Saturday, June 26, 2010
6/26/10 The 4 1/2% Solution?/ Cocaine
If I had been asked to invent a carbonated drink in the early 19th century that would rake in billions, I would also have opted to add extracts of the coca leaf.
Yesterday I turned in a new 'placeholder' application in the event the 30-yr fixed hits 4.5% (or less) in the next few weeks. My broker quoted 4.75% this week (no fees). As always, the long bond gets bid up during periods of market volatility/uncertainty, which drives down yields and leads to lower mortgage rates.
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Doug Kass- Obama is bad for the markets.
ReplyDeletehttp://finance.yahoo.com/news/Cramer-Why-Obama-Is-Bad-for-tsmf-2364771359.html?x=0
2nd- Do you keep kicking the loan duration back to 30 years? What's the thinking behind that? Do you make extra principle payments? Trying to come up with a game plan for myself.
ReplyDeleteMark- The duration is of no consequence. I can pay down the principal at any rate I wish (by making extra payments), and 'customize' the duration. I can make it a 14 1/2 year loan if I wish. Or a 22 year loan. Whatever. That's why it's imperative to obtain a loan with no 'prepayment penalty.' Which is the only type of loan this guy will allow his clients. In the meantime, the lower monthly payments give you flexibility- in my case, a little 'padding' while the kids are in college. When they graduate, I can simply accelerate principal pay-down and shrink the loan to, say 15 years.
ReplyDeleteThe banks have every incentive to increase duration and generate interest income.
ReplyDeleteDid you know that by making just ONE addtional payment each year (13 instead of 12), you can shorten the duration to about 22 years?
The way I've been working it is to simply pay an additional few hundred on the mortgage each month, which immediately gets credited as an 'additional' principal payment.
I'm not planning to work another 30 years, of course. But I fully expect to have the house paid off by the time I retire.
ReplyDeleteThanks 2nd- That aligns with my thinking also. I'll give him a call Monday.
ReplyDeleteI found that the rates on 15 yr were lower, if you aren't going to be working longer than that, anyway. The no prepay penalty loan is critical to long term wealth, IMO, because as your income increases, you can increase the payment amounts to reduce the loan term.
ReplyDeleteBeing debt free opens up a world of investing possibilities, because borrowed money is always scared money, and not having payments for any debt enables you to accumulate wealth. That's why I live way below my means. I have always lived that way, working hard, borrowing when things were "on sale", and paying them off ASAP, and saving/investing/trading with what was left instead of buying/living in a McMansion or buying new, expensive cars on credit like the rest of the nation.
Like Cheapy, I prefer the 15 year mortgage and would apply the same mindset you guys discussed for the 30 to the 15. Obviously the one drawback is the higher payments, but a payoff in 7 or 10 years is going to feel great.
ReplyDelete2nd's post article on malaise is really good. Generally not a fan of Cramer, but he is right on in this piece and the guy is smart.
The one thing that really gets me is that this Finreg piece does not limit leverage. This is key to reigning in risk. If one leverages 70 to 1 or 100 to 1 (not sure of the exact number) a 2% move in the wrong direction wipes you out. No risk management in the world can protect you from that i.e. LTCM and Lehman.
Cheapy agree with all you said below:
Keynesian economics has failed. To be honest I think it was always wrong, and never did work. They just wanted to WISH it would work. This time the Fed has no ammo left to use to bail it out other than print/debase/devalue. The tax hikes in 2011 will cause the downturn to accelerate.
On second thought Cheapy says that rates are lower on the 15. I do not know if he prefers this.
ReplyDelete"Keynesian economics has failed."
There is a very good chance that it was WW2 which brought us out of the malaise of those times and people mistakenly attributed it to Keynesian economics.
Yup, agree on all points.
ReplyDeleteWW2 ended the depression because the US was almost untouched when the war ended, and there was much demand for everything we produced because factories everywhere else had been devastated.
All those who took my advice 8 or 9 years ago and went to 15 yr loans as soon as the payments could be afforded now have paid off homes, no debt, and have actual savings, even though most lost their jobs or at least took major pay cuts since. That they all managed to hang on for years even without incomes, says a lot for the methodology. You have to get to zero debt and zero payments to ever really accumulate any sizable wealth beyond the IRA/401k and the salvage value of your home, IMO.
Banks lending to hedge funds and more than normal margin (ie less than 2 to 1) should be outlawed. Them being forced to unwind all the silly borrowing is what really sent the market into the black hole, I think. As I see it, if the bubble not been fostered by the Fed in the first place, there would not have been a crash.
ReplyDelete"Did you know that by making just ONE addtional payment each year (13 instead of 12), you can shorten the duration to about 22 years?"
ReplyDeleteThere's also an optimum time of year to make that extra payment.
I like the longer duration loan b/c interest rates aren't likely to be lower in a few years and why not leverage someone else's money for the duration anyway? Housing prices are bound to be higher in so many years and while you're gaining equity using someone else's money you can take your money and do something else with it (more property?). I wouldn't entertain the thought of taking a mortgage with prepayment penalties(unless the differential was quickly normalized), no telling what changes you might to make down the road.
I guess it depends on what you want to do with your cash, but I don't see why taking advantage of the available leverage wouldn't give you a better return, especially when you factor in the right off.
CADC - Now included in Russell micro cap.
ReplyDeleteRiddle: US, Britain, Japan, Germany - Does this sound vaguely familiar?
ReplyDelete"I like the longer duration loan b/c interest rates aren't likely to be lower in a few years and why not leverage someone else's money for the duration anyway?"
ReplyDeleteIMO, the answer lies in studying the amortization schedules of the proposed loans and paying particular attention to the difference in the interest amount paid over the term selected.
Some are offering 20 yrs at rates lower than 30 yr. Add up the payments for the 15 yr vs the 20 and 30 yr and you'll understand why you should want to live debt free.
ReplyDelete2nd - Do you take requests - the Waterboys - 81-90 - The Whole of the Moon - Spirit - Don't Bang the Drum
ReplyDeletekyle,
ReplyDeleteyou can put in a link to it. no law against that...
does this work
ReplyDeletehttp://www.youtube.com/watch?v=nUzLQ8xOa9Q
Another link
ReplyDeletehttp://www.youtube.com/watch?v=3F2mML4uZRA
Well, I've done pretty well on the equity end when it comes to financing the debt with a loan rate below that of inflation and housing prices that were crushed gave me the best leverage I could find. I'd do it again if my home weren't paid for. Heck, my realized gains more than paid off my new home when I sold my rentals at market top long before the 30yr mortgages matured!
ReplyDeleteErr - Near market top actually, one sold before and another slightly after market topped out.
ReplyDeleteLiving debt free still presents the same challenges in terms of income. Ten years from now when mortgages are 16%, a 4.75% mortgage becomes a moneymaker. I've always taken advantage of low rates and a weak market, this might be the first one I'm going to pass on unless prices get incredibly weaker from here and I can't pass up the deal.
ReplyDeleteOwning a home outright(or any home for that matter) in this environment isn't such a good deal because prices are still falling. Renters are the current winners.
I realize a lot of folks here are into not doing this or not doing that, they don't often offer any positive suggestions either. I wonder how they intend on making money by not taking on risk?
ReplyDeleteI'm about done with the doubting Thomas mentality, so I won't be posting too many more of my ideas.
Admittedly, if you were to borrow money when its "cheap", and invest the proceeds till the investment went up, you would make more from the additional leverage.
ReplyDeleteBut if the things you invest in instead go down, you still have the mortgage to pay.
In general it makes sense, but you'd have needed balls of steel to survive the last few years of it.
I see the US as a gigantic Greece within a couple years. If you had invested in the Greek markets a couple years back, I shudder to think where you'd be today with those investments. I certainly don't expect the US to do any better when the panic gets to our shores.
Cheapy - I said I like the current rates, didn't say I like the housing market. Sure am glad I don't have to mark my real estate to market, not going to sell in a down market like many others are all trying to do simultaneously... I noticed plenty going on the market here either due to spring (when activity here picks up), or recent news of housing recovery.
ReplyDeleteThere's a long line of folks wanting out of real estate right now, it won't turn around too quickly and we might find even better mortgage deals in the not too distant future...
Who knows, but at some point prior to the day I die I'm hoping I'll have a chance to put some money to work.
It is still a free country and you can do what you like.
ReplyDeletehttp://www.youtube.com/watch?v=q9cd_RLThLo
We are just discussing different views, no one is telling anyone what to do.
One of my all time favs, check out the comments.
ReplyDeletehttp://www.youtube.com/watch?v=IN1J5sMv28Q&feature=fvw
The scent of new plywood-
ReplyDeleteWe went to the local Lowe's on Friday, selected three sheets of 4x8' plywood, and had them cut it to fit the dimensions of three beds that we purchased recently (have yet to take delivery on the beds). They're being stored in the garage right now.
Just walked into the garage and noticed the (relatively) strong scent coming from them.
(a) Can't say it necessarily smells like formaldehyde (off-gassing).
(b) Does anyone know the source of Lowe's plywood- domestic/foreign?
(c) Is this a normal occurrence with freshly-cut plywood, and will the problem dissipate with time?
(d) We decided to try plywood on the advice of a salesman who hinted we could save on the cost of 'bunkie boards' (buying the little guy a bunk bed) by putting our own boards together.
Light up or have a few stiff drinks. I have to say Traffic has to be one of the great bands of all time.
ReplyDeleteI have never heard this version, wow.
http://www.youtube.com/watch?v=7_nwbTeIN4Y&feature=related
2nd should dig the piano
http://www.youtube.com/watch?v=ZVlbgqmxXNY
Classic
http://www.youtube.com/watch?v=SHRpRzXzTHg&feature=related
God, I'm glad I grew up in this period saw them live in 72 in Baltimore.
http://www.youtube.com/watch?v=73VXUZMOJdQ&feature=related
ReplyDeleteThis is my fav rendition of this one...
ReplyDeletehttp://www.youtube.com/watch?v=zYaHzg_oAJk&feature=related
Mmmmm, Traffic... I have 2 LP's of theirs, and also the CD's. John Barleycorn is one of my favs there...
ReplyDeletehttp://www.youtube.com/watch?v=iZXdV4R2Ox4&feature=related
Here is the song that describes my existence these days... The Boxer
http://www.youtube.com/watch?v=-hqdZ4AWSaI&feature=related
Nice choices Bob. Lang opened up for the Stones the last time they were in Hawaii. I think Johnny was 16.
ReplyDeleteHere is Barelycorn live,
http://www.youtube.com/watch?v=-q4LvXZNOuI&feature=related
later
2nd,
ReplyDeleteShould have an imprint on the plywood with grade and source.
Depends on what you bought, is it AC or CDX?
I would imagine it's from N. Cal. Oregon or Washington. Could be Canadian I suppose but plywood requires peelers, big logs they peel the plys from, then they glue them together using a big press and steam. the glue smell (and somewhat damp wood) should dissipate over time. Maybe store it outside in a covered area where it's warm and dry. It's manufactured and then stored and shipped in slings then stored at Lowes in a sling where it doesn't have the chance to breathe. It takes a while.
I paid off my house with extra principal payments.
ReplyDeleteIt wasn't much, an additional 9-10% a month and I was paid off in 15 years easy. Of course you are still left with the damned taxes....
I'm glad I don't have a mortgage these days...it gives me a chance to maybe buy a rental if we get the double whammy.
"We are just discussing different views, no one is telling anyone what to do."
ReplyDeleteYep, some come here to lurk and get ideas, while others share their ideas.
If I'd known there was a Russell rebalance I would've mentioned it, how about you?
morning all - we paid off our house a few years back and i'm damn glad we did it.
ReplyDeletewhat's been happening with everyone?
jb- It's been awhile. This blog is almost like a daily journal- it's all here. What's been happening with you?
ReplyDelete