NEED HELP WITH FUNDING...EXCELLENT CREDIT

[Richard5]

Originally Posted by GILow

... people come in CONVINCED they have it all worked out. But they don't really. What they have worked out is what they WANT to work. Because they DON'T have any practical experience. And then they build this set of logical steps up to justify how it all will work, and they simply don't hear the stuff that says it might not....

Brother, you should see how the architects do it. The structural engineers come in to fix it yet sometimes even then they too don't see it...it just gets passed downstream.

[sailorboy1]

all the advice must have helped the OP as he hasn't been on CF since Nov 12

[BandB]

One more comment. There is one huge problem in comparing cost of financing versus anticipated rates of return on investments and this isn't at all just boat related. The financing cost is guaranteed. It's 100% going to be as anticipated. The return on investments has no guarantee. The investments with the least return come the closest. While many have built huge wealth through financing, it has led others to disaster. I shiver a bit when I hear people talk about "Safe" investments. By the very nature of them being investments the safety is limited. I remember sitting in a room years ago and the exercise was choosing five safe stocks in different segments. Oh how many in retail chose K-Mart, Sears, Wards, and Penney. I remember hearing people one day talking about a sure thing in energy and that turned out to be Enron. General Motors was often used as the perfect example.

I remember when well run businesses limited debt to 33% of their debt plus equity. I also knew many who had all their plans for retirement destroyed when the Dow Jones dropped from nearly 12000 to 7200 or when it dropped from over 14000 to 6500. Even knew a few people who suffered both times. It dropped to 7200 and then started back up but they felt confident now that it would go up and stay and bragged how right they were when it hit 14000. Then it was at 6500 when they had planned to retire. In 2009 they were 67 and 65 years old. When it hit 10000 again a year plus later, they panicked and sold as they wanted to retire. But they were retiring with 40% less than they'd one projected and nearly two years later. With less money than they'd had 10 years earlier. 0% on investments while paying 5% on home and 8% on cars. Oh and that $750,000 home they planned to sell and downsize at retirement now had a market price of $500,000 and no takers.

Each person has to determine their own risk tolerance. Mine is low. Now being conservative as I am has it's own risks too. We just sleep much better at night without debt and certainly without debt on a boat. Now if you're living on that boat we'd feel a bit less troubled by it. One problem of the last decade was that banks forgot how to say no. Sometimes when they do say no we should listen. As they protect themselves, they may also be protecting us.

[mchad]

The main word for me is Liquidity. My thoughts are strictly about cruising live aboards.
I would not buy a cruising boat that I could afford to comfortably pay cash for.
By why pay cash. Buy the 50k boat with 20k down. Put the other 30k in an account with 3-4% interest. The loan is at 5% interest so you are losing a slight bit. Deduct some mortgage interest and you might be back to even.
So why not have some liquidity in case of a major issue? I know people theory on Cash is King but I think liquid cash is the real King.
Now for one of the possible flaws to this... Do most cruisers have full coverage insurance. Banks will certainly force a minimum amount of coverage that could drive the insurance cost up substantially.
What is the difference with insurance costs with the two scenarios?

[gwmort]

My wife and I are still a ways off (at least 6 years), but I've been thinking about this too.

My question is whether anyone is financing their cruising with a reverse mortgage? My plan has always been to sell everything and buy the boat, but I am getting the feeling my wife would prefer to keep the house and only sail part of the year.

With the house paid off we could probably get a reverse mortgage to finance a nice boat purchase, have no payments, and not have to move our stuff to storage or anything. I understand the terms of the reverse mortgage would require us to spend at least 6 months of every year at home. We could probably "snowbird" it and spend 1/2 the year in the Caribbean and 1/2 in the Chesapeake (home).

I am not concerned with saving the house to pass on to the kids (we were going to sell it anyway). Just wondering if anyone else has gone this route and how you are finding it working out for you (or not).

[denverd0n]

Originally Posted by BandB

There is one huge problem in comparing cost of financing versus anticipated rates of return on investments and this isn't at all just boat related. The financing cost is guaranteed. It's 100% going to be as anticipated. The return on investments has no guarantee.

So true. I've seen people try to rationalize financing something for as short a period as 5 years, on the basis that the stock market returns 10% a year and their financing costs will be less than that. Sure, over any 20-30 year period the stock market is pretty sure to return about 10% on average. But there have been 5-year periods when the stock market return was less than ZERO! You're in a darned big hole--entirely of your own making--if you were counting on stocks to pay for your financing for those particular years, aren't you?

Originally Posted by BandB

I also knew many who had all their plans for retirement destroyed when the Dow Jones dropped...

Every time the Dow drops by more than a couple of percentage points they will trot out people who wring their hands and whine incessantly about how they were planning to retire this year, or next, and now they can't because their savings have been wiped out. Well, boo-frickin'-hoo.

I have no sympathy at all for these dopes. If you are planning to retire next year then you should have enough money in low-volatility investments that you can ride out a 10-year downturn in the Dow, without changing your plans. If you have all of your money in stocks, and you expect to retire anytime in the next few years, then you are an idiot. I'm sorry to be so blunt, but that's just about the nicest possible way to put it!

[valhalla360]

First problem with getting a loan is it lets an inexperienced person get in too deep. If you can't afford the boat (and needing that cash in liquid form suggests you can't afford it), the bank is doing you a favor not giving you the money.

If you have $20k on hand and buy cash, the worst you can do is to lose $20k. Put that down and take out another $100k... then you sink the boat, you are on the hook for $120k.

Someone suggested the bank will help you fight the insurance company...doubt it. They may force you to take out additional insurance (at your cost) to cover them but if the boat sinks and the insurance doesn't pay up, the bank is still coming after you.

You can rationalize all you want about return on investement but when you boil it all down, you will be better off in the long run paying cash.

[letsgetsailing3]

Originally Posted by gwmort

My wife and I are still a ways off (at least 6 years), but I've been thinking about this too.

My question is whether anyone is financing their cruising with a reverse mortgage?

------------------------------

Let's keep this simple, shall we?

NO! DON'T DO THAT!

[gwmort]

Originally Posted by letsgetsailing3

------------------------------

Let's keep this simple, shall we?

NO! DON'T DO THAT!

I get it, they are not recommended in many instances, but I would like to discuss it a little more fully.

It seems to match well with the idea of using the equity in the home to finance the retirement we want without adding any financial stress of a payment and without having to actually give up the house while we are alive.

Compared to just selling the house entirely, renting storage space, not having a permanent address, and no real base to return to (and I understand that is appealing to many people, but not my wife so much), what is the downside?

When we die the bank will get the house? So what, we're dead, and if we had sold it there would be nothing to leave behind anyway, except the boat which we will still have to leave behind.

I know they won't let us take all the equity, at our age I suspect its only about 40%, and I appreciate the opportunity cost that we could take the other 60% from a sale and invest it. However, for us, I really think having a place we know we can live may be more emotional security than having that money in the kitty.

[avb3]

You may want to consider what I did in a similar but more complex situation.

First of all, a reverse mortgage is the worst solution. Period.

I sold my home, and bought a condo down in Florida. There are still areas you can buy a reasonable condo for ~40k there. My situation is more complex because I am only allowed to be in the USA for six months of the year, as I am a Canadian snowbird. I ended up buying a very small house in a remote and very small village to have a place to keep my residency and come back to. That combination left me with significant equity left to buy a boat and have funds remaining.

Consider selling and buying elsewhere an inexpensive place. You will be way better off than the reverse mortgage. My condo I bought last year has appreciated, but I bought near the bottom.

[rw58ph]

I agree CASH is KING. You run out of cash, you are bankrupt/done. We financed 110% of the Eagle as we where house, children, grand children poor but we both made a good income so we had the cash flow. We always have paid our selves first, meaning max 401K and IRS. That is a 15 to 20% tax saving the first year and they have out passed over the years the loan interest rate of 6%. Further more the boat has increased in value, as we have improved/remodel and full displacement trawler have become in fashion so the values has increased. Anyway do the math to see what is best for you in the short and long run.

As long as the cash will earn about equal to the loan interest rate, the boat is above water, and you have the cash flow, I would finance. Besides the memories and the enjoyment has been PRICELESS.

[satdiver]

As my father used to tell me and his father told him and I tell my friends looking to buy boats. If you look at a boat the same way a financier looks investing at a business you're a moron.

You look at buying a boat the same way you evaluate a vacation. If you plan it right the money will be well lost.

As I've stated in other post and forums after decades of owning 12 different boats the only boat I made an ROI on was my first boat which was a wrecked S&S 34 I got for free.

As for financing a boat you need something to leverage in case of a catastrophic event which brings me to the next lesson my father taught me.

There will be a catastrophic event if you own boats. And if you only rely on insurance to cover it you are now a in debt moron without a boat.

Now for the best lesson I ever got on financing a boat.

Don't finance an amount for a boat more than 10% of your networth over the next 5 years. So if you want a 100k boat your assets and income need to have some combination of $1 million in the next 5 years. For a simple explanation that means if you have a 100K in property and 100k in the bank your income should be 800k in the next 5 years. or if you have a 500k property 50k in the bank you need to clear 450k in income the next 5 years. The rule for this means you would have no problem buying a boat you could easily pay off in 5 years. It also leaves a great deal of money for errors post purchase.

This has worked for me very well. I lost a boat in a storm once when I lived on land and did not sweat or lose a wink of sleep over it. Made my claim and was back in another boat in a few months.

[Gerryson]

You are correct in your theory. If you can earn a higher rate of return from your invests then the loan amount you should be fine. However the only area I caution you in is if your loan rate is floating and ever goes above 5-6 percent then even over a long term investment horizon your profit spread between investment returns and loan payments may become so tight that the amount if market risk you are taking on isn't even remotely worth the savings. So just be careful with that, but other then that happy sailing/investing and good luck!

Ps, I work in finance and my two cents would be explore the option of building your investment portfolio around a core group of blue chip equities that pay a 4-5 percent dividend and have a history if never cutting it, even in recession and raising it year after year. Check to make sure their dividend payout ratios are sub 90 percent and this should be a good start. Many companies have been doing this for 50+ years. Then instead of dripping the dividends back into the account pay them out in cash and pay your loans. If you can stay away from pricy packaged products like mf's that charge you 2+ percent a year as it could make or break the plan if the returns are mediocre. Just my two cents, I wish you all the best in your endeavours!

[letsgetsailing3]

Originally Posted by gwmort

I get it, they are not recommended in many instances, but I would like to discuss it a little more fully.

It seems to match well with the idea of using the equity in the home to finance the retirement we want without adding any financial stress of a payment and without having to actually give up the house while we are alive.

Compared to just selling the house entirely, renting storage space, not having a permanent address, and no real base to return to (and I understand that is appealing to many people, but not my wife so much), what is the downside?

When we die the bank will get the house? So what, we're dead, and if we had sold it there would be nothing to leave behind anyway, except the boat which we will still have to leave behind.

I know they won't let us take all the equity, at our age I suspect its only about 40%, and I appreciate the opportunity cost that we could take the other 60% from a sale and invest it. However, for us, I really think having a place we know we can live may be more emotional security than having that money in the kitty.

It's not worth fooling yourself or your wife. If your equity in your house won't cover the lifestyle you want as the result of a sale, neither will a reverse mortgage.

The smart move is a direct sale of your house, and a cash investment in the boat you can afford. If that doesn't work, neither will a reverse mortgage. Don't try and kid yourself that the banks don't know what they're doing.

[gwmort]

Let me try giving you some numbers:

My house is worth about $350,000 and we will own it outright in about 2 years. We have about that much also in retirement investments, and my wife has a modest state pension, I want to be cruising well before we're old enough to take Social Security, so thats not really a factor.

My plan was to sell the house, buy a cat for around $300,000 and try to live on the investments and wife's pension. Assuming a 4% draw down rate and the pension I figure we would have a budget of around $2500 a month.

If we took a reverse mortgage on the house at 60% equity, we could take out $210,000, maybe use some of the investments to still get a cat for around $250,000, and an income of around $2,200 a month, but still have a land house to come home to and store our stuff.

I'd rather sell, my wife would rather keep the house, this looks like a reasonable compromise to me. Of course keeping the house means property taxes and upkeep expenses as well.