sasha at asksasha.com
Mon Sep 19 15:21:38 MDT 2005
>This works fine, until the Prime Rate goes up. And then you are screwed
> with a capital 'S'.
a) you can get a fixed rate home equity loan
b) pay it off really fast and get your principal really low BEFORE the prime
rate goes up
Here is what we did:
We owed about $52,000 on the mortage at the fixed rate of %6.75 in 2003, and
then refinanced it to a home equity loan from UCCU at a variable rate, which
then was 4.00%. We knew it would go up, and between then and now cut the
principal down to $15,000. Now our mandatory monthly payment is $180, while our
interest rate is %6.75 - back to what it was in the original loan. However,
because the principal is so low, we pay less than $100/month in interest. If the
interest rate were to double, we would be paying less than $200/month even if we
had not reduced our principal between now and then.
What is often forgotten is that there are two variables, not one, affecting your
interest payments - interest equals principal times the interest rate. Cutting
the principal in half makes up for a doubled interest rate. Cutting the
principal in half is also as good as cutting the interest rate in half without
changing your pricipal. And the principal is the variable in the equation you
will usually have a lot more control over than the interest rate.
I find it much more productive to fight the battle for financial security in the
field of financial dispipline rather than in the field of income. You pay an
income tax in proportion to how much you make. Thus, for every gain there is a
certain immediate loss. Two steps forward, one step back. However, there is no
tax on financial discipline. The goverment does not encourage it (mortgage
interest is tax deductable, while savings interest is taxed), but at the same
time you are not taxed when you choose not to buy something expensive and not
very useful, or find a way to live happily without a supposed "necessity".
AskSasha Linux Consulting
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