Paying off Mello Roos

User Forum Topic
Submitted by paranoid on February 27, 2012 - 7:39pm

Interest rate is historic low now. MR in places like 4S ranch has a 40-year life, and has a rate close to 10% (my rough guestimate). MR can be increased by 2% every year. So my question is: is it worth it to pay off completely your MR now? This saves alot of money if you intend to stay for a long time. What do you guys think?

Submitted by all on March 1, 2012 - 10:51am.

The collection of the special tax that backs the core CFD #6 must stop no later than 25 years after the final bond is issued, or FY 2045/2046. The annual 2% increase is optional, but I checked the numbers since 2003 and the tax went up 2% every year. I assume PUSD won't leave any money on the table and they will be collecting until 2045 with regular 2% increases.

It looks like they assumed the rate of inflation higher than 2% since the payoff amount increases every year. It is either $16K + 2%/year or your share of the debt, whichever is greater.

The bonds pay 5-6% and without thinking much about it I assumed the cost to me is close to that and after adjusting for tax deduction it did not seem that bad. After the recent deductibility discussion and this thread I feel paying off MR makes more sense than getting a rental or a fancy new car.

Submitted by enron_by_the_sea on March 1, 2012 - 11:14am.

Don't forget that if you can pay off Mello Roos with a HELOC then HELOC interest is tax deductible while Mello Roos is not!

------------------
Disclaimers

1. If you are hit with (Federal) AMT then it does not help
2. Most people can not get HELOC unless they put more than 20% down (due to 80% CLTV rule). For those cases it is better to put only 20% down and pay off Mello Roos out of pocket. You still get extra tax deduction due to extra Mortgage interest paid .. (which might go away in "tax reform of 2013"!) This route does not get affected by AMT!

Based on what I am reading, if you live in a high MR McMansion, you are sure to live there forever, if you fall in high tax bracket and if you have extra 50K lying around; this looks like a very attractive investment!

Submitted by ocrenter on March 1, 2012 - 1:04pm.

enron_by_the_sea wrote:

------------------
Disclaimers

1. If you are hit with (Federal) AMT then it does not help

??? you mean it would help to pay off the mello roos using a HELOC, right?

Submitted by enron_by_the_sea on March 1, 2012 - 2:17pm.

ocrenter wrote:
enron_by_the_sea wrote:

------------------
Disclaimers

1. If you are hit with (Federal) AMT then it does not help

??? you mean it would help to pay off the mello roos using a HELOC, right?

Precisely. If you are under AMT, you can't deduct HELOC interest (but you can still deduct mortgage interest). So it might be better to do a cash-out refi instead to raise CLTV up to 80% and then use the cash-out money to pay off Mello Roos.

Submitted by ocrenter on March 1, 2012 - 4:59pm.

enron_by_the_sea wrote:
ocrenter wrote:
enron_by_the_sea wrote:

------------------
Disclaimers

1. If you are hit with (Federal) AMT then it does not help

??? you mean it would help to pay off the mello roos using a HELOC, right?

Precisely. If you are under AMT, you can't deduct HELOC interest (but you can still deduct mortgage interest). So it might be better to do a cash-out refi instead to raise CLTV up to 80% and then use the cash-out money to pay off Mello Roos.

Thanks for the clarification. Love that AMT, it is the gift that keeps on giving... Too bad I'm not successful enough to pay the Romney tax rate...

Submitted by temeculaguy on March 1, 2012 - 9:39pm.

Is there a way to find out what the bond is actually paying in interest as opposed to trying to calculate it yourself. I've read numerous articles where mello-roos districts have refinanced and lowered the cost to residents. Could some of what looks like mello-roos be a community service district fee, which can't be paid off as it is for ongoing maintenance or services that other residents of a city do not get. For over 50k, you'd want to make sure that you are getting out of the entire bill, not just part. You'd also want to make sure there aren't plans to refi on the part of the municipality as the buyers of certain muni bonds don't pay tax, thus they have a lower yield. I'm kinda shocked they are paying 9%, that's more Greece pays.

Here's an article from about 5 years ago when rates were much higher and a municipality refi'd the mello roos for just a .9 interest rate bump.

http://www.theacorn.com/news/2006-05-18/...

The article indicates the city in the article discovered by accident they could refi the mello roos bond, perhaps sending the mello rood district officials this info could save you even more, their rate should be less than a heloc.

If they end up doing it, I expect some mention in whatever news coverage they receive, it's good for my social life

Submitted by ocrenter on March 1, 2012 - 11:30pm.

temeculaguy wrote:
Is there a way to find out what the bond is actually paying in interest as opposed to trying to calculate it yourself. I've read numerous articles where mello-roos districts have refinanced and lowered the cost to residents. Could some of what looks like mello-roos be a community service district fee, which can't be paid off as it is for ongoing maintenance or services that other residents of a city do not get. For over 50k, you'd want to make sure that you are getting out of the entire bill, not just part. You'd also want to make sure there aren't plans to refi on the part of the municipality as the buyers of certain muni bonds don't pay tax, thus they have a lower yield. I'm kinda shocked they are paying 9%, that's more Greece pays.

Here's an article from about 5 years ago when rates were much higher and a municipality refi'd the mello roos for just a .9 interest rate bump.

http://www.theacorn.com/news/2006-05-18/...

The article indicates the city in the article discovered by accident they could refi the mello roos bond, perhaps sending the mello rood district officials this info could save you even more, their rate should be less than a heloc.

If they end up doing it, I expect some mention in whatever news coverage they receive, it's good for my social life

Over 9% would have made the payoff an absolute no brainer. Not so with my MR. One of the CFD interest rate is at 5.5%. When I called the 800 number managing my MR, they were able to provide the interest rate and the approx payoff.

Submitted by all on March 2, 2012 - 9:48am.

temeculaguy wrote:
Is there a way to find out what the bond is actually paying in interest as opposed to trying to calculate it yourself. I've read numerous articles where mello-roos districts have refinanced and lowered the cost to residents. Could some of what looks like mello-roos be a community service district fee, which can't be paid off as it is for ongoing maintenance or services that other residents of a city do not get. For over 50k, you'd want to make sure that you are getting out of the entire bill, not just part. You'd also want to make sure there aren't plans to refi on the part of the municipality as the buyers of certain muni bonds don't pay tax, thus they have a lower yield. I'm kinda shocked they are paying 9%, that's more Greece pays.

The interest rate on the bond does not match the interest rate residents are paying. CFD#6 has three special tax bonds (2002, 2007 and 2010 series) and the most recent one starts with 1.2% in 2011 and goes up to 5.375 in 2036.

It looks like PUSD can issue bonds as needed at whatever cost/value they can negotiate and pay them off with money collected from the residents. I am not sure if PUSD's ability to issue bonds is limited by the amount they are projected to collect from the residents, or some magic number specified in the original Bond Indenture that I can't find on CaliforniaTaxData website.

Submitted by sdnerd on March 2, 2012 - 10:12am.

Quote:

The interest rate on the bond does not match the interest rate residents are paying. CFD#6 has three special tax bonds (2002, 2007 and 2010 series) and the most recent one starts with 1.2% in 2011 and goes up to 5.375 in 2036.

It looks like PUSD can issue bonds as needed at whatever cost/value they can negotiate and pay them off with money collected from the residents. I am not sure if PUSD's ability to issue bonds is limited by the amount they are projected to collect from the residents, or some magic number specified in the original Bond Indenture that I can't find on CaliforniaTaxData website.

Perhaps I'm missing something, but the way I interpret everything thus far:

Right now they charge me $5,600/year.

They can, have, and presumably will continue to increase this amount annually by 2% until the last possible second. Behind the scenes they can pile on more debt, etc.

So my final annual payments will be approximately $9,500/year after factoring in annual 2% increases.

Temecula's question is a good one.. whether or not that payout amount truly removes that entire bill (there's not some fixed school fee/etc that would still remain).

Perhaps I'll call again today and try to clarify.

Submitted by all on March 2, 2012 - 10:47am.

sdnerd wrote:

Perhaps I'm missing something, but the way I interpret everything thus far:

Right now they charge me $5,600/year.

They can, have, and presumably will continue to increase this amount annually by 2% until the last possible second. Behind the scenes they can pile on more debt, etc.

So my final annual payments will be approximately $9,500/year after factoring in annual 2% increases.

Temecula's question is a good one.. whether or not that payout amount truly removes that entire bill (there's not some fixed school fee/etc that would still remain).

Perhaps I'll call again today and try to clarify.

I guess PUSD board could decide that they don't need the money?

Once you pay it off you should be free of any future obligations. Here is what I received from the CFD administrator two years ago:


When the School District receives the prepayment, the School District will then send a copy of check and accompanying paperwork Dolinka Group so that the
parcel can be removed from the Special Tax levy for the following Fiscal Year.
The School District will then send the prepayment to Joni D'Amico at Zions Bank to be deposited for the purpose of calling bonds, or to be used by the School District at a later date to construct facilities.

And from the annual report:


With respect to an Annual Special Tax obligation that has been prepaid, the Assistant Superintendent shall reasonably indicate in the records of CFD No. 6 that there has been a prepayment of the Annual Special Tax and shall reasonably cause a suitable notice to be recorded in compliance with the Act within thirty (30) days of receipt of such prepayment of Annual Special Taxes, to indicate reasonably the prepayment of Annual Special Taxes and the release of the Annual Special Tax lien on such Assessor’s Parcel, and the obligation of such Assessor’s Parcel to pay such Annual Special Tax shall cease.

Submitted by sdnerd on March 2, 2012 - 3:49pm.

captcha wrote:

I guess PUSD board could decide that they don't need the money?

That would certainly be a historic moment. :)

Thanks for the other information. I received a call back today, and it confirms what you said.

At least in my case, the payoff completely removes the entire enchilada. ~$60K kills $5,600/yr(+2% annual) in its entirety.

Submitted by temeculaguy on March 3, 2012 - 4:50am.

Something stinks in denmark. The math doesn't work. With all the taxpayer watchdog hype going on, I wonder if any of these watchdog agencies would look into this, that district at appears to be raping people. They pay between 1% and 6% and charge 9%, not to mention their ability to raise the rate to the residents while enjoying a fixed rate? They also charge a fee to give out info that probably takes them a few minutes at a computer? I'm not a conspiracy theorist but something is wrong with this picture. I'll bet a nickel the district barely understands it, this is screaming for an audit if you can find an auditor that understands the premise that borrowing 60k per parcel at 2-6% does not amount to 5600 a year with possible rate hikes.

Submitted by ocrenter on March 3, 2012 - 7:33am.

temeculaguy wrote:
Something stinks in denmark. The math doesn't work. With all the taxpayer watchdog hype going on, I wonder if any of these watchdog agencies would look into this, that district at appears to be raping people. They pay between 1% and 6% and charge 9%, not to mention their ability to raise the rate to the residents while enjoying a fixed rate? They also charge a fee to give out info that probably takes them a few minutes at a computer? I'm not a conspiracy theorist but something is wrong with this picture. I'll bet a nickel the district barely understands it, this is screaming for an audit if you can find an auditor that understands the premise that borrowing 60k per parcel at 2-6% does not amount to 5600 a year with possible rate hikes.

I called the managing company and asked about the possibility of rate reduction/refi by the CFD distric, what was said was that some of the bonds carry penalties against refis for up to 10 years. Hence the jacked up outrageous interest rate. As for the fees, apparently there's some serious mega calculation they got to do to figure out the actual repayment. Go figure.

Submitted by sdrealtor on March 3, 2012 - 9:03am.

LOl and that serious mega calculation requires any more than pushing a button. Two words....Turbo...Tax

Submitted by ocrenter on March 3, 2012 - 9:53am.

sdrealtor wrote:
LOl and that serious mega calculation requires any more than pushing a button. Two words....Turbo...Tax

Haha... I was thinking more mortgage/interest rate calculator. Well, at least they were helpful enough to provide a fairly close approximation.

Submitted by outtamojo on March 3, 2012 - 2:06pm.

sdrealtor wrote:
I have seen homes with paid off MR on the market before. They are more desirable and that helps them sell quicker which is worth something in a declining market. From my recollection they seem to sell for a little more but not a lot more. The premium doesn't seem dollar for dollar. As a caveat I believe they were in Aviara so the MR fees were modest so the difference probably shouldn't be much. As a general statement I would recommend paying off MR early for personal benefit rather than being able to sell for more in the future. I'd look at a potentially higher sales price as a bonus but would not factor that in to the decision. Just my opinion though

Edit: thinking a bit more there has gotta be a difference when the annual
MR are 5000 vs 400 so it likely would create more value in a high MR environment. I just think it would be much less than dollar for dollar

Don't know why it took so long but it finally dawned on me that new construction in SEH and next door Old Creek is selling with MR about $80 a month next door to older homes with MR at about $300.

Here is a nicely upgraded traditional sale with high MR
http://www.sdlookup.com/MLS-110063558-12...

Here is new construction w/ low MR
http://www.sdlookup.com/MLS-120007414-11...

In Old Creek,

http://www.sdlookup.com/MLS-110042190-26...

Old Creek New http://www.sdlookup.com/MLS-120010261-17...

I think about paying off my CFD costing $3385/year (for 23 more years) with a payoff of about $45K. I mean where else am I going to get that kind of guaranteed head-ache free return but the wife wants to go for the gusto and get another rental....

Submitted by sdrealtor on March 3, 2012 - 2:17pm.

Good examples just make sure to make allowances for upgrades and landscaping if any on resales. Also make sure to look at closed resales as they could be even lower than asking or could end up higher if lender counters it higher. Lastly, people will pay a bit of a premium for brand new to choose their own upgrades and be the first person to use bathrooms and kitchens etc.

Again good examples but you need more complete information for a full picture.

Submitted by ocrenter on March 3, 2012 - 9:22pm.

http://208.179.148.84/find_property.aspx

use this link to find your property and associated mello roos info, best to use parcel number.

Somehow I'm getting much higher interest rates doing back calculations based on the actual total bond compared to the interest rate the MR management company quoted. The approx payoff they provided was quite off too compared to the actual amount from the original docs pulled from the above link.

Submitted by ocrenter on April 5, 2012 - 10:02pm.

Jim has a new post on the topic:

http://www.bubbleinfo.com/2012/04/04/pay...

Jim is putting the value of the property at $20-30k higher compared to comparable homes without MR. If thats indeed the case, then one's break-even point would just be 5 years. That makes it a much easier decision!

Submitted by sdrealtor on April 5, 2012 - 10:44pm.

I think you need to re-read what he wrote and check your math. He wrote maybe $10,000 to $20,000 more for paid off MR on a house with $5400 annual MR (payoff = $58,000). And I think thats a fairly big maybe. His opinion is very much in line with mine that paying them off wont get you close to a dollar for dollar return. A 2 to 4X the annual MR payment seems like a reasonable boost in value for paid off MR but I wouldnt expect more. Paying them off could be a wise choice if you stay long term but most likely wouldnt if you wanted to boost resale value only.

Submitted by ocrenter on April 5, 2012 - 11:39pm.

sdrealtor wrote:
I think you need to re-read what he wrote and check your math. He wrote maybe $10,000 to $20,000 more for paid off MR on a house with $5400 annual MR (payoff = $58,000). And I think thats a fairly big maybe. His opinion is very much in line with mine that paying them off wont get you close to a dollar for dollar return. A 2 to 4X the annual MR payment seems like a reasonable boost in value for paid off MR but I wouldnt expect more. Paying them off could be a wise choice if you stay long term but most likely wouldnt if you wanted to boost resale value only.

I would not recommend anyone to payoff the MR to boost value on resale. Nor did I say that. Yes, misread the value Jim quoted. My bad on that. That moves the break even from 5 years to 6.5 years.

Submitted by sdrealtor on April 6, 2012 - 12:25am.

No problem. Its definitely worth considering for those that know they will stay long term. It just comes down a simple discounted cash flow calculation along with how much cash you have lying around and what else you can do with it.

Submitted by sdnerd on April 6, 2012 - 9:10am.

sdrealtor wrote:
along with how much cash you have lying around and what else you can do with it.

Along those lines; one thing I've been considering is a 5 year fixed home equity. There's a couple places offering ~1.99% rates.

Kill the MR in 5 years with a ~2% loan and find another use for the bulk of the cash. (Assuming there is a better use.... :) )

Submitted by sdduuuude on April 6, 2012 - 11:28pm.

sdrealtor wrote:
I think you need to re-read what he wrote and check your math. He wrote maybe $10,000 to $20,000 more for paid off MR on a house with $5400 annual MR (payoff = $58,000). And I think thats a fairly big maybe. His opinion is very much in line with mine that paying them off wont get you close to a dollar for dollar return. A 2 to 4X the annual MR payment seems like a reasonable boost in value for paid off MR but I wouldnt expect more. Paying them off could be a wise choice if you stay long term but most likely wouldnt if you wanted to boost resale value only.

Doesn't this scream "whatever you do, don't buy a house with MR " ??

I mean, if by paying them off early you get out from under a 9% loan, but it doesn't increase the value of the house by the same amount, then buying into a place with MR is just dumb.

Just a trick the developers pull because people aren't making rational decisions.

Maybe the good realtors will start a trend of putting in buy offers that include a requirement that, as a part of escrow, the MR tax is paid off. Then, you can get clear comparisons between houses with different MR. i.e. offer 800K for a house with $40K in MR, or $840K for a house without it. Either way, you offer $840K with any and all MR paid off.

Submitted by sdrealtor on April 7, 2012 - 8:40am.

I dont agree. It screams there is a price to pay to live in a new house in prime area of SD. Personally my MR goes toward improvements to the San Dieguito schools. I think thats a good investment and I am happy to pay the $800 every year. I donate more than that to other charities every year any way. To me this is a tax deductible (at least for now) contribution I make. Unlike the things I give to charities which make me feel good, I actually get some benefit from this.

Submitted by ocrenter on April 7, 2012 - 1:20pm.

sdduuuude wrote:
sdrealtor wrote:
I think you need to re-read what he wrote and check your math. He wrote maybe $10,000 to $20,000 more for paid off MR on a house with $5400 annual MR (payoff = $58,000). And I think thats a fairly big maybe. His opinion is very much in line with mine that paying them off wont get you close to a dollar for dollar return. A 2 to 4X the annual MR payment seems like a reasonable boost in value for paid off MR but I wouldnt expect more. Paying them off could be a wise choice if you stay long term but most likely wouldnt if you wanted to boost resale value only.

Doesn't this scream "whatever you do, don't buy a house with MR " ??

I mean, if by paying them off early you get out from under a 9% loan, but it doesn't increase the value of the house by the same amount, then buying into a place with MR is just dumb.

Just a trick the developers pull because people aren't making rational decisions.

Maybe the good realtors will start a trend of putting in buy offers that include a requirement that, as a part of escrow, the MR tax is paid off. Then, you can get clear comparisons between houses with different MR. i.e. offer 800K for a house with $40K in MR, or $840K for a house without it. Either way, you offer $840K with any and all MR paid off.

Heres the thing, the difference between a house with no MR and a comparable with MR would not be $840k vs $800k. Similar sized and upgraded and updated homes in established neighborhoods without MR are often times $100-150k above newer homes in MR communities. This differential of course is because of not just lack of MR, but also because of higher % of distress. In these situations, the MR payoff would be fraction of that price difference. Knowing that one can pay off the MR should open people up to buy in MR communities, not stay away from it. Insistence on steering clear from MR with complete disregard to the premium you would have to pay otherwise simply close you off from potential opportunities.

Submitted by sdduuuude on April 8, 2012 - 9:36pm.

But you just said that paying of the MR doesn't increase the value of a particular home by as much as the amount you pay off. How is knowing that you can pay it off (and effectively lose money), any comfort at all ? ?

he point is - you put yourself in a no-win situation. Here I am, today, with no house.

OK. So I can choose to buy a house with MR or not.

If I choose an MR house, then I am choosing to buy either the right to make payments on a 9% loan or the right to make a lump-sum payment which will improve the value of my house by less than that lump-sum payment.

If you choose to put yourself in a position where your next move is a choice between two bad options, then it's a bad choice.

Those MR should trade like the cash liabilities that they are and the only way is for buyers to start putting MR payoff requests in their offers.

Submitted by ocrenter on April 8, 2012 - 11:45pm.

sdduuuude wrote:
But you just said that paying of the MR doesn't increase the value of a particular home by as much as the amount you pay off. How is knowing that you can pay it off (and effectively lose money), any comfort at all ? ?

he point is - you put yourself in a no-win situation. Here I am, today, with no house.

OK. So I can choose to buy a house with MR or not.

If I choose an MR house, then I am choosing to buy either the right to make payments on a 9% loan or the right to make a lump-sum payment which will improve the value of my house by less than that lump-sum payment.

If you choose to put yourself in a position where your next move is a choice between two bad options, then it's a bad choice.

Those MR should trade like the cash liabilities that they are and the only way is for buyers to start putting MR payoff requests in their offers.

But it isn't a no win situation. Had I completely ruled out all homes with MR, I would not be able to purchase my home at $260k discount from original asking.

Now I simply need to pay about 1/5 that discount to get rid of the MR.

The point here is there's a lot of people like yourself that shy away from communities with MR. Which helps create more bargains in MR communities. And it just so happens these are communities that was hit hard, hence, more great opportunities. This often means excellent bargains even factoring in the yearly MR. With the ability to pay off the MR early at 1/3 the long term cost, it makes buying bargains in MR communities even more attractive.

If you insist that's no win, sure, be my guest.

Submitted by sdduuuude on April 9, 2012 - 12:15am.

ocrenter wrote:
sdduuuude wrote:
But you just said that paying of the MR doesn't increase the value of a particular home by as much as the amount you pay off. How is knowing that you can pay it off (and effectively lose money), any comfort at all ? ?

he point is - you put yourself in a no-win situation. Here I am, today, with no house.

OK. So I can choose to buy a house with MR or not.

If I choose an MR house, then I am choosing to buy either the right to make payments on a 9% loan or the right to make a lump-sum payment which will improve the value of my house by less than that lump-sum payment.

If you choose to put yourself in a position where your next move is a choice between two bad options, then it's a bad choice.

Those MR should trade like the cash liabilities that they are and the only way is for buyers to start putting MR payoff requests in their offers.

But it isn't a no win situation. Had I completely ruled out all homes with MR, I would not be able to purchase my home at $260k discount from original asking.

Now I simply need to pay about 1/5 that discount to get rid of the MR.

The point here is there's a lot of people like yourself that shy away from communities with MR. Which helps create more bargains in MR communities. And it just so happens these are communities that was hit hard, hence, more great opportunities. This often means excellent bargains even factoring in the yearly MR. With the ability to pay off the MR early at 1/3 the long term cost, it makes buying bargains in MR communities even more attractive.

If you insist that's no win, sure, be my guest.

With me, it's a logic problem. Either you realize all the gain of buying down the MR or you don't.

If you have to pay $40K to buy down your MR and you feel you got a $40K discount vs. a comparable property because of it, then you are good. And if that is really the case, then you would honestly get the $40K back when you sell.

But, sdr and others said that you aren't going to get that $40K back when you sell, so I'm not so sure I believe that you got as much of a discount due to the MR that you think. Your $250K discount was due to the other factors you mention.

Pragmatically, we'll never know, of course. Who can measure it ? Nobody. The only way to know is if buyers start putting it in the offer letter so you can compare properties against each other.

The neat thing about this thread is - it points out the importance of knowing how buyers and sellers value MR vs. the actual, real cost of it.

Submitted by ocrenter on April 9, 2012 - 10:04am.

sdduuuude wrote:

With me, it's a logic problem. Either you realize all the gain of buying down the MR or you don't.

If you have to pay $40K to buy down your MR and you feel you got a $40K discount vs. a comparable property because of it, then you are good. And if that is really the case, then you would honestly get the $40K back when you sell.

But, sdr and others said that you aren't going to get that $40K back when you sell, so I'm not so sure I believe that you got as much of a discount due to the MR that you think. Your $250K discount was due to the other factors you mention.

Pragmatically, we'll never know, of course. Who can measure it ? Nobody. The only way to know is if buyers start putting it in the offer letter so you can compare properties against each other.

The neat thing about this thread is - it points out the importance of knowing how buyers and sellers value MR vs. the actual, real cost of it.

well, the logic issue is a two step logic.

you are correct, if all things being equal, of course MR is a bad deal. that seems like a no brainer.

but the problem is the nature of the bubble and the nature of the bust. leading to all things are NOT equal.

it is highly unlikely to find a similarly upgraded and updated non-MR home for JUST $40k more than the MR home. The non-MR home, given it is in established neighborhoods that took less beating from the bust, carries a higher than logical premium than MR homes.

So with the above scenario, insisting on ALL MR homes are BAD deals makes very little sense.

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