Sasha Pachev sasha at
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'.

Two solutions:

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".

Sasha Pachev
AskSasha Linux Consulting

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