Archive for September, 2010

To Refi or Not to Refi – Does This Help?

There are a lot of reasons to refinance a home, and a lot of reasons (probably the same number) NOT to do so.  Mortgages Unzipped has provided a good number of analyses recently, including really good ones from Evan Vanderwey and Ken Cook. This post isn’t meant to explore all of the reasons, just to offer one possible calculation for those out there that are hesitant to refinance because doing so 1) resets your mortgage to 30 years again and 2) sticks another dollop of closing costs onto the loan.  Maybe it’s because I do lending in Utah, but it seems that for many people these days, their fondest dream is not to have a mortgage at all.  That’s fine, and I encourage my clients to think that way.  That does not mean, however, that you shouldn’t refinance.

Instead of looking at your loan as a new set of requirements, look at how to fit your new loan into your current requirements.  Stay with me here.  This is going to require you to do some actual forward planning.  But it won’t hurt much, I promise.

First, figure out when you want your home paid off.  Yes, put an actual date on it.  If your 30-year mortgage closing was in October of 2009, that means that you’ll pay the loan off more or less in October of 2039.  Sound like forever?  Okay then, shorten the time.  Put that date anywhere you like.  At this point, it doesn’t matter.

Second, now that we have a date, we have to figure out what payment pays the loan off on that date.  Alternatively, we have to figure out what lump sums at what points will pay the loan off on that date.  The earlier additional funds are paid on the principal balance, the greater the impact those funds will have.  There are excellent calculators out there that can help you do this math.  For instance, on a $200,000 loan, if you want to cut your 30-year, 5% loan down to 18 years, you pay an additional $316/mo, and there you go.  You can accomplish the same thing by putting $3500 down every year in a lump, plus $5000 right at the beginning.  And so on.

NOTE: You’re thinking this is backward.  You’re thinking that what you should do is figure out how much money you can put toward your mortgage, then see how fast it will be paid off.  And of course you can do that, but I wouldn’t.  This is not how savvy people do this calculation.  They know that if they have a target to hit, they’ll move Heaven and earth to hit it.  So they set a date, then they figure out how to arrange things to make that date.  This process makes it much more likely that the plan will work.

Third, now that we have the payoff date set and the payment calculated, let’s find out if the refi gets us to that date faster, or with less cash expended.  Using the same scenario above, the current loan already has a low interest rate, and it has already been paid for 11 months.  That’s an advantage for the current loan.  However, what happens if you refinance it to the current rate, say, 4.5%?  The principal balance after one year is about $197,000.  We’re going to add $5000 in closing costs to that, making it $202,000.  Since you’re looking to pay off, not to drop your payment, we’re going to take the payment you skip (all refinances have a payment skip built in) and pay it as a principal reduction on the new loan.  That drops our principal to $200,900.  Then we have monthly payment savings of $56/mo (from reducing the interest rate).  Doesn’t sound like much.  But over time, it is the difference-maker.  If you target your 18-year payoff, as above, you can pay $30 less per month and still hit it.  If you keep the payments at the same level, the refinanced loan pays off one year sooner and saves you $10k in interest.

And that means (in this case) that you should refinance, if your goal is to get to zero in the shortest time, with the least cash expended.

Now, you can do these calculations yourself, but I wouldn’t.  Your mortgage professional – you do have one of those, right? – can do those numbers in seconds, while you’re doing what you do for a living.

If you need to lower your payment, then this calc won’t help you.  But for those that are aggressively seeking zero, as we say, this is a handy way to figure out how best to get there.

Looking in the Crystal Ball Again

First, let’s check the Crystal Ball’s accuracy from last time:

  • Dodgers fail to make the playoffs: Check.
  • History of Money has 9 more students than TJYC (tho both are great classes): Check.
  • Wall Street Reform increases fees: Check (I’m already getting fun “new annual fee” notices for credit cards – bet you are, too)
  • Obama blames the banks: Pending (he has bigger fish to fry at the moment)
  • 2011 Mortgage collapse: Pending (obviously)
  • Mortgage lending difficulty increases and fraud is up: BWAAAAHAAAHAAA.
  • Senate and House takeover: Pending.  Looking dang good for the GOP, though.
  • Harry Reid Survives: Pending, but this one might not come in.
  • Mayor of Emmett’s and Ethel’s: Check.
  • Mortgage Rates remain low: Check.  And Check.
  • Six Channels of Marketing book completed by Hallowe’en: Pending.  On track, believe it or not.
  • Jazz fail to sign another free agent: Check
  • Okur unable to perform: Check
  • Jazz in second: Pending
  • Diana’s children sleep through the night by Labor Day: Check.  Barely, but check.
  • Mockingjay NY Times Bestseller: Check.  But I don’t know that it deserves it.  It was easily the least of the three books, and it serves as a warning that even good writers can get lost and screw up their characters.  Review on this coming in a couple weeks.
  • Next Crystal Ball in 30 days: Fail.

So the Crystal Ball appears to be functional.  I would add that in the comments, Catherine asked the identity of the US National Team’s manager on January 1, 2011.  The Crystal Ball named Bob Bradley, who was just named the manager for the next two years.  So that one is also correct.

A couple of new predictions:

Republicans will win both statewide California races, defeating both Boxer and Brown.

Jennifer Grey will make the final four in Dancing with the Stars, but will not win.

Next Crystal Ball, I predict, the first Thursday in November.

On Breaking the Rules in Sports

This is one of a Series of Short Takes, about the salient issues of the day.  This one isn’t all that short.  It also isn’t about politics (though there’s one of those coming) or religion, but it might as well be, because it is about sports, which is more religious than religion is these days.  You can get offended if you want.  But really, why not just make a comment and let’s fight about it.

It’s the quarterfinals of the World Cup.  Two decided underdogs, Ghana and Uruguay, are facing off in a match that just keeps getting better and better.  Each team has legitimate chances to win, but the game goes into overtime tied at 1.  Late in the overtime – this is Ghana’s second overtime in a row – the unthinkable happens.  Here is the description by the Washington Post’s Steven Goff:

It was also hard to believe the frantic final moments of extra time. Ghana had pressed Uruguay to the brink with several outstanding opportunities in the last 15 minutes. With time melting away, [Luis] Suarez, stationed on the goal line, used his knee to block Stephen Appiah’s point-blank attempt, then in desperation, used both hands to slap Dominic Adiyiah’s header.

The header having been handled, bounced away.  Handling of the ball by a non-goalkeeper, in soccer, is a no-no, and Suarez was issued a red card, ejected from the match, and Ghana was awarded a penalty kick.

Which they missed.

The game went into penalty kicks, and Ghana was defeated by Uruguay, which went on to the  semifinals and a gritty but lopsided loss to Spain.  Ghana went home, and the entire continent of Africa was incensed at Suarez for cheating.

Two schools of though immediately formed.  One said that Suarez was just doing what anyone would do.  His job is to win the match, and in that circumstance the best he could do was to bat the ball away in contravention of the rules.  He got the punishment, so what’s the problem?  The other school said that Suarez violated the rules in the most shameful possible manner, so that he ruined a terrific soccer match by stealing a victory from the opponent through cheating.  He was booed unmercifully, and he should have been.  He should have been banned for life.

There are countless more examples, but here’s just one more, from baseball.  A couple of days ago, one of the game’s alleged true gentlemen, Derek Jeter, took a pitch that sailed way inside.  He rocked back and grimaced, holding his arm and, well, doing what the picture shows.  That’s not really a grimace.  It looks like agony.  It would be, if he got hit.

But he didn’t.

Replays showed conclusively that the ball never touched him.  Jeter was acting.  It was really good acting, from a player ordinarily not suspected of that kind of behavior, and he was rewarded for it.  He got to go to first base.  No, really, that’s it.  It is a pennant race, and the Yankees are being overhauled by that evening’s opponents, the Tampa Bay Rays.  Jeter’s histrionics didn’t win the game.  Didn’t affect the outcome at all, really.

Again, we get two schools of thought.  Jeter was just gaming the system, looking for an edge.  His job is to win the game.  he did his best, it didn’t work, so what’s a little acting?  Everyone does it.  Don’t blame Jeter if it worked.  And on the other hand, here’s a guy renowned for playing the game the right way who clearly cheated.  He cheated.  He feigned that something that didn’t happen, did, and that deceived the umpire, who awarded him something he had not earned.

So who is right?

This isn’t going to be a surprise to most people – or anyone that’s a regular reader here – but I think both of these guys ought to be taken out and shot.  But I can justify my feeling that about Jeter, and not about Suarez.  Herewith my attempt to do so.

Suarez’s act was despicable and unsportsmanlike, but clearly a part of the game of soccer.  They have a rule for it.  It’s forbidden, but it is in the rules, if you handle the ball intentionally, you’re going off.  All Suarez did was invoke that rule.  It’s not materially different from someone hammering a guy going in for a layup, taking the foul, and making him get his two from the foul line.  It feels different, but it isn’t, and I have to admit that.  Just because the stakes are higher doesn’t change the nature of the act.  Now, soccer really ought to address this rule, because Suarez’s act of civil disobedience pointed up that there is a really harsh disconnect in some of the punishments handed out for various infractions in the game.  Some are insanely harsh (bumping a guy who is running away from the goal, but happens to be inside the penalty area, is awarded a penalty kick), and some are dangerously soft (a penalty kick is also awarded if I grab the ball on the goal line and throw it off the pitch).  But Suarez was doing something that is contemplated by the rules as they currently stand.

Jeter, however, was not.  He was pretending that something had happened, something that has a rule in baseball, but that thing had, in fact, not happened.  He was, point blank, no question about it, cheating.  He was attempting to get an advantage he had not earned under the rules.  Jeter ought not only to be fined, he ought to be banned for the rest of the season.  This isn’t like fouling a guy to stop a layup.  This is like falling over in the penalty area when nobody touched you, looking for a penalty kick.  That behavior is already a stain on soccer, and it should likewise be punished severely.

Yes, players all the time pretend they made tags that they didn’t make.  That’s the same thing.  It’s cheating.  Players pretend they didn’t touch the ball when it went out of bounds.  That’s cheating, too.  I sincerely believe that you can reach a point where that kind of thing destroys the game.  If you’ve ever played against a player that cheated all the time, you know it gets quickly to a place where the game isn’t worth playing.  Because really, it isn’t the same game.

Really, the “hey, everyone does it” argument is what gives you Enron.  Enron’s guys are supposed to me maximizing shareholder value and making money for the company.  They were just doing a Jeter.  We have countless daily examples of people violating the law for personal advantage, and we are swiftly reaching the point where those that do that are shrugged at.  At Enron, they got caught, but if you’re not cheating, you don’t want to win bad enough, right?

No.  Not right.

In the end, what it comes down to for me is what sort of person are you?  Suarez, I don’t know what he was thinking.  Maybe he did it deliberately, maybe it was reflex.  I don’t know.  If he did it deliberately, it was a shame, and he is a person in need of straightening up.  When I foul a guy in basketball, especially these days, almost all the time it’s because I just don’t have the skill to stop him legally.  I do, however, always try.  I never grab a guy’s arm to stop him because that’s easier than going for the ball.   A good man – and I hope to grow into one of those one day – doesn’t do that, no matter what advantage he gets from it.

But Jeter, in addition to being a Yankee, which is itself unforgivable, just straight cheated.  If I had any respect for him, which I would never admit, I lost it all right there.  Instinct when you rear back away from the ball?  Sure.  Obviously.  Instinct when you sham that it hit you?  You know it didn’t.  What kind of man wants to win a game – a GAME, people – so much that he’s willing to invent things that didn’t happen to try to get an advantage?  Do you seriously believe that you could leave your cards on the table while you went to get a drink and Jeter wouldn’t look at them?  Do you really believe a guy like that won’t try to cheat you in a business deal?  What sort of integrity does he have?  He has none.

I know what sort of man that is, because I once was one of them.  When I was 15.  When winning was the most important thing in the world to me.  Then I grew up, and I realized I’d rather lose and be a guy you can trust than win and know I had to cheat to do it.  I started calling the ball out on myself.  I started calling my own fouls.  I started throwing the ball out of bounds intentionally when I knew that the ref had mistakenly given the ball to my team.  I believe that’s what good men do – play as fair as they can, and try their best to right wrongs where they see them.

And no, it wouldn’t be different if I were playing for money.  I play for money right here in this office every day, for large, large sums of money.  And I do not cheat.  There’s no replay here.  No umpire.  No one to catch me.  The way I am on the court is the way I am here.  And the way I am here is the way I am on the court.  I think that’s true of everyone, down deep.

There are a lot of good people in sports, and a lot of opportunities for people to become good.  Which makes it all the more disappointing when one of a game’s top ambassadors shows what a rat fink he really is.  At least it allows other rat finks to try to exonerate him, so we can tell not only who to stop watching play, but who to stop listening to, as well.

RateWatch Tuesday 14 Sept 2010

RateWatch ALERT – Friday Sept 10

As you are doubtless aware, rates have been absolutely fantastic for about three weeks.  We have seen rates tumble from already ridiculous lows to unseen and unheard-of low 4% ranges.

That appears to be over.

The last three days the market has moved in the wrong direction every day, and today is no exception.  RateWatch sees that the benchmark bond is off 38bps, which is enough to move rates higher when coupled with the loss of 70+bps over the last couple days.  I believe that we have seen the best pricing we’re ever going to see.

If you have been holding your fire on doing a refinance, or you are purchasing a home but have not locked your rate yet, you had best get on it quickly.  Rates will have moved to 4.5% this morning, edging toward 4.625%.  If your credit isn’t perfect (or your loan has other quirks), your rate will be higher yet.

Sorry to be the bearer of bad news.  But we all knew this wasn’t going to last forever.