Financial wizardly

[cpaharley2008]

With a financial background and economic education I have learned of ways to make money work for you, even in today's low interest rates. I went to the bank today and requested a 6 month loan to use for my new Escape purchase. With my sale proceeds of my other trailer I still needed to borrow around $10,000 and wanted to hypothecate a loan using money on deposit as collateral.
Bank: We have a 1.9% home equity loan special
Me: I do not wish to place a lien on my property, I have a CD which matures in 3 years paying me 2.5%, I wish to use that.
Bank: ok, let me look at the rate, our rate for 6 month to 24 month collateral loan is 3.5%
Me: Great, I want to borrow it for 7 months because I have another 12 month cd maturing that is only paying me 1.2% which I can use to pay off the loan in 7 months from now.
Bank: ok we can set up a loan for $10,000 using your CD as collateral, no payments due for 6 months. Here is your check. I thought, this is too easy.
Me: So while you are paying me 2.5% on my $10,000, I do not have to pay you anything for 6 months on my loan and in the 7th month when I pay the loan back my interest charge is 3.5% or 1% more than what you are paying me. That is $100/year or a little more than $50 for 6 months of use of their $10k.
Great way to do business.
Bank:she smiled
I guess with the high credit card fees banks are now charging, they are not offering high rates of return but also not charging high interest rates on their personal loans. I think the most that a bank can charge for hypothecated interest is 2% more than what they are paying you on your money. If I chose, I can pay off the loan early and still have both my cd's still open in the bank. No liens, no credit checks,no title releases, very simple, very cheap source of liquidity, loan hypothecation. Great way to buy a car also and at the end of the term you have you car and still have your money in the bank too.

[Mary F]

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[Raz]

Perhap the Fed lending to banks at 0% has something to do with it? Raz

[Alf S.]

Hi: Carol H... Bin there...done that. Maybe thats why Banks are the only place that will chain down a pen that doesn't work!!!
Alf S. North shore of Lake Erie

[Tim Wood]

Jim, I did something like you did a couple of years ago, but not at a bank. I have two credit unions that I deal with instead.

Carol, That's why I like dealing with Credit Unions, I do feel your pain. What it boils down to is where ever you can get the job done.

[Mike Magee]

Carol: Having to renegotiate a mortgage frequently... I don't understand. What kind of mortgage did you get to begin with? Mine is a 15 year fixed rate, and there's no renegotiation. I could shop for a new mortgage with lower rate, but would have to pay hefty fees at closing. What are you getting, balloon mortgages?

Jim: great that you have those CDs.

[Carol H]

Originally Posted by Tim Wood

Carol, That's why I like dealing with Credit Unions, I do feel your pain. What it boils down to is where ever you can get the job done.

LOL Tim sorry but Credit Union's play the same game when it comes to mortgage renewals. Had my very first mortgage with one and they taught me well to always make sure you shop around.

[Alf S.]

Originally Posted by Mike Magee

Carol: Having to renegotiate a mortgage frequently... I don't understand. What kind of mortgage did you get to begin with? Mine is a 15 year fixed rate, and there's no renegotiation. I could shop for a new mortgage with lower rate, but would have to pay hefty fees at closing. What are you getting, balloon mortgages?

Jim: great that you have those CDs.

Hi: Mike Magee... In Canada we don't have that many long term fixed rate Mtg's. Most are 6mo.- 5yr. That way the banks don't loose out on any spikes in rates. We generally went short term as on average they were the lowest rates. We seemed to be in what I called a "Bump along the bottom" rating.
We now have no Mtg. to pay but I owe I owe it's off to work I go!!! The big boys "TOYS" you know...
Alf S. North shore of Lake Erie

[Tim Wood]

Originally Posted by Carol H

LOL Tim sorry but Credit Union's play the same game when it comes to mortgage renewals. Had my very first mortgage with one and they taught me well to always make sure you shop around.

You are right, I just find it easier to deal with a CU.

[Carol H]

Originally Posted by Mike Magee

Carol: Having to renegotiate a mortgage frequently... I don't understand. What kind of mortgage did you get to begin with? Mine is a 15 year fixed rate, and there's no renegotiation. I could shop for a new mortgage with lower rate, but would have to pay hefty fees at closing. What are you getting, balloon mortgages?

Mike the mortgage practices are a little different here than in the US - one of the reasons we managed to avoid the housing crash that the US experienced. So am not totally familiar with the term "Balloon" mortgages.

In Canada at the end of a mortgage term you start over with total new mortgage with all new terms regardless of the type of mortgage you previously held -and they will recheck your credit rating to make sure it is still good & take a look at what other loans or financing or equity you may have acquired since. You will need to have at least 25% equity in your home - that's a standard mortgage in Canada whether the rate is fixed or variable. Lenders will give a mortgage on less than 25% equity (some as low as 15% - perhaps some do less) but there is a big *rate penalty* for having less than 25%, unlike the US where they were offering up sub prime rates to people with little of their own equity in the home. The result is that few people would walk away from a home in Canada due to price drops as most have a good chuck of their own cash in the home - better to hold on and wait for the market to recover before selling.

The type of mortgages I have gone for over the years depends on the economic climate and what the financial wizards predictions are in regards as to where prime & mortgage rates are heading..... could be a 1 & 3 year closed (longest was a 5 year closed) but more often than not its been a short term opens or variables that has worked out in the long term. One of the nice things about getting old and having built up home equity is that other options start to come into play - such as a simple line of credit, which of course all have very different terms - some good some not so good - in most cases the rate and terms will be impacted as to what other equity holdings you may have that the bank is also benefiting from - ie are you using their bank to manage your investment funds.

Re legal fees for transferring the mortgage to a new bank - dont pay them - have found the bank you are transferring to will if asked eat those fees - its the cost of getting a new customer - just as most will offer a new customer a way better rate to start off with than a bank that already has you as a customer - they are banking on the fact you arent going to bother to shop it & thats how they cover the costs of giving Jim such a deal

[Carol H]

Originally Posted by Alf S.

Hi: Mike Magee... In Canada we don't have that many long term fixed rate Mtg's. Most are 6mo.- 5yr. That way the banks don't loose out on any spikes in rates. We generally went short term as on average they were the lowest rates. We seemed to be in what I called a "Bump along the bottom" rating.
We now have no Mtg. to pay but I owe I owe it's off to work I go!!! The big boys "TOYS" you know...
Alf S. North shore of Lake Erie

The longest closed term I have ever been offered of late is 10 years (although I have heard of a few 15 year ones out there) and there was a 1.2% difference between the 10 year and the 5 year term. The longer the closed term normally the higher the rate.

[Mike Magee]

That's pretty interesting, thanks. I thought everyplace did the 15 and 30 year mortgages like in the USA; now I know better.

[Carol H]

Originally Posted by Mike Magee

That's pretty interesting, thanks. I thought everyplace did the 15 and 30 year mortgages like in the USA; now I know better.

I actually seem to think we have some consumer protection law that is the reason for it......

Edit to add: Another BIG difference between the US and Canada is we do not get to write off the interest paid on our home mortgages :-(((

[BCDave]

Only way to write off home mortgage interest here is to "borrow for the sole purpose of investing". (Funds borrowed for investment purposes....)

That means ya gotta either take a second mortgage for that OR, pay off your mortgage and then re-mortgage to invest with. That's what I have now done a couple of times - paid it off, re-mortgaged and invested the $$$. (then when I paid that one off, too, using investment proceeds, I did it again.)

Allowing for tax deductions, my actual after-tax rate of my mortgage is about 1.5% and any time I can't do better than that investing, I shouldn't be in the market! Even GICs can pay better than that!

[cpaharley2008]

In the US in order to write off the interest the loan must be secured by your primary residence.

[Frederick L. Simson]

Originally Posted by Carol H

So am not totally familiar with the term "Balloon" mortgages.

A.K.A. "Interest Only"
Monthly payments are the Interest only, no Principal gets paid down. Low payments for the life of the loan and one "Balloon" payment of all of the Principal due at the end of the loan. Usually the only way to pay the principal is to take out a new loan. Or win the lottery...

[Carol H]

Originally Posted by Frederick L. Simson

A.K.A. "Interest Only"
...

Why would someone actually want that type of loan on their home? If you never really want to own it why not just rent?

[RogerDat]

Originally Posted by Carol H

Why would someone actually want that type of loan on their home? If you never really want to own it why not just rent?

During the bubble the idea was that long before the loan came due the property would have gone up in value enough to make refinancing easy. Buy for 200k with the banks money then refinance with 50k in equity when the house reaches 250k in a couple of years.

While house shopping we were out bid on a house where the buyer had an 80% first mortgage, and 20% second mortgage, with the builder picking up a chunk of the closing costs. Of course they would pay more, none of it was their money. They started out with an upside down equity position.

We got a lot of advice to "buy more house" or go with one of these fancy mortgages. Which we ignored to buy the house we needed (like our 13 ft FG just what we need) putting down money so both payments and total interest is low. Good thing too because with all those other houses being dumped on the market our mortgage payment might as well be rent. Value is falling faster than we are paying it off.

[Carol H]

Thanks for explaining. It makes it easy to understand why so many people where willing to walk away from their homes in the US, causing the US housing prices to take such a big drop - while prices here in Canada continued to climb. Cant get a first mortgage on a home in Canada without having your own equity in it so people are not going to walk away to fast if prices take a dip.

[Frederick L. Simson]

Originally Posted by Carol H

Why would someone actually want that type of loan on their home? If you never really want to own it ...

I had not heard the terms "Balloon Payment" or "Balloon Mortgage" in a long time. From my understanding, (and I could be wrong about this) they existed before "Sub-Prime" and "Adjustable Rate" mortgages were invented. Nobody ever wanted one; they usually settled for one because their lack of documented creditworthiness prevented them from obtaining a "regular" mortgage and they really wanted to "own" a house. These were only short term of 5 to 7 years and paying only the interest made the monthly payments affordable until you gained some equity from price appreciation. Think about it, you Buy a House and you take out a mortgage. The deed lists you as the owner and the financial institution as the lien holder; it's all in the semantics.