Archive for February, 2006
NEWYORK (CNNMoney.com) – $25 a day plus expenses. That’s what Sam Spade (Humphrey Bogart) charged to do detective work in 1941′s “The Maltese Falcon.”
Sometimes, money references in classic movies provide the jolt that reminds us of how inflation has changed what we pay for things. After adjusting for inflation, $25 in 1941 is the equivalent of $332 today — a PI today might get between $80 and $125 an hour (or more).
Mike Meyers skillfully exploited the disconnect in the first “Austin Powers” epic. The villain, Dr. Evil, who has just come out of a 30-year deep freeze, is holding the world hostage and demands . . . (portentous music) . . . $1 million dollars to spare it. After some consultation with henchmen, he ups the demand to $100 billion.
Even in 1997 dollars, when the movie was made, a million 1967 dollars only comes to a little under $5 million. Either Dr. Evil was a bit of a piker or the cryogenics had frosted some of his brain cells.
Here is a sampling of some classic movie money moments, complete with a rating of how surprisingly HIGH or LOW they seem from our perspective in 2006
Some movie prices seem totally divorced from reality. Lenny and George in “Of Mice and Men” are tying to scrape together $600 to buy a rabbit farm in the Salinas Valley. In California today, $600 wouldn’t buy a rabbit hutch.
Rating: LOW. The movie may be set during the Great Depression, but even adjusting for inflation, $600 then is only about $8,500 today. Perhaps Lenny and George were angling for a no-down payment, interest-only mortgage, intending to flip the property in six months.
In the 1960 Hitchcock opus, “Psycho,” the room rate at the Bates motel is $10 (including a hot shower), which sounds pretty low, but it’s actually the equivalent of $66 today.
Rating: HIGH. Remember, this isn’t the Ritz; it’s a seedy place in the middle of nowhere that the new highway has bypassed, leaving it with no customers. For $66 you can rent a pretty good room in a chain motel and not have to worry about Norman’s mom.
In “Double Indemnity,” the payoff conspirators Fred McMurray and Barbara Stanwyck hope to realize on her husband’s life insurance is $100,000, a substantial pile of money back in 1944, and worth more than $1.1 million today.
But the really amusing sum mentioned in the script comes as a by-play between Edward G. Robinson and a witness to the murder, who tells him, “These are fine cigars you smoke.”
Robinson’s reply: “Two for a quarter.” Witness: “That’s what I said.”
Rating: LOW. 12 and a half cents works out to $1.39 in 2006. But the price of a good cigar these days would be between $10 and $15.
In “Jaws” (1975), a victim’s relative offered a whopping $3,000 to whomever could catch and kill the shark (played, of course, by “Bruce”).
Rating: LOW. In today’s dollars, that’s about $11,000 — we’re betting bounty hunters would need quite a bit more to put together some barrels of fish guts for chumming and seek out a three-ton, 25 foot long, great white.
In 1979′s “Kramer vs. Kramer,” Dustin Hoffman’s character gets fired from his high powered ad agency job, paying in the low $30s, and has to settle for another that pays him $28,200 a year.
Rating: LOW. That salary is higher than it sounds, worth about $76,000 today. But the Bureau of Labor Statistics reports that the average wage for an advertising VP is $83,000.
In 1955′s Oscar winner, “Marty,” Ernest Borgnine is planning to buy the butcher shop where he works. It means taking out a loan for $8,000. (“That’s a big note to carry, boy,” he says.)
Rating: LOW. A big note, indeed, worth close to $60,000 today. That still seems reasonable to buy the physical plant and goodwill of a going concern. But most of the butcher shops listed for sale on various Web sites are at least in the six-figure range.
In “Midnight Cowboy” (1969), Ratso Rizzo (Dustin Hoffman) tells the naïve Joe Buck (Jon Voight), who has relocated to Manhattan hoping to jump start a career as a male hustler, that, with the right connections, he can make “fifty, maybe a hundred dollars a day, easy.”
The equivalent in 2006 is $265 to $530.
Rating: How would we know?
“You pay $15 for a tie, you expect it to tie!” That’s Frank Sinatra in 1955 in “The Tender Trap,” complaining that a tie from Bergdorf Goodman isn’t up to snuff.
Rating: Low. Sure, that’s $110 today, which can buy quite a nice tie. But Sinatra might easily pay $150 and higher for quality neckwear.
Few movies spell out prices as complete as “Mr. Blandings Builds his Dream House,” the timeless tale of home buyer and home owner angst from 1948 starring Cary Grant and Myrna Loy. Of course the prices aren’t quite as timeless.
City dwellers Grant and Loy buy a rural Connecticut home on about 35 acres that is in such bad shape, demolition is the only solution. Purchase, demolition and construction ends up costing a total of $38,000 for a home with four beds and three bathrooms — the bathrooms costing $1,300 a piece. That translates into $308,100 total cost in 2006 dollars, with each bathroom going for $10,540.
Rating: Low. Even with all their overspending, the Blandings came out very nicely on their investment. The median price of a four-bed, three-bath home in that part of Connecticut would just over $600,000 today, and that’s with a small lot, not a sprawling 35 acres. The price of the bathroom is spot-on. A bathroom remodeling costs an average of $10,499 today.
Of course, despite Mr. Blandings worries during the movie about being stretched financially, he should have been able to handle his spending spree. He was earning $15,000 as a Madison Avenue copywriter. That comes to $121,618 today, (doing far better than Ted Kramer 31 years later). He should have been able to easily handle the $18,000 mortgage identified in the movie, which would have had payments of just over $100 a month, especially if he was able to scrape together the other $20,000 on his own.
You know those chain emails that are going around? The ones that purport to give you the origins of common phrases like “big wig” and “and arm and a leg”? Right, those. I got one the other day from my mother-in-law that was sent to the entire family. As I usually do, I responded by essentially ripping the origins to shreds, mostly on the basis of them defying all common sense. Perhaps I was a little harsh (I have a problem with that, I have to admit), because my 15-year-old nephew in Maple Valley, WA (posh suburb of Seattle, for those not acquainted) wrote back a scathing email accusing me of everything from arrogance to cultural blindness.
The great thing about the First Amendment is that it makes it possible to distinguish between competing claims, since you actually get to hear them both.
The first email:
>>Tidbits you did not know you needed to know
In George Washington’s days, there were no cameras. One’s image was either sculpted or painted. Some paintings of George Washington showed him standing behind a desk with one arm behind his back while others showed both legs and both arms. Prices charged by painters were not based on how many people were to be painted, but by how many limbs were to be painted. Arms and legs are “limbs,” therefore painting them would cost the buyer more.
Hence the expression, “Okay, but it’ll cost you an arm and a leg.”
As incredible as it sounds, men and women took baths only twice a year (May and October)! Women kept their hair covered, while men shaved their heads (because of lice and bugs) and wore wigs. Wealthy men could afford good wigs made from wool. They couldn’t wash the wigs, so to clean them they would carve out a loaf of bread, put the wig in the shell, and bake it for 30 minutes. The heat would make the wig big and fluffy.
Hence the term “big wig.” Today we often use the term “here comes the Big Wig” because someone appears to be or is powerful and wealthy.
In the late 1700s, many houses consisted of a large room with only one chair. Commonly, a long wide board folded down from the wall, and was used for dining. The “head of the household” always sat in the chair while everyone else ate sitting on the floor. Occasionally a guest, who was usually a man, would be invited to sit in this chair during a meal. To sit in the chair meant you were important and in charge. They called the one sitting in the chair the “chair man.”
Today in business, we use the expression or title “Chairman” or “Chairman of the Board.”
Personal hygiene left much room for improvement. As a result, many women and men had developed acne scars by adulthood. The women would spread bee’s wax over their facial skin to smooth out their complexions. When they were speaking to each other, if a woman began to stare at another woman’s face she was told, “mind your own bee’s wax.” Should the woman smile, the wax would crack, hence the term “crack a smile”. In addition, when they sat too close to the fire, the wax would melt . . therefore, the expression “losing face.”
Ladies wore corsets, which would lace up in the front. A proper and dignified woman, as in “straight laced”. . . wore a tightly tied lace.
Common entertainment included playing cards. However, there was a tax levied when purchasing playing cards but only applicable to the “Ace of spades.” To avoid paying the tax, people would purchase 51 cards instead. Yet, since most games require 52 cards, these people were thought to be stupid or dumb because they weren’t “playing with a full deck.”
Early politicians required feedback from the public to determine what the people considered important. Since there were no telephones, TV’s or radios, the politicians sent their assistants to local taverns, pubs, and bars. They were told to “go sip some ale” and listen to people’s conversations and political concerns. Many assistants were dispatched at different times. “You go sip here” and “You go sip there.” The two words “go sip” were eventually combined when referring to the local opinion and, thus we have the term “gossip.”
At local taverns, pubs, and bars, people drank from pint and quart-sized containers. A bar maid’s job was to keep an eye on the customers and keep the drinks coming. She had to pay close attention and remember who was drinking in “pints” and who was drinking in “quarts.” Hence the term “minding your “P’s and Q’s.”
One more: bet you didn’t know this! In the heyday of sailing ships, all war ships and many freighters carried iron cannons. Those cannons fired round iron cannon balls. It was necessary to keep a good supply near the cannon. However, how to prevent them from rolling about the deck? The best storage method devised was a square-based pyramid with one ball on top, resting on four resting on nine, which rested on sixteen. Thus, a supply of 30 cannon balls could be stacked in a small area right next to the cannon. There was only one problem…how to prevent the bottom layer from sliding or rolling from under the others. The solution was a metal plate called a “Monkey” with 16 round indentations.
However, if this plate were made of iron, the iron balls would quickly rust to it. The solution to the rusting problem was to make “Brass Monkeys.” Few landlubbers realize that brass contracts much more and much faster than iron when chilled. Consequently, when the temperature dropped too far, the brass indentations would shrink so much that the iron cannonballs would come right off the monkey. Thus, it was quite literally, “Cold enough to freeze the balls off a brass monkey.” (All this time, you thought that was an improper expression, didn’t you.)<<
>>Wonderfully fun. And most of these are false in some important respect.
“Arm and a leg” is first recorded in 1956. It has nothing whatever to do with paintings.
Big Wig of course means a “big wig”, and the richer you were, the more stuff in your wig and the bigger it could be. But baking it in a loaf of bread? Why would only rich people be able to bake their wigs? Poor people had no bread? There is absolutely no evidence that anyone ever did this.
The Chair Man – people have all – ALL – been sitting on chairs or at least benches to eat dinner in the West since recorded history. Absolutely everyone had a dinner table right back to Christ and before, which, if it were low enough for those on the floor, would have been too low for the man in the chair, and if it were high enough for him, would have forced all the rest to stand. This is just silly. This origin is supposed to be from the LATE 1700s? Hinged boards are supposed to be less technologically advanced than the TABLE? ADAM built a table.
“Mind your own bee’s wax” comes directly from “mind your own business”, which is by a fair bit the older of the two phrases. No one ever wore bee’s wax on their face intentionally. “losing face” does not have anything to do with this.
The word – it’s only one word – is straitlaced, which does not mean straightly laced-up but straitly (narrowly) laced, the same as the path is strait and narrow, not straight and narrow (look it up). “Straight Laced” is someone’s bad spelling, or else a Christmas punch. But this one, although misspelled, is otherwise correct.
Gossip has nothing to do with drinking. It’s a misspelling of “godsibb”, or a sort of Godfather or Godmother. It comes from the 15th century and is not a political term. Gossip meaning the rumors themselves instead of the person who tells them doesn’t arrive until the 19th century.
Mind your Ps and Qs might be related to taverns but also might come from printing, where the p and the q are extremely similar in the dim candlelight, with the letters inked black, and having to be set in the type backward.
The original phrase is “cold enough to freeze the tail off a monkey”. The phrase was changed to make it more improper than it already was. There is such a thing as a powder monkey on a ship, but it’s a person, not a brass implement, and shot hangs in bags or nets, and isn’t stacked on the deck of a ship that might be pitching as much as 35 degrees, not to mention being shaken like James Bond’s martini every time a gun fires. “Landlubbers” might or might not know anything about the contraction of brass vs. iron, but the guy that wrote this has never, ever set foot on a ship. Or read Patrick O’Brian.
I have often wondered whether I could be sufficiently clever to come up with a bunch of plausible origins of common words and send it around, just to see how long it took for me to get it back. But alas, I am not that clever. Or else I just don’t have that much free time.
wordorigin.org and word-detective.com are a great resource when stuff like this shows up in your inbox.
>>I don’t think that information necessarily proves everything else wrong. Human language is infamous for carrying multiple meanings for just about every word. We do it in our books, movies, motions, everything. Think of the practices within our church. A baptism doesn’t mean anything physically. If that were true, I’d become more Christ-like every time I took a shower. Instead baptism is a symbol of a spiritual cleansing, a sacred ordinance that signifies purity. Remember what you said to the “Mind your P’s and Q’s” phrase? Let me quote, “Mind your Ps and Qs might be related to taverns but also might come from printing, where the p and the q are extremely similar in the dim candlelight, with the letters inked black, and having to be set in the type backward.” So the phrase could have applied to BOTH situations. But how do you know which one is the “correct” event? There have been too many people, too many situations, too many things to have happened to pinpoint the exact origin of something like a saying. I know what you’re saying now, “but I know that the phrase ‘arm and a leg’ came from 1956! I looked it up!” how do you know that the source knew it was true? To say “Give ‘em the whole nine yards!” was invented back in 1852 is absurd. We don’t know who invented that saying. All we do know is that the saying became more and more popular as the years went by. The Bible talks about events occurring thousands of years ago. Yet it was only put together, as we know it, about 1500 years ago. Just because the book was PUBLISHED back in some-odd A.D. does not imply that all the events there-in took place in A.D. The best we can do is say, “Hey! This phrase seems somewhat associated with some human action back 300 years ago”! All we have to go off of for our history is published works. And frankly, I doubt that any historian would record the invention of a phrase. The historian may use it once or twice, but that only shows to us that is was popular back in his time too. And how dare you think to work out a phrase with your own logic? The only culture you can associate with is the western culture. Can you imagine living in a society where your wife would HELP you find a prostitute? Where you would kill your own child just because they weren’t a boy? Of course you can’t imagine doing those things. But I’m sure that the Japanese and Chinese can, that WAS their culture. You are confined by your own knowledge.
Interesting. Hard to read, but interesting.
First, I can imagine many of the things you mention. Thirty-seven years is a long time to live without much imagination, and you know me better than that.
Second, please take the time to actually read what I write before you get all excited. I mentioned that Ps and Qs might be related to taverns, before mentioning that they might not be, too. Nobody knows. Smarter people than I am have tried without success to find the origin of the phrase. Straitlaced, despite the misspelling, is also likely correct, based on the evidence we have. I mentioned this. I’m not saying “but I know” about any of this. I’m reporting something I researched, and gave the sources (which you have obviously checked yourself). Where is the supporting documentation for any of the origins in the original email? There is none.
Third, don’t castigate me for relying on written records. It is possible that the phrase “an arm and a leg” was used to indicate how much a painting cost in the 1700′s (or before, if it comes to that), but it is curious that nobody ever used that phrase in any written communication known to researchers before Billie Holiday used it in a memoir in 1956, about 200 years after it was supposed to have been in common usage, and it referred to something costing a lot of money (exactly the modern usage), not to having her picture painted. If you like, I’ll retract the complete certainty and simply say that as evidence in support of the stated origin’s falsity we have the compiled research of at least two linguists that get paid to know these things, plus thousands of other people that like to prove them wrong whenever possible (and in this case, have failed to do so). In support of the stated origin we have a chain email. You may draw your own conclusions. That make you happier?
Fourth, I would love to have a conversation with you about the symbolism of baptism, if you like, but I’m not at all sure that I understand where this topic gets mixed into the primary discussion, which is about a collection of fanciful, clever, and mostly wrong phrase origins. The word baptism may have a billion different meanings, but its origin is still fairly easy to trace, and has nothing to do with being “bapt” on the head, for instance.
Fifth, who said anything about the whole nine yards? You didn’t get that from my email. All I know is I liked the movie, despite its pretty complete amorality. About the origin of the phrase I know almost nothing, except that if an email says it came from the length of the bandolier of ammunition in WW2 (and I get one a week that says so), I go on record as saying that is almost certainly false.
Sixth, historians very frequently record phrases, and are themselves part of their invention in many cases. On the one hand, if a phrase is supposed to have been invented by a man in 1930, but we have it in Confucious, then we can state with pretty good certainty that the man did not make it up. On the other hand, one would expect that if a phrase were in wide use – and this email claims that most of these phrases were in common usage, since they deal with common events – it would be written down somewhere at approximately the time it was supposed to have been used. When the FIRST recorded use of a particular phrase comes more than 200 years after it was supposed to be used, and well after the phrase would have had any meaning, according to the explanation we received (who has their picture painted anymore?), it doesn’t take a PhD to suspect that someone is having us on.
Seventh, I wonder from what superior position you presume to lecture about cultural sensitivity. How many languages do you speak, Justin? I mean really speak, so that the first word that comes to your mind is a word in another tongue because English just doesn’t have a word for what you’re trying to say? How many miles have you ridden on third-world trains? How many dirt floors have you slept on? Eaten much blood sausage recently? How many people do you personally know that speak no English? Your father and mother know something about these things. Your grandparents know more. But I wonder about you.
“How dare I” work out the silliness of an obvously bogus word origin? How dare I not? Stupidity is still stupidity, no matter what language it clothes itself in. Some things are true and some things are not, and though I freely admit I do not know all things, I do know some things and from those I can work out other things. Not to do so is an affront to the God who made me. And you. And everyone else, in every country, none of whom is going to be made better off by the repetition of obviously incorrect information. Truth is not relative, Justin. It is what it is and it is so in every land. Shot was never stacked on the deck of a ship. Of any ship. Physics doesn’t change itself just because the culture experiencing it doesn’t have the concept of zero. No culture that ever built a boat stacked round 20-pound balls of iron on the decks of their ships. All of them had tables. None of them covered any sort of scar with bee’s wax, at least not on any regular basis.
Or if, in the impossibly unlikely event that they did, they did not write it down, which would mean that whoever wrote this email couldn’t have found out about it. This is especially true since the phrases we’re talking about are all in English – MODERN English – and thus come from a very easily identifiable and extremely literary culture within the last 300 years.
You’re a bright kid with a lot on the ball, Justin, and I like you almost as much as I like your mother and father, which is high praise, since they are among my favorite people in the world. You write with passion, which can be useful, but you still have a teenager’s perspective, which is a dangerous thing when you get into arguments. Make sure your powder is dry before you start firing shots.
Oh, and a paragraph break here and there would be very useful, too. It’s just a style thing, but it makes arguments easier to follow and emails easier to read.
I very much hope that this won’t be our last exchange. I don’t write things without thinking about them and am perfectly prepared to defend what I say. Hope you are, too. En garde!
And finally (for now) On Cultural Blindness:
Having done some additional thinking about this “tidbits” kefuffle, I wanted to make just one more comment, somewhat on tangent from, but connected to, your spirited attack on my response. Chain emails bug me in the first place. I get roughly 30 a day, and cannot remember much correct information that was ever transmitted thereby. That’s the first thing. The second thing, though, is more important, and bears directly on what you were talking about, I think.
Do you hear the mocking tone of these emails? “Look at these weird people,” it says, “who baked their hair, never bathed, slathered their faces with beeswax and didn’t even have tables! Bet you never knew you were using phrases cooked up by these cavemen.” I hear it. Some of the “origins” don’t have this tone, but many of them do, and it is this that bugs me more than anything. The people described by this and other similar emails were not the barbarians they are consistently painted as.
Yes, they had quirks and customs we would find odd, but those customs were not silly in the way this email portrays. You would perhaps find wigs odd, but you wouldn’t be baking them in a compressed, wet space (the interior of bread is very, very humid) “for 30 minutes” and hoping that it would make the wig fluffy (what happens to curled hair in the rain?). Made-up phrase origins play on three things, all of which I find mildly offensive. One, they assume that we don’t know anything about people that lived even a couple of hundred years before, so we’re apt to believe anything about them. Two, they assume that we believe ourselves superior to those people, so the weirder (and more unsanitary) the origin, the more we will be inclined to believe it. Three, that we know nothing ourselves about physics and have no common sense, so when someone tells us that sailors stacked round shot on the deck of a ship, hey, what do we know? Unfortunately, these things get passed around mostly because all three of these assumptions prove correct. Don’t defend these people. They’re the ones displaying a lack of cultural sensitivity, not me.
What would your response have been if the email had said that “burn, baby, burn” came from the Chinese practice of sacrificing their children to Buddha, a practice that only ceased during the Opium War? You’d howl. There are at least two really dumb things in that “origin”, and you don’t have to be an Orientalist to see them. Or to detect the tone of “see what savages these people are” thinly hidden in “an interesting fact”. Just because you didn’t hear it in the original email we’re discussing doesn’t mean it wasn’t there.
If you want to associate with other cultures, and I fervently hope that you do, one good place to start is by not blinding yourself to the one you’re a product of. I have a healthy respect for Japanese and Chinese culture, but we’re talking here about the origins of ENGLISH phrases, which origins specifically rely on ENGLISH custom. In your rush to accuse me of being culturally blind – and you’ll please remember that I lived for two years on the other side of the world, in a culture quite as foreign as the ones you describe – you’ve risked showing yourself blind and uneducated about this one. You’re better than that.
Another compendium of stuff:
The journal Science has an article in its newest edition about the Science of Songs, and what makes a song into a hit. Interesting stuff. Reminds me of The Tipping Point by Malcolm Gladwell, which I recommend.
Great post on the Freakonomics Blog, which I also recommend, about a cool new gadget coming to a stadium near you. Instant replay on steroids, sounds like. A little late for the poor Seahawks, I’m afraid.
The ankle is feeling incredibly much better, thanks to the very good people at Dry Creek Physical Therapy in Lehi, up by Micron. Dr. Jensen, who turns out to have known my father-in-law when my wife’s family lived in eastern Kentucky, is a super fellow and I enthusiastically recommend his services.
Financial markets are not doing anything of note. Apparently Greenspan got my message yesterday. The Chris Jones Group wishes to express its gratitude to the Fed for doing nothing visibly today to screw up the economy.
Property values in Lehi grew 12% last year. We told you so.
The crush of stuff to do never slackens, so of course I’m blogging about it instead of doing it. Ha ha!
I’ve been cast as Lumiére in a Bluffdale performance of Beauty and the Beast. This was an accident, I assure you. I brought my son Crispin up to audition for the part of Chip (which he secured after reading exactly one line), and apparently the current Lumiére had just become unable to perform (a trip to Ukraine to adopt some kids, I understand). So I am now growing a French mustache and speaking like Pepé le Pew.
How do I despise Alan Greenspan? Let me count the ways. Today he made a speech at Lehman Brothers at which he is alleged to have said that the low rate on the long-term bond might make it necessary to raise short-term rates farter than they otherwise might need to go. Now this is pathological, folks. Not only is this man contending that the millions of bond traders in the world are flat wrong, he’s actually blaming them for his destructive policies. Message to Alan: you’re not running things anymore. Shut up.
Message to the bond market: he’s not God. Trust me on this. You can stop listening for his indigestional rumblings for ideas about how the market is going to perform.
The NY Times (oh, man, I hate that rag) has a blog about real estate, which I never read, and can’t recommend to you. However, David Porter of the Pacesetter Mortgage Blog (to which status this humble scrawl aspires) shot me an email about a post at the Times that referred to the Ameriquest commercials during the Super Bowl. Since, as I predicted, the funniest commercials this time ’round were NOT for comestibles, and were, in fact, the Ameriquest commercials (and for certain the MasterCard MacGuyver commercial), I was all ears. The link is here, for those of you that would like to read the article and my response.
The “Don’t Judge too Quickly” ads were very, very good, I thought. And the MacGuyver ad was priceless. No pun intended. None of the others struck me as being worth the money, though there was a Budweiser ad that was fairly clever (the crowd doing the sign-holding thing). If anyone can explain to me the GoDaddy.com ad where the straps busted on the fairly homely model’s tanktop, I’d be appreciative. I think.
But wait – you were a radical resister and you didn’t see these ads, did you? You don’t watch football on Sunday, or you don’t want to support the hype. Fine. The ads are here. Watch them for yourself. Nobody has to know.
Wait – this is a mortgage blog, isn’t it? Then let me mention an email I got from one of our clients earlier today. John English (my favorite movie critic and a very good man) wrote to ask (following a very interesting back-and-forth about Munich, the Spielberg film) why his mortgage rate has risen from half a point below the 30-year rate to half a point above it in about 8 months. Happy, is he, you think? No, he’s not. I completely understand. I’m not happy, either (my own mortgage goes adjustable in 90 days), and we two have lots of company. Let me take a second to copy here my response to him, since it applies to pretty much everyone that has an adjustable mortgage, especially those that have option-pay ARMs:
Your rate is indexed to prime. The prime rate is available here and here, and it rises every time the Fed raises its interest rate, which is the rate that banks can borrow from the Federal Reserve. My blog has a fairly large amount of analysis of this phenomenon.
Your loan – all option-pay adjustables – decouple your minimum payment from your interest rate. This is a useful feature for those in payment difficulties, which at the time you were, since your investment house had not sold. You took a couple of days to think about this when you signed for the loan, and I know it was not an easy decision to make. I believe you made the right one, given the information you had at the time. You were weighing possible future higher interest rate against lower payments for the immediate-term, and this loan did make it likely that you could hang on until your house sold. That took again some months, as I recall, during which time you benefitted from a lower minimum payment. You still have that payment, of course, though as you correctly point out, your actual interest rate is somewhat higher. The Fed has raised interest rates 14 consecutive times over a 2-year period, an unprecedented rise in interest rates beyond any possible calculation of necessity. It is a thing over which we have no control. You are far from the only client we have that made the same calculation – it was the same one we made, most of the time – and determined that the short-term payoff made the longer-term risk worth it. All our clients with this loan wish (as do we!) that Greenspan had acted differently. Most of them are still pretty sure (as are we) they did the right thing.
Remember: option-pay ARMs do not adjust payment (in the first 5 years) with rising interest rates. The repayment is at a fixed rate, which can be (and right now almost invariably is) below the actual interest rate that your loan uses to calcualte interest due. The mortgage can “neg-am”, or principalize your unpaid interest, using the equity in your house as an overdraft protection. Your loan amount can rise. This is not the end of the world, and in some cases it is even a desirable thing. Not always. This is why we ALWAYS say about these loans that they are like chainsaws. They are very powerful tools, and like any power tool, it has the capacity to do very impressive work if used correctly, with skill, on the proper job. Like all power tools, however, it has the capacity to cut your leg off, too. So be sure that it’s doing what you want it to do before you sign anything.
John was smart enough to spend an entire afternoon poring over the paperwork to be sure he understood the loan thoroughly. We ran numbers half a dozen times. He then walked out of the closing and took a day to think it over. This was, I think, exactly what he should have done. He used the tool for what it is good at. That the market has turned on him is nothing he could have forseen and, indeed, we’ve been saying on this blog for months that it shouldn’t have happened. Sometimes it does. Everyone does the best he can to make the right decision, then you live with it and go on.
Greenspan is still an idiot. I just couldn’t go the whole day without saying that at least once.