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.

Don’t Drown In Sunk Costs

This activity makes no sense. Unless the guy in the Oxfords is placing the penny down to see what cheap soul picks it up.

This activity makes no sense. Unless the guy in the Oxfords is placing the penny down to see which cheap soul picks it up.

 

It’s amazing how many people will congratulate themselves for such money-saving machinations as calling the cable or phone company to get their monthly bills reduced by a buck or two, yet won’t expend similar effort to save themselves tens of thousands. Here’s an example:

You borrowed $200,000 to finance your house 5 years ago at 6.57%, after putting 20% down. Should you refinance?

Yes.

30-year rates are now 3.47%, 15-year rates 2.84%.

Your balance should now be $187,124.51. (That’s right. After 5 years, 94% of your balance remains. Pretty impressive, huh? Sorry, but this is how interest works. It’s why you should be a lender.)

You can pay 6.57% on the $187,124.51 for the next 25 years, continuing to make monthly $1,273.36 payments. But if you refinanced, you’d pay:

$1,277.90 a month for the next 15 years. For an extra 4½ bucks a month, you could burn your mortgage a decade quicker. Would that be worth it?

Depends on how much refinancing costs are.

We’re assuming that your credit is good. If your credit isn’t good, refer to page 33 in Control Your Cash: Making Money Make Sense and treat consumer debt like the hantavirus that it is. If you’re carrying balances on your credit cards, balances that you pay the minimum on and don’t expect to pay off for years, dig deeper. You’re an individual, not a government. You can’t do this indefinitely, and better you endure brief sharp pain than enduring dull pain. In fact, you shouldn’t even be wasting your time reading blog posts. Go out and get a second job, and stop spending money beyond the essentials. Once you’ve done that, and you’ve eliminated your consumer debt, come back.

(Good. With those folks out of the way we can get down to business.)

So what are the costs of refinancing, anyway?

The largest expense is the loan origination fee, which will almost always be 1% of the new loan. $1,871.24.

Appraisal fee. The lender doesn’t want to refinance your lean-to at Windsor Castle prices. Call it another $500.

Inspection fee. Even if it is a lean-to, it needs to be habitable. Pencil in another $225 or so. You’ll also need a pest inspection. Maybe $50 if you live somewhere like North Dakota, $75 if you’re in Florida, The Palmetto Bug State. You might also need a flood certification, $75, to prove you live (or don’t) in a flood zone.

There are also credit reporting fees at around $150. Plus recording – formalizing and registering the transaction documents with your county assessor’s office or whomever. Call that $35.

Depending on which state you live in, a reprobate lawyer might need to get his piece of the action. $750 for attorney review, because reading a series of boilerplate documents requires someone with an advanced degree and a goodly amount of self-loathing.

There may be other fees too. When you ask your lender to quote a rate, make sure they include a breakdown of all closing costs, including the costs charged by any closing agent. Compare the interest rates of any “no-cost” refinance to one with costs. Lenders will usually increase the loan’s interest rate by 25-50 basis points to cover the costs not collected up front.

Tally it up, and that’s $3,681 for the privilege of paying another $230,022 over the next 15 years, instead of paying $382,008 over the next 25 years. An investment that pays 41-fold, maybe minus a few multiples for the accelerated payoff. Hopefully you don’t need to be convinced further that that’s a fantastic deal.

Last week we wrote Part I of how we manage to remain liquid, comfortable, and reasonably affluent in Year 5, maybe 6 of The Recession That Politicians Wouldn’t Let Wither. Some people thanked us for and were inspired by the first-person perspective. Others decried us as out-of-touch and haughty with no understanding of the world beneath us, Mitt Romneys in a sea of 47-percenters.

The secret to building wealth is that you don’t need to shoot superlatively high. Sure, Sergey Brin and Larry Page beat you to the idea of creating a search engine that could metastasize into an entire online ecosystem, where hundreds of millions of people willingly share personal information that can be monetized. Brin and Page are billionaires several times over, while you aren’t and never will be unless Obamanian/Bernankite hyperinflation becomes reality. Does that mean you should look for the next cosmically resonant opportunity instead, which simple probability dictates that you’ll probably fail at?

NO. There are other choices beyond aiming that high, and aiming small. Taking a few hours to save $152,000 over the period of a home loan is what people with a wealthy mindset do. The ones who don’t, don’t because it:

  • Is more involved than just picking up the phone and calling Verizon Wireless’s billing department.
  • Involves using the services of other people, some of them experts who charge fairly for those services.
  • Requires a little math.
  • Might result in nothing. (If there were less of a difference between current mortgage rates and what you’d borrowed at originally, for instance.)

Cursing the darkness might make you feel briefly better, but that’s not what we do here at Control Your Cash. Instead, we prefer to take aggressive, intensive steps to significantly increasing revenue (or significantly reducing expenses.) If you’re going to chase pennies, chase them tens of thousands at a time.