And they come with no warning,
nature loves her little surprises.
Continual crisis!

Wednesday, October 24, 2007

Our House

Countrywide is dedicated to refinancing 80,000 ARM Loans given to subprime borrowers. That's excellent, you know, except for Countrywide holding about 2,500,000 such loans. They're also selling it as a gracious benefit to their customers who may find themselves struggling to pay their loans once the rate adjustment hits. That's really nice of them.

If it weren't completely self-preservation motivated. If those home-owners default Countrywide will be left holding the bag, very literally, for these properties. These properties that have probably lost value in the past few years, are on loans less than 5 years old, and in a very soft market for sellers. Yeah, they're doing this to help their customers. Nope, sorry, they're doing it so they won't lose their shirts. Even in a good market, with prices going up and a large pool of home-buyers a bank will lose money if they have to foreclose. If the loan had been serviced for 10 years or so, they won't lose a lot compared to value in value out (they still lose a great deal than if the home owner had been able to continue paying on the loan until it was closed). But they still lose even when everything is ducky. So, yeah, they're doing this to save themselves.

This isn't to say I don't applaud that move. However, maybe not having such ridiculous loan packages in the first place would have helped. Sorry, balloons for subprime borrowers is like playing the lottery on the corporate level. Of course, they expected that people with these loans would either sell their homes or refinance before the payments ballooned, generating extra loan processing fees (which you may not know, Countrywide has been sued over).

Countrywide holds the mortgage on my home. We have a 30-year fixed-rate mortgage, and I wouldn't have trusted anybody to get an ARM (on which you're betting that interest rates would remain at all time lows, or that you could get out before rates adjusted - Vegas gives you better odds). I'm not completely satisfied with my loan, but their rates for our area were comparable to other lender's rates.

Also, I'm fortunate to be able to pay extra toward my mortgage, and if you can, I suggest it. Here's some quick math on why. Let's say because of my refinance that I still have 25 years on my mortgage. Think of extra money toward your principle as prepaying the last payments on your loan. So if I pay an extra $100 now, for the sake of quickness lets say I have a 5% mortgage (simple, not compounded). Every year carrying that $100 would cost me $5 until that last payment 25 years from now. Sending in that $100 now saves me an extra $125 that I would have paid in interest. Of course inflation will knock off some of that, but then interest rates are compounded daily, and then you have to factor in the prediction of will your pay raise to meet inflationary rises, both of those mitigate the loss through inflation. At some point the rate of return reduces to below a certain pain level, but then you can think of it as discharging your debt early, so then you'll have extra money when your pay rate hasn't been rising to meet inflationary changes in the prices you're paying.

A 25-year repayment schedule is also a good exercise to show this as most credit cards base their minimum monthly payment based on a 26-plus-year schedule. And their rates are much higher.

2 comments:

ThatGreenyFlower said...

Smart math.

I have two mortgages we're paying down: one on the house, and the other (just as expensive) on my student loans. Both are, essentially, 30-yr fixed mortgages. I don't pay extra on either because I have a family to feed, but I wish I could. Sometimes I get so stressed out about money that I feel like I'll never sleep again, you know? Urk. I just need a reminder every now and then that it'll all get taken care of as long as I don't do anything stupid.

I'm working, we're saving, and we're paying down loans. 'Sall good, right? Right?!?

Steve Buchheit said...

Greeny, oh yeah. Getting a safety net (savings) is a very big thing. For me, we run a little below my comfort zone on that, but I agree with my wife that paying off loans that have a higher interest rate than what we would get through savings make more sense, so we run over her comfort level and below mine on the savings.

Not having kids certainly helped with us keeping ahead of the debt (our house is our only real debt at this point, and we got that fairly late in our lives). We also don't take vacations all that often (we've started this last few years to actually take vacations and we still want to go to Europe). Right now I make way more that she does, although that wasn't the plan (she has a PhD).

It's been a hard scabble to get away from the paycheck to paycheck living we once had. And I'm certainly glad that it'll take more than a minor emergency to crash us financially.