is lower risk and affords greater flexibility. If something happens to the boat, the bank will wait to collect on the insurance money, and you can use your money in the meantime to do something else (like buy a house or pay rent elsewhere). You still have to make the boat payments, but it is the *bank* waiting on the insurance to pay off the principal, not you. If the boat is a total loss and the insurer refuses to pay for some reason, you may be able to negotiate with the bank and not have to ultimately pay off the full amount.

Two caveats:
1) Insurance. Likely to limit your cruising range (at first) and be somewhat expensive. But ask yourself -- if you bought the boat all in cash, with your life savings, would you feel comfortable *not* insuring it? Would you feel comfortable without liability insurance, given the assets you have saved up? I would not

2) You have good credit and can get a low interest rate. If your credit is shot, and the best you can get is 10% -- pay cash.


I can't underscore enough the advantages of financing, and -- provided the caveats are met -- I can't understand why anybody would pay outright in cash. The same goes, actually, for almost anything that one would buy. If interest rates are low enough, financing almost always makes sense over a cash purchase.

So dya want to send me the appropriate forms to sign up with your company...

[scoobert]

Originally Posted by FlyMeAway

The same goes, actually, for almost anything that one would buy. If interest rates are low enough, financing almost always makes sense over a cash purchase.

this also makes you a slave to the bank.
i believed the same way once. so i changed from paying cash for everything in life, to credit.
so now the only reason my dock lines are tied up is because before i take off for Patagonia i need to pay off my loans.
so when it came time to buy my yacht, i went shopping for one i had the cash for.
now i own it free and clear.
and once i sell everything, and everything is for sale, i am gone.

[sailorboy1]

Originally Posted by scoobert

this also makes you a slave to the bank.
i believed the same way once. so i changed from paying cash for everything in life, to credit.
so now the only reason my dock lines are tied up is because before i take off for Patagonia i need to pay off my loans.
so when it came time to buy my yacht, i went shopping for one i had the cash for.
now i own it free and clear.
and once i sell everything, and everything is for sale, i am gone.

That has nothing to do with banks, loans, or credit cards. You are talking about managing ones finances.

I pay for everything with credit cards and rarely have more that $20 cash in my pocket. But I pay the card off each month and it costs me nothing, in fact I make $50+ a month on the rewards points.

I do have a loan on y house and my boat. The interest rate is so low that it makes more sense to have my money invested.

[capttman]

Originally Posted by scoobert

home equity loans are the cheapest loans out there. on a quarter of a million dollar boat, you will saves 10's of thousands on the interest. my boat loan (on my powerboat) is at 6%, i have not found a much better rate.... but i guess if you have an 880 credit score....

That's a bit crazy so you take a solid asset like your residence and pledge it ones collateral for a diminishing asset And risk losing both.

[scoobert]

Originally Posted by sailorboy1

That has nothing to do with banks, loans, or credit cards. You are talking about managing ones finances.

I pay for everything with credit cards and rarely have more that $20 cash in my pocket. But I pay the card off each month and it costs me nothing, in fact I make $50+ a month on the rewards points.

I do have a loan on y house and my boat. The interest rate is so low that it makes more sense to have my money invested.

i have my money invested in one of the highest yields available today,
4%.
with the exception of the loan on my BMW at 2.4% its all higher.
i am with you on using the CC for rewards. thou my bank hated me for it. i did this exact thing, and they cut my credit limit in half, to discourage me from doing it more.
but BOA is evil like that, lol.
the best way, i believe, is a cash based life, with everything paid in full.
if you get sick, hurt, cant work, you dont lose everything.

[scoobert]

Originally Posted by capttman

That's a bit crazy so you take a solid asset like your residence and pledge it ones collateral for a diminishing asset And risk losing both.

if you buy the boat outright, they cannot take it if you lose the house.
however when they sell the house, the debt is gone.

[Rocketman]

When someone recomends borrowing money, then giving it to them to invest because they can beat the interest rate in some kind of investment, you better get a firm grip on your wallet, because you are a about to loose it.

Let's ask that person, or so called adviser, why they don't do it themselfs? They will say they can't becaue of rules, or laws, or you name it. It's BS. Remember Bernnie Maddoff?

A couple of rules I all ways follow.
1. If it sounds to good to be true, it is.
2. If you don't fully understand what you are doing, when investing, don't do it.
3. I am more concerned about the return of my money than I am concerned about the return on my money.