Gyroscopic Investing

My "margin" plan is taking form.  I've made the following quasi-conclustions about mortgage debt:

1) Any more than 80% LTV in loan tends to be expensive due to PMI or piggyback... getting to 80% LTV is a must.

2) ARMs, if shopped for correctly, offer advantages over 30 year mortgages.  Not only are they currently lower than long rates, but them staying low is in line with my predictions about the future, and there are limits to how high they can adjust to (usually 5% up from current rates).

3) I don't mind deleveraging by paying down the mortgage debt, but when I'm getting a solid tax benefit from the loan, the effective rate of a 2.9%, 5/1 ARM is about 2%, and as I'm getting a solid tax arbitrage and tax-free growth opportunity by contributing to HSA/IRA/401k/Roth mix (the last of which is liquid), then I don't really feel like being forced to pay down a mortgage balance if I can go along interest-only.  The cash-flow is better used servicing tax-deferred accounts and other entreprenurial ventures that are more lucrative for me.

I know all the general tips: "It's good to have a fixed payment in case rates rise... don't go interest-only because you won't build equity... have your house paid off in retirement."  I believe these are generic and good for most people, but I feel I understand taxes and investing well enough to do better than the 2% effective rate on a 5 Year ARM right now.

Outside of those generic responses, I would love to hear what you guys think about either the 5 Year ARM, or, more specifically, the interest-only loan.  I know that I'm talking to many debt-averse individuals here, but I value your input.  I'm 95% sure I'll refi, 85% sure it'll be a 5-year arm, and only about 50% sure an interest-only makes sense.  Let me know what you think.

Hi Moda,

I would look for a 10/1 ARM.  They are more rare, but should protect you in the very likely event that interest rates move up in the next few years.  Keep in mind that refi costs can be expensive if interest rates take a jump and you need to get out of the ARM down the road.

Storm,

I've thought of a 7 or a 10... and I'm still considering them.  The nice thing is, there is a maximum to what these things can get to... usually 5% above the temporarily fixed yield.  I'll definitely keep these in mind.

Any opinions on going interest only?  The way I see it, if I still have retirement/HSA and I/EE bond limits I'm not using, I'm better off using those avenues to save than offering the bank a forced amortization neither of us may want.

There's nothing wrong with interest only if you also invest the portion that would have went to the house equity.

I'd be more concerned about the duration/maturity risk.  5 years is about the lowest end of an estimate of when we could start to see all the unproductive inflation rear its ugly head, so going beyond that could be risky depending on the terms, caps, refinancing ability, etc..  We don't have the same structural and cultural limitations that Japan does to make an economic recovery such a low probability event.  Just make sure you have an exit plan.

MG

moda0306 wrote: Storm,

I've thought of a 7 or a 10... and I'm still considering them.  The nice thing is, there is a maximum to what these things can get to... usually 5% above the temporarily fixed yield.  I'll definitely keep these in mind.

Any opinions on going interest only?  The way I see it, if I still have retirement/HSA and I/EE bond limits I'm not using, I'm better off using those avenues to save than offering the bank a forced amortization neither of us may want.

MachineGhost wrote: There's nothing wrong with interest only if you also invest the portion that would have went to the house equity.

I'd be more concerned about the duration/maturity risk.  5 years is about the lowest end of an estimate of when we could start to see all the unproductive inflation rear its ugly head, so going beyond that could be risky depending on the terms, caps, refinancing ability, etc..  We don't have the same structural and cultural limitations that Japan does to make an economic recovery such a low probability event.  Just make sure you have an exit plan.

MG

Very good points, MG.  Moda, just keep in mind that we could very well have some high inflation "Volker moments" in the near future where the Fed has to raise short-term interest rates to super high 17-18% like rates just to drain liquidity from the system.  In that case your interest rate would rise to the max. possible, which would be probably around 8% and a refi would not be possible.  It doesn't sound too bad, but wouldn't you rather be paying 3.625% fixed instead of 8%?

I guess the point is that chasing a point or two of yield now could cost you four or five points down the road.

Storm,

I'm weighing that... and I'm starting to think 7 or MAYBE even 10 year is more appropriate.

I'm thinking that if I make sure I have a decent stash of I/EE bonds, then I'll be able to do ok during rising-rate periods as I plop them into T-bills, new savings bonds, etc. 

It'll be interesting to see us all debate the next fed chairman appointment and its implications on the PP, inflation, etc!