Rate Hikes

[Ghel]

I'm putting this here because I wouldn't know how to do these calculations if I wasn't a lender. Some of these thoughts are work-related, but more of them are personal.

Lots of folks in banking are freaking out over the recent interest rate hikes. It's kind of a mixed bag for us. When rates are lower, more people want to take out loans, but we earn less on them. When rates are higher, fewer people want to take out loans, but we earn more on each loan. I'm not really privy to management's calculations or thought processes when they decide to change rates - I just get a new rate sheet.

The past few months, we've been trying to keep our in-house adjustable rate mortgages at a slightly lower rate than what's available on the secondary market. Customers can get a 30-year fixed rate on the secondary market, but maybe they'll want to stay in-house if they can get a lower rate for the next 5 years. We earn a fee on secondary market loans, but we get both fees and interest on in-house loans.

We're also experiencing a bit of a housing bubble. I bought my house for $50k about 5 years ago. Now sites like zillow and realtor dot com say I could sell it for $100k. And I haven't done anything other than maintain it. It's in the same shape it was when I bought it. The issue, of course, is that every other house in the area has also increased greatly in price. So if I did try to sell my house, I wouldn't be able to find a comparable house that I could afford.

My boss and I were doing some calculations based on the rate changes in the past few months. Not so long ago, you could get a 30-year fixed rate mortgage at 2.85%. As of today, it's 6.50%. Based on that change, your interest paid on a $100k loan over 30 years would go from $40k to over $120k, tripling your payments over the term of the loan. It's not great for people trying to buy a house.

My boss says he regrets not refinancing when rates were low. He balked at the closing costs (around $4k), and I agree. I did a calculation of how much I would save in interest over the remaining 25 years on my loan, and it wasn't enough to justify draining my savings for closing costs.

I have less than $40k left on my loan. My payments are only $225. Although I have an ARM and the rate is going to go up in December, it still wouldn't have made sense for me to refinance when rates were low. My rate is going to go up from 4.75% to 6.75%. There's a cap of 2% increase any time the rate changes, or else it would likely go up more. But because where my loan balance is, my payment is only going to go up about $30 a month.

I've been putting an extra $100 on the loan almost every month for the last year, ever since I paid off my car loan. Yesterday, I calculated that if I continue doing that, I'll pay off my loan in 13 years instead of 25 and pay half as much interest, too. Despite everyone freaking out over rate hikes, I don't think it's going to affect me, personally.

Ok, that's not entirely true. My credit card rate will almost certainly go up. It's astronomical already. And, obviously, costs of buying things will continue to increase, same as for everyone. And I'm not an economist, so I'm not sure how these rate hikes are supposed to stave off recession. But I'm not going to freak out over mortgage rates increasing.

[mjr]

I get where you're coming from, Ghel. We bought our house in 2008 with a 5.5% rate. At one point when rates were down around 3%, I thought about refinancing but didn't, because I knew closing would be high, and I didn't make as much as I do now.

A couple of years ago, I bought a car. I negotiated a price, and got pre-approved through my bank at 3.4%, for something like 36 months. Unfortunately, the dealership wouldn't let me use outside financing with the negotiated price, for whatever reason. Their interest rate was 6.1% for 72 months. So I basically paid something like 5x my monthly car payment, and paid that car off in a year.

At that point, I realized I could basically sink a car payment into my house every month and pay it off much faster. So now I'm sending over double what my mortgage payment is to the mortgage company every month. My regular amortization schedule says my house should be paid off in 2038. However, if I stay on track, I can pay it off in early 2023.

At that point, I will be completely debt free. No mortgage, no car payment, no debt. I'll still have my yearly property taxes and such, though.

[csquared]

Unfortunately, the dealership wouldn't let me use outside financing with the negotiated price, for whatever reason. Their interest rate was 6.1% for 72 months.

More than once, I accepted the dealership's financing. Then I contacted the bank/credit union/insurance company and got a better rate. Had them pay the dealership off.

I have a 3.625% mortgage. I have no intent of paying that off early. Milk that for what it's worth.

[Nunavut Pants]

I'm with csquared on that! "Sure, I'll take your loan--if there's no prepayment penalty. Hello, Credit Union? I'd like a car loan..."

My wife sometimes seems obsessed with property values. I personally don't care--in order to realize any profit, we would no longer own the place. Then where would we live? That kind of profit is all funny-money to me, unless you are taking the profits and moving someplace much cheaper. Or possibly downsizing to a smaller place. Neither of which we are doing, so why are you telling me that "our place is worth more than twice what we paid for it!"

[Ironclad Alibi]

My wife sometimes seems obsessed with property values.

High property values are good if you are selling, bad if you are paying property taxes.

[taxguykarl]

When Mrs. TGK & I refied in ‘11, our rate was 4 ⅝% on a 20 year fixed; down from 6 ¼. That lowered our payments without extending our mortgage (IIRC, the loan was, in fact, shortened a few months) and lowered our installments a couple hundred per month. Come to think of it, the appraisal also helped our property tax appeal as the value was $10k+ less than the assessor’s estimate.

I have been making an additional principal payment each payday (I was paid bi-weekly). I still pay the monthly equivalent. We presently have 82 installments to go. May 2029 will be our last payment. If I keep up the principal payment regimen, our last will be May 2028.

When we pay our July installment next week, the principal balance will be $99k and change (down to 5 figures at long last!!!). It’s been a long time since our interest payments exceeded the principal payments. In fact, since the Tax Cut and Jobs Act passed, we only itemized for 2021 because Mrs. TGK and her brother donated their late mother’s hoarded stuff.

I’ve been getting almost daily appeals to refinance at the earlier lower rates….and unwittingly discovered the downside to extra principal pay: To maintain the present installment payments and payoff schedule (Mrs. TGK’s prerequisites), we would have to have a 7 year fixed loan with no closing costs at less than 2%. As if that will happen. Rate hikes or not, we will be sticking to our present loan, warts and all. Come to think of it, this firm (Sir Barrel-maker, based in Dallas) has the only other escrow analyst I’ve dealt with who knows the difference between ‘annually’ and ‘monthly’...also their phone jockeys speak English, unsurprisingly with Texas accents.
Zillow estimated our home value at $120k more than we originally paid in 2001. I utilized a very effective law firm that specializes in property tax appeals. The principal of which got kicked off the primary ballot for County Assessor by means of some major political chicanery---that's Illinois for you.

[Nunavut Pants]

High property values are ... bad if you are paying property taxes.

Not much of a factor in California (where we live), due to Prop 13. CA property taxes can only go up by a small amount per year, no matter what happens to the actual value.

[mjr]

I have been making an additional principal payment each payday (I was paid bi-weekly). I still pay the monthly equivalent. We presently have 82 installments to go. May 2029 will be our last payment. If I keep up the principal payment regimen, our last will be May 2028.

When we had our house built, I was making far less than I am now. I think our house was originally around $120K. It's one of the less expensive ones in the neighborhood (or it was at the time). There's been a lot of construction going on in my neighborhood and a neighborhood down the street, with more expensive houses.

Originally, I was making my monthly mortgage payments as scheduled. But now that I don't have a car payment and make significantly more than I used to (basically, right now I make 2.5 x what I did when we bought the house), I've been sending in significantly more. I could (probably) pay it off right now, but I like having the extra cushion in my bank account. We owe a little over $17,500 on it.

I figure once it's paid off, we can put a lot of that money aside for future home improvements/repairs.

I want a deck, for one. I also have some other home improvements I'd like to have done. We have a half-wall that separates our kitchen from our living room that I'd like to have brick on, because I think it'd look neat. I'd also like to replace our laminate countertops in the kitchen with granite. I'd also like to get some landscaping done.

But first it's paying it off...