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Stay the course cap'n... - The Obscurarium

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March 27th, 2010

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04:49 pm - Stay the course cap'n...
So I don't make many posts about personal finance. But I'm compelled to because I'm still in a bit of a state of shock...

Back before the bust in real-estate, my wife and I bought our house on an adjustable-rate mortgage. When things starting going south in the housing market, all the press was screaming about "Exploding ARMs" and how terrible they were for people. As a result, there was a mad rush out of ARM loans and into fixed-rate mortgages, that were at a low, but not extraordinarily low rate, at the time. People paid millions (if not billions) of dollars in refinancing charges to banks and brokers to get out of the loans everyone said were going to blow up in their faces.

I shopped around and nearly refinanced, but pulled up short after I did the math. Paying down the principal at a fixed rate during our 3-year lock-in period, we'd still be better off for as long as 3 years beyond the lock-in, even if the ARM increased at its maximum-allowable rate every year during that time. Three years is a long time, in mortgage terms, and even if the credit markets stayed locked up, the chances of not being able to refinance into something in the span of 36 months seemed unlikely. Our first year beyond #3, the rate did, indeed, increase the maximum annual amount of 2%.

But since then, rates have plummeted through the floor. It went down 0.75% the following year, and 1.25% the year after that. This year, with US Treasury T-Bills at their lowest rates in decades, my rate went down again.

... to 3.125%.

At this rate, my loan would have to increase its maximum amount every year for the next 4 years, and then stay capped at the maximum for 6 more years in order for me to be behind on this transaction. And, in fact, that's impossible, since my mortgage should be paid off before then.

It really makes me wonder precisely how many people would still be in their homes, from the latest bust, if there hadn't been the wild, mad, "common knowledge" rush out of cheap early 2000's ARMs over the last few years. A 1% swing in the APR of the average American mortgage is about $220 per month in interest. All those people that refinanced around 6% on a fixed-rate could potentially be paying as much as $550/month less on their mortgages right now. $550/month is no small-potatoes amount!

A mortgage is an investment like anything else. It generally really does pay to take the long-run and stay pat with your decisions. I'm darned happy that I didn't succumb to the fear generated by the press over the last few years and flee my "Exploding ARM"... It may well turn out to be the best-yielding investment I've ever made. And it's a salutary lesson in not taking life lessons from the media!
Current Mood: pleasedpleased

(6 comments | Leave a comment)


[User Picture]
Date:March 28th, 2010 01:41 am (UTC)
In your case, made good sense. But most of the cases *I* see are not the same. They are cases where people had teaser rates of 4-5% and then the small print is that their adjustment was to 8% over prime with a minimum of 14% or even higher - mortgages that they either didn't understand or were promised by brokers would never happen because they would be able to refinance before the new rate set in 2 years down the road - unenforceable promises, of course.

My home equity loan is at a delightfully low rate right now, but believe me when I tell you that most people who got in trouble are not the kind of people who would bother to try and refinance until their feet were in the fire.
[User Picture]
Date:March 29th, 2010 02:49 pm (UTC)
Ah... yes, I agree with you there. The "Option ARMs" that were cut, and allowed interest-only payments, or even flex payments with the interest rolling back into the principal. Those instruments should never have existed in the first place, and are pretty much the epitome of predatory lending.

But that's not what generated the buzz. In ~2007 when interest rates were spiking, there was a general flight from ARMs over a spike that lasted all of ~8 months.

I'm not saying there wasn't predatory loans out there. There absolutely were, and this is no excuse to that. But what we have here is yet another example of media hype costing a lot of people a lot of money, and exacerbating a problem that probably didn't have to be as bad as it was.
(Deleted comment)
[User Picture]
Date:March 29th, 2010 01:30 am (UTC)
Awesome rate! Where are you getting the average mortgage amount? It must be a heck of a lot higher than what I thought to swing that much with 1%. (or at least way the heck higher than my mortgage!)
[User Picture]
Date:March 29th, 2010 02:55 pm (UTC)
You're right -- I somehow multiplied by 2 somewhere along the line. That was sort of a back-of-napkin calculation. The median US home value is $167,500. The median US mortgage is $1295/month. (According to the Census bureau.)

So, by that, a 1% swing (from 6.5% to 5.5%, for instance) would be $110 in savings.

[User Picture]
Date:March 30th, 2010 05:20 pm (UTC)
We had a similar issue and had a 5-year ARM which became variable last year. Since we were moving, and interest rates were so low, we said "Heck, no!" to refinancing, and are doing just fine. :) Now, this next one, we may try to lock in a 30-year, because we're not planning on moving anywhere and the interest rates ARE so low...

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