Need Some Advice

[cube_rat]

Please poke holes in my plan and/or provide some sane advice to wantabe FIRE person:

We just re-fied from an adjustable to a 7 year fixed.  The 7 year fixed is at a respectable rate of 5.62% which caps out at 10.62%  cap after 7 years.  The loan balance is $390k (I had to absorb 6K in prepayment penalties from World Savings    into the loan).  My plan is to pay the interest only portion and save $1500 a month to an ING account for a period of 84 months.  At the end of the loan term, I should have around $126,000 (not including componded interest) to paydown the principal to either re-fi again or stay with the new adjusted rate. 

My rationale is this:  Interest rates are trending upwards which will drive the savings rates up.  I can take full advantage of a yearly tax write off in the amount of $21,924 per year for seven years not including property taxes.  The downside is that I suspect I will probably pay more in interest in the long run by going by my plan.  I haven't done the full computation yet. 

Poke away....

TIA

 

[renferme]

Are you still working ?
I couldn't sleep at night with that kind of debt !
What are the property taxes ?
Where do you live ?

 

[cube_rat]

Are you still working ?
I couldn't sleep at night with that kind of debt !
What are the property taxes ?
Where do you live ?

I live in the outskirts of San Francisco, hence the seemingly high loan amount.  Trust me when I say that my loan amount PALES compared to some folks I know with million dollar mortgages!  There are local radio ads here talking about how one can get a million dollar mortgage like it's nothing.  Also, it's all relative too, I get paid a healthly six figure income. 

BTW - my property taxes are $4700 per year.

 

[Sheryl]

We just re-fied from an adjustable to a 7 year fixed.  The 7 year fixed is at a respectable rate of 5.62% which caps out at 10.62%  cap after 7 years

So how is it fixed, if it adjusts to 10.62?

 

[cube_rat]

It's fixed for 7 years at 5.62 then in the 85th month the loan reverts to an adjustable which caps at 10.62%. So if the interest rate plus my margin (I don't know the index off the top of my head) is 12% in month 85, my interest rate will be 10.62%. If the interest rate in month 85 is 8%, I pay 8%. Let me know if I made anyone more confused

 

[vinhmen]

If your plan is to pay only interest for the term, why not take out an interest-only loan and get a lower rate?

 

[cube_rat]

If your plan is to pay only interest for the term, why not take out an interest-only loan and get a lower rate?

When you say interest only, do you mean negative amortazation? 3 year adjustable?  There are many flavors of interest only loans.  Interest only loans, assuming you mean adjustable, turns my stomach.  I had one with World for one year and felt like my payment was a moving target.  I simply cannot budget around a moving target.  Besides rates are trending upward.

 

[Nords]

We just re-fied from an adjustable to a 7 year fixed.  The 7 year fixed is at a respectable rate of 5.62% which caps out at 10.62%  cap after 7 years.  The loan balance is $390k (I had to absorb 6K in prepayment penalties from World Savings    into the loan).  My plan is to pay the interest only portion and save $1500 a month to an ING account for a period of 84 months.  At the end of the loan term, I should have around $126,000 (not including componded interest) to paydown the principal to either re-fi again or stay with the new adjusted rate. 

Interest rates have been predicted to rise for almost three years and look how far they've come... but (sarcasm) this year it'll really be different!  

You will pay more in interest, but you're hoping to earn more (after taxes & inflation) than you pay.  I guess that would work if you could earn an interest higher than the loan you're paying.

Your loan is tax-deductible but the interest earned on an investment is also taxable, so unless you evade a significant state tax on something like an I bond or a tax-free municipal your rate to beat will be 5.62%.  We're seeing 16-month CDs at 5% and perhaps there are higher interest rates for longer terms but you may not have the principal to lock in a big amount for a higher rate.

With "only" seven years and having to DCA into an investment, it looks like you're making a significant bet with high risk on rising interest rates.  We've beaten this topic to death in another thread.  You may want to see if there's any wisdom in there that you could use to tweak the rest of your portfolio.

 

[vinhmen]

The ones I've seen are fixed for a term and then balloon payment is due at the end for the entire balance.  Payments service strictly interest, no reduction of principal.  Of course the plan is usually to refi after the term is up. 

 

[justin]

I'd pay the mortgage down at the regular rate. I calculated your breakeven point. If you're starting with an initial rate at ING of 3.3%, and the rate increases linearly for the next seven years, and the rate at the end of seven years is 6.78%, then you would have the same amount of money if you either pay of the mortgage on the regular schedule or if you pay interest only and stash the rest in an ING account.

I believe the tax savings you expect would be a wash, because your ING account produces interest that is ordinary income.

6.78% in seven years seems like an overly optimistic goal. When you look at historical money market rates, that rate hasn't been seen in a while.

 

[azanon]

Interest rates have been predicted to rise for almost three years and look how far they've come... but (sarcasm) this year it'll really be different!

Its best to make movements with regard to interest rates based on what's actually happening,  not what you think is going to happen.  The past 3 years (or a year ago from now), interest rates dropped every single time it changed.  The time to reconsider interest rates was when it actually started going up, not when folks were predicting it to go up.

Interest rates are rising now.  That is a fact.   So the trend on interest rates now really is up. In short, compare the prime rate today, to what it was before it changed. If it went up, the trend is up. Probably 80% of the time, it will go the same direction again.   

And for the record it will be different this year.   So far it has been.   I'll bet you it will continue to be. 

 

[Mr._johngalt]

I live in the outskirts of San Francisco, hence the seemingly high loan amount.  Trust me when I say that my loan amount PALES compared to some folks I know with million dollar mortgages!  There are local radio ads here talking about how one can get a million dollar mortgage like it's nothing.  Also, it's all relative too, I get paid a healthly six figure income. 

BTW - my property taxes are $4700 per year.

I can get a million $ (or more) without breaking a sweat.
Will I? No way. BTW, "PALES"?? What is that?

JG

JG

 

[wabmester]

Interest rates are rising now.  That is a fact.

What kind of fact?   Here's the rate on the 10-year for the last year:

(Notice the rate a year ago, and the rate today?)

 

[cube_rat]

BTW, "PALES"?? What is that?

JG

JG

Audio pronunciation of "pales" ( P ) Pronunciation Key (pl)
adj. pal·er, pal·est

1. Whitish in complexion; pallid.
2.
1. Of a low intensity of color; light.
2. Having high lightness and low saturation.
3. Of a low intensity of light; dim or faint: “a late afternoon sun coming through the el tracks and falling in pale oblongs on the cracked, empty sidewalks” (Jimmy Breslin).
4. Feeble; weak: a pale rendition of the aria.

Another words a stark contrast between a 390K loan and a 1 million dollar one. I do not ever wish to obtain the latter. No way!

 

[Mr._johngalt]

Audio pronunciation of "pales" ( P )  Pronunciation Key  (pl)
adj. pal·er, pal·est

   1. Whitish in complexion; pallid.
   2.
         1. Of a low intensity of color; light.
         2. Having high lightness and low saturation.
   3. Of a low intensity of light; dim or faint: “a late afternoon sun coming through the el tracks and falling in pale oblongs on the cracked, empty sidewalks” (Jimmy Breslin).
   4. Feeble; weak: a pale rendition of the aria.

Another words a stark contrast between a 390K loan and a 1 million dollar one.  I do not ever wish to obtain the latter.  No way!

Duly noted!

 

[bosco]

Trust me when I say that my loan amount PALES compared to some folks I know with million dollar mortgages! There are local radio ads here talking about how one can get a million dollar mortgage like it's nothing. Also, it's all relative too, I get paid a healthly six figure income.

theory of the greater...never mind.

Tulips, anyone? It's all relative....

 

[cube_rat]

theory of the greater...never mind.

Tulips, anyone? It's all relative....

I don't understand your comment here. Please elaborate.

 

[Nords]

I don't understand your comment here.     Please elaborate.

Here's the Greater Fool Theory and here's "Tulipmania".

 

[cube_rat]

Here's the Greater Fool Theory and here's "Tulipmania".

Thanks Nords! I now look at the San Francisco area as a field of gigantic tulips soon to be cut-off at the stems when the real estate market cools off.

 

[yakers]

Well my 100% accurate crystal ball says there will be a correction. The only problem is I don't know when. Feels like it should have ahappened already. And I do not know what "shape" it will be--a sharp contraction or a slow 1% or 2% decline over several years, like the Japanese. I'm actually hoping for a sharp contration (sorry you already ERd folks) as I am still working and I would have time to acquire more reasonably priced assets.
Yep, we are due for a correction, just wish I knew when and what shape it will take.

 

[Nords]

Well my 100% accurate crystal ball says there will be a correction.

Yep, we are due for a correction, just wish I knew when and what shape it will take.

Jeremy Grantham, Daily Reckoning, & John Mauldin have made a living for years by expressing this single thought (with its caveats) in one article/book/lecture after another. I may be cynical but I'm impressed with their chutzpah.

Personally I think there's going to be a huge bull market. I don't know exactly when but I suspect it's going to precede & follow the correction. So please let me know if your research happens to nail down the dates of the correction. We ERs will step smartly aside and jump in just before the bull begins to gallop...