Our Bank Loves Us And Wants Us To Be Happy, Pt. 1

Our 1st house was in Brobdingnag

Our 1st house was in Brobdingnag

 

Welcome to one of those rare 1st-person stories in which we give a smattering of detail about our personal financial life, which is comfortable, so that you can apply the decision to your own life and watch the benefits accrue.

Among the houses in the CYC Land Empire, which still totals a few thousand square miles fewer than John Malone’s, is a handsome 3-bed/2-bath number which we rent out in Clark County, Nevada.

(Fun Fact: The home is in Las Vegas, but that’s not the Fun Fact. The Fun Fact is that in the 1990s, and possibly still today, Citibank operated a check processing center and several other concerns on the outskirts of town. Convinced that their clientele were dumb enough to think that monies addressed to “Las Vegas, NV” would somehow end up on a baccarat table or inside a slot machine before finding their way to Citibank, the company used the county name in place of the city identifier. Beyond that, Citibank created fictional towns that people could send correspondence to without fear. Red Rock, NV was one. The Lakes, NV was another. These cities never existed in any form, but the postal service didn’t care as long as you used the right street address and ZIP code.)

In April of 2005 we refinanced the house, which we’d bought a couple years earlier, for $160,000. A couple of paper transactions later – a sale to a trust we own, and then to a limited liability company of which we’re the directors and officers – and the house is now more than ¼ of the way to being paid off. Well, that’s not exactly true. The mortgage term is more than ¼ over – 7½ years out of 30 – but we’ve dented only ⅛ of the principal. Which is how these things work. The portion of the monthly payment that goes to principal accelerates as we get approach the end of the mortgage. Math.

If you remember, 2005 was an awful time to buy a house and a similarly bad time to refinance one. The bubble was about at its limits, a nationwide mountain of unsustainable debt ready to prick it at any provocation. Still, the proper comparison at the time wasn’t to 2008 home prices. (For one thing, we didn’t know what those were going to be.) The proper comparison was to other investments. We had nothing at our disposal that would (almost) guarantee $1200 or so a month in cash flow, so we committed to the house. Which last appraised at exactly a quarter-million, which probably says less about our shrewdness as investors than it does about the appraiser’s love of round numbers.

The current monthly payment is $1078. The house is in a pleasant if not affluent area, with no visible meth labs nor signs of suburban decay. The neighbors are clean and quiet, as best we can tell. In other words, the street started off OK and doesn’t seem to be getting any worse.

ANYHOW…yesterday we received an ominous phone call from someone purporting to be from a bank. “Hi, this is Christina. Please call me back at this number.” She didn’t address the person she was leaving the voice mail for, which seemed suspicious. A few seconds of Googling did confirm that she was indeed a bank employee and not a sophisticated criminal who dupes people into calling them back with their financial information. (We may have been born at night, but…) Then our skepticism made way for good old-fashioned Catholic guilt. “Oh my God, are they repossessing the house?” No, our payment record is perfect. “Sweet Jesus, are they calling because someone hacked into our account and…?” Even if that were true, what could such a person do? Pay off our balance? We’re debtors here. Anyone who impersonates us is going to be impersonating someone with 22½ years of financial obligations.

Or 15 years. When we finally got a hold of Christina, she made us an offer:

Your credit history is perfect. You’re paying too much. If you want to refinance again, we can put you in a 15-year mortgage for only $100 a month more than you’re paying now. It costs $420 to do this. You want me to send you the paperwork?

Yes, you can send us the paperwork.
But no, we don’t want your charity.

Our current rate is 5⅞%. The new one was supposed to be 4½%. The new monthly payment would indeed have been $100 more, but we’d also be cutting 7½ years off our obligation. (Not forgetting the $420 upfront cost, of course.)

So it’d take 2 years for this to pay for itself, and again, it frees up 7½ years worth of investment potential, new opportunities to take advantage of. If we held onto the house for 2 years and 1 month, assuming the market doesn’t crash again, this would seem like a shrewd move. Except for one thing. Well, 2 things. First, the closing costs worksheet the bank employee sent us used a rate of 4⅞%, not 4½%. Baiting-and-switching us isn’t a good way to start this relationship off. Second, just look at this (changed slightly since we stole created the graphic):

 

15-year

 

The worst rate listed on Bankrate is 3.68%, that from Mutual of Omaha. With all due respect, we think we’re entitled to the 3⅜% that Roundpoint customers are paying.

Say we hold onto the house for another 5 years. Sparing you the calculations, if we take advantage of the bank’s “generous” offer we’ll have paid down an additional $14,994.89 in principal. We’ll also have forked over an extra $10,504.80 in monthly payments. Is doing this worth $4,490.09, given that it takes 5 years to realize?

No, because there are better offers out there. Paying 120 basis points over market price is insanity. Not quite as insane as staying in our current loan, but at least now we know we have options. In the interests of full disclosure, we’ll shop around and give you our findings next week. And tell you how much we’ll end up saving.

15 Years to Freedom

Thanks to Arohan at Personal Dividends for indirectly helping us out yet again. He’s the guy who graciously lets us guest host the Carnival of Wealth every month, and also let us write this post for his last year. It appears here in slightly updated form on Recycle Friday. Again, updates in CYC Burnt Umber. This week’s topic? Halving your mortgage. Totally legally:

It’s the modern exemplar of fiscal responsibility – the mortgage you pay off in half the time of a standard one. Granted, people who carry 15-year mortgages are generally the same ones who alphabetize their refrigerators and iron their gym clothes. But people like that are worth emulating in a society where the populace now regards mortgages and credit card debt as no more obligatory than rural speed limits.

Obviously, paying a mortgage off in half the standard time means you’re making payments twice as big, or close to it.

But you aren’t. Here are a couple of graphs that show how long it takes to start making a dent in the principal when you finance your house over 30 years, vis-a-vis 15 years. We used standard market rates, which we’ll quantify in a second. The purple line is your cumulative interest payment, which you obviously want to keep as low as possible. The purple line moves in concert with the yellow line, which is your principal balance: you want the yellow line to take as short a path as possible from the northwest corner of the graph to the southeast corner.

Chart 1: A 30 Yr Mortgage
30-Year Mortgage
Chart 2: A Comparable 15 Yr Mortgage
A Comparable 15-Year Mortgage 

That second graph is revolutionary, and indicates how there’s not only never been a better time to buy a house (or houses) than now, but that there’s never been a better time to get yourself into a 15-year mortgage.

Around 1981, 30-year mortgages were going for 18%. Just for sheer horror value, here’s a comparable chart from then. We enclosed it in a thick red border to denote danger:

Chart 3
 

It’s true: There are homeowners whose 30-year mortgages are coming due this year, who as recently as 2008 still had less than half equity in the house. These people might be your parents. Don’t show them this article.

But getting back to the relevant charts, the first two: we’re not criticizing people with 30-year mortgages. Given such variables as human life expectancy, house obsolescence, and wages and salaries, 30 years has always been the historical happy medium for a mortgage term – not so long that you’re on the hook into your senescence, and not so short that you’re forgoing dental floss to make payments.

However, we’re in The Great 21st Century Stagnation and everything’s at least a little askew.

Here are the actual current mortgage numbers. The average 30-year mortgage right now goes for a minuscule 4.33%, which still dwarfs the average 3.85% that 15-year mortgagors are paying. The difference between the rates has never been this big. Ever.

Last summer, the median home in the United States sold for $176,400 according to the first chart on this page.

Aside: some esoterica from that chart.

  • the string of “N/A” in the Detroit row is amusing. What a craptastic town. Nothing there is applicable.
  • the numbers for Ocala and Ft. Myers seem low until you remember that the vast majority of those homes are snowbird apartments.
  • building restrictions in the Bay Area have had the desired effect, if the effect desired was pricing everyone out of the market.

If you bought the median house with an average-priced 15-year mortgage, how big would your monthly payments be? Here come the math:

Mortgage Payment Calculation

You really need to stop complaining. “Waah, I suck at math. I’m no good with numbers (giggle).” It embarrasses us both.

Would you say “Waah, I suck at English. I’m no good with words” in public? Of course not, you’d sound like a tard. How is this any different?

Take your interest rate, divide it into the number of payments you make annually, add 1, take to the power of (negative) the number of payments you’ll make over the life of the loan, subtract from 1, multiply by the number of payments in a year, divide into the interest rate, multiply by the amount of the loan. Wasn’t that easy? You should have learned how to do this in the 6th grade. Clip and save the formula, it comes in handy all the time.

Anyhow, your monthly payment is the product here, which is $1291.58.

10 years ago, the average 30-year mortgage went for 7.96%. Let’s plug that interest rate into the above expression and see how much house we could have bought with such a mortgage back then, given the same monthly payments.

You ready?

A house costing $176,693.34.

Yes, today you can pay a house off in half the time it would have taken to pay off the exact same house (plus a medical supply table) in 2000.

In other words, God wants you to not only buy a house today, but be free of your debt obligation no farther in the future than O.J. Simpson’s not guilty verdict is in the past.

Everything beyond this is speculation, but the Fed chairman has indicated that he wants to keep inflation low and money tight. Maybe taking him at his word is foolish, but it seems as though mortgage rates can’t fall much lower. If you’re looking at a 15-year mortgage, and the economy stabilizes between now and 2025 (which of course it will), your 178th, 179th and 180th payments could be awfully palatable and the checks downright fun to cut.

(Thanks to TheMortgageReport.com, which we didn’t crib from to write this post. But it’s one of the very few well-written and informative blogs on any subtopic of personal finance. And Dan Green, the guy who runs it, makes awesome charts.)

**This article is featured in the Yakezie Carnival-Tour de France Financial Factoids Edition**

Man of the Year 2010 update

He‘s gotten even smarter, which we didn’t think was possible.

Bob had 22 years left on a $148,000 mortgage at 6¼%. Knowing an opportunity when he saw it, Bob didn’t complain about how low interest rates are and how hard it is for banks to make a profit. Nor did he lament that his house had lost $115,000 from its inflated peak value (which, of course, is just a number on an appraiser’s calculator. Bob’s house gained value, albeit not very much, in one of the most brutal housing markets in America.)

He, and we, noticed how low 15-year mortgages had gotten. Bob refinanced, and next month will begin making payments on his new 15-year, 3¾% mortgage. He’ll save $200/month. But, there’s always a trade-off. In this case, it’s that he’ll now own his house free-and-clear 7 years earlier.

Wait – he pays less monthly, and repays the debt faster? Alright, maybe there is no trade-off.

Poor people, would you even have thought of this? Back away from tonight’s episode of Celebrity Disagreement and learn from the master.