Banks, Interest Rates & Inflation

[Waxman]

Here we go again.

An opportunity may exist to lower my interest rate from 6.5% (60% of loan) and 7+%(40%), both fixed for 20 yrs. to 6% for 100%. but fixed for only 5 years.

I think we can plan for inflation and higher interest rates at some point in the near future.

Save now and risk a (much??) higher rate in 5 years or stay the course and know the payment for the life of the loan?

 

[Bubbles Galore]

My personal opinion is to stick with what you have. I see rates climbing in the distant future.

 

[bigleo48]

Waxman,

I'll take the opposite approach from Bubbles. Depending on your financial situation, this could be a lot of money and I suspect it is if you have a 20yr loan. If you do the math and pay that difference down over 5 years, where are you? In the end, I take the bird in the hand!

BigLeo

 

[dclark3344]

I am with Big Leo,
I would probably do the 6% over 5 years have it amortized over the 20 but make the same payment you are presently or more as the money is available. Put a pencil to it and see how much you would owe in 5 years if you stay just like you are and how much you would owe in 5 years at 6%. I think you will be surprised and how much more you will pay off quicker.

 

[Earl Weiss]

In June I was trying to arrange some financing. The bank wanted 7% for 5 years with a balloon. Thank goodness those idiots bombed out in October. because I asked for a secured line of credit and they said they could not do it.

So, I went to another bank and asked for a secured line of credit. They gave me prime +1. Dec. 1, 2008 when I closed prime was at 4% now at 3.25%.

I will make the same payments I would have made at 7% and the principal will be paid way down by the time we see a rate near that amount.

You might want to try and get the secured line of credit.

 

[Waxman]

Pardon my ignorance, but how does a secured line of credit benefit me as opposed to a lower fixed rate on my mortgage?

Thanks!

 

[Earl Weiss]

Pardon my ignorance, but how does a secured line of credit benefit me as opposed to a lower fixed rate on my mortgage?

Thanks!

The answer lies within your question. If in fact you get a lower fixed rate for a mortgage than you do for the rate (Usualy variable ) for the libne of credit, then of course there is no benefit.

However, for whatever reason the secured line of credit usualy will provide a lower rate than the mortgage (Except of course it can adjust.) The initial post indicated a possible new fixed rate mortgage for 6%. As I indicated the banks wre quoting prime + 1% (Prime currently at 3.25% with all indications it will stay low for a while. ) So the rate would be 4.25% for the loan. Prime would have to ratchet up 1.75% before the line of credit rate would equal the fixed mortgage rate.

Some homeowners have equity lines where the rate was prime minus 1%. Some had a floor they thought it would never reach and now some have access to $ at 2.25%.

The key is to be disciplined and make payments at the same amount as if the rate were higher to retire principal early.

Example. $200,000 loan. Pay $2000.00 month (Numbers rounded for simplicity)

At 6% it is paid after 139 months and the total interest paid is $78,000.00

At 4.25% it is paid after 124 Months and total interest paid is $47,500.00

Granted you gamble that rates don't skyrocket. However, in the meantime you hedge your bets by paing down the principal substantialy so that even iof they rise you can maintain the same payment. The cash flow will remain steady, but the payoff will extend.

 

[soapy]

One thing that I see hurting the economy right now is that many banks are unwilling to loan money even if land is presented as collateral. Many car dealers who have their property paid off have gone to banks to get loans against the dealership property only to be turned away because of the auto scare right now. I think this is starting to filter to other areas as well.

 

[Waxman]

The problem can be low appraisals, too.

Because real estate is low, the loan to value ratio banks use to calculate risk can appear unfavorable.

 

[Greg Pack]

IMHO, in your situation there not enough sweetener for the increased risk of higher rates in the future. Your rates are pretty decent as is.

Although rates are low and will stay low for as long as the government can somewhat influence it, with budget deficits staying high the rates will eventually be forced higher by the bond market. Within five ears we could have double digit rates again.

I'd stick with the current setup, or shop for the lowest long term fixed rate.

 

[Waxman]

Before I make any decision I'll look at an amortization table, plugging in the proposed lower rate and my current payment and see how much I would whittle down principle within the 5 years.

But I tend to agree that the 5 year rate would have to be quite low to justify that future risk of (gulp!) 10% interest! Sleepless nights, stress, worry and fear are not what I intend to create in my business life.