I was asked about our interest only loan by someone on the FOOL and thought some people here could be interested as well.
The question is in italics and my reply is below that.
Mish,
3m Libor has gone up from 1.2% or so to 2.1% or so in the past 6 months.
has your mortgage payment been affected yet? How much by? Does this cause you to have significantly less disposable income yet? When would the pips squeak?
Please excuse if this is too invasive, just trying to get a handle on how much pressure the hikes to date have applied.
Plunger.
No problem at all Mr. P.
People can feel free to ask me anything reasonable at ant time.
Libor has not affected me nor do I think it has affected anyone that did what I did for the reasons I did. Since that is not clear.
Let me start here in detail.
We had a 5% fixed mortgage for 15 years.
We refinanced to interest rate only loan with an effective rate of about 3%.
After three hikes our rate is now 3.625%
Thus Greenspan can hike another full 1% and I am still better off going to libor based rate.
Also bear in mind that we are sending in the same payments as we did before. Thus we are paying off the mortgage faster. Should economic difficulty arise we can make the interest only payment and that is about $500 when before we had to pay $1400 whether we could or not.
In short these products are no brainers IMO, managed correctly, and even more so if one has the dicipline to keep paying off principle (by making the same payment that one was making before).
Also bear in mind that we are not house leveraged like many. Yes we have a 600K enormously large house for two people, but we also only owe 170K on it. I worry about a housing decline, but prices here have not run up like they have elsewhere. I am not sure if our house has appreciated at all in 4 years (and we got a tremendous price from a custom builder - He lost money on every phase of the project over what he expected to make. I am not saying he lost money I am saying he did not make what he thought he would. We have a complex design with lots of angles, not a typical square house at all, done in cedar and stone. He underestimated the stone work for sure. There were places in our house where he thought the architect was not conservative enough in spacement of 2 by fours. So at his expense, he told me about it and either doubled them up, reduced the spacing or went with 2 by 6's instead. He added some oak trim for me at no cost that was not in the plan because he thought it should have been in the plan. He also used non union labor at very good rates (cost savings for me and probably him as well), and those guys were very very skilled. Land prices have dramatically gone up since we bought. You could not get a 1 acre lot with 25 or so 100-200 year old white oak trees on it for anything close to what we paid (70K). At the time I thought 70K was outrageous. This lot would easily be 120K now. My trees are a very valuable asset. You just can not find lots with lots of 200 year old trees on it easily. We only paid 7K more for this lot than lots across the street with ZERO trees on it. So... If there is a crunch I hope the uniqueness of this lot will hold its value better than just plain flat treeless land.
Sorry for the digresion
But back to the point, as you can see, the 3 hikes have not changed a thing here and another 2 would not either (but if they come quickly they sure will affect my eurodollars).
Now, the thing to ask is if we are the typical case?
There might be people who went with an interest only mortgage to start with and over-leveraged and are indeed now hurting. I would bet there are some of those but I could not guess a percentage. It is possible we start seeing more and more and more people going to these products, and paying the interest only, we do not see a problem until 10 years from now when principle has to be paid. We hope to be free and clear by then by paying more principle than we have to.
As long as housing prices hold up and as long as people can make the minimum payment there is not a problem. How long that is, is very hard to say. Cash out refis are over, but postponing the day of reckoning by going to libor based loans might only be starting.
Finally, that last sentence does not really read properly since I am a big big fan of libor based loans as long as they are done for the right reasons and as long as a good attempt to pay them down above and beyond the interest only portion. I would recommend them to everyone on this board.
Mish |
