We have an adjustable rate mortgage and it’s a good thing!

Benefits of our adjustable rate mortgage

If an ARM works the way it is designed, the potential for significant savings is one of the key selling points. Here’s more benefits:  

• Lower interest rate and lower payments resulting in more money to invest for our long term goals.
• If interest rates were to drop when our loan adjusts, we would automatically be able to have the lower rate.
• Ability to save money if we don’t stay in the house long term.

Not all adjustable rate mortgages are created equal

We obtained our ARM from a reputable lender with good terms. Without some of these safety precautions, I wouldn’t necessarily have considered one:

• No prepayment penalty.
• Limited caps (maximum percentage increase) on both the annual adjustments and total adjustment.
• Hybrid 5/1 term that provides a fixed option for the first five years and adjusts annually after that.

Our Housing History

How long you stay in the house is critical to determine whether or not an ARM is appropriate. If you are staying a long time (10 years or more) a fixed rate is probably a better deal. If you’ll be moving before that, an ARM may be appropriate. This was the case with our last two houses. Our first was a starter house that we didn’t plan to live in long term. We had a 7 year balloon. We actually moved out in 9 months, but that’s another story! Our initial plan was to stay for 5-7 years.

Our last home, a condo, we had a 2/2 ARM from Pentagon Federal Credit Union. It was an adjustable rate that adjusted every two years, with a max adjustment of 2% each time. We locked in at 3.625%. We lived in the condo 3 years until we built our current house and realized substantial savings over a fixed mortgage.

I’d love to tell you that we’ll stay in our current house forever, or a long time, but I know myself better than that! Having said that, we’ve been in the house 2 years and currently don’t have plans to move.

What happens after the 5 years are up?

I’ve been investing with the intent to have enough money to pay off the house in 9 years, coinciding with our dollar plan. We’ve given ourselves the option to ride out the interest rates. However, I’m also ready to refinance if we need to. In fact, it is one thing I might consider if I decide to stay home from work.

After it starts adjusting, if we are no longer comfortable with the annual changes in interest rates we can do one of the following:

• Refinance for another 5 years until we have enough to pay it off.
• Pay off the portion we have saved.
• Or do a combo of the above.

When an Adjustable Rate Mortgage is the Wrong Choice

An ARM fits our current financial situation. I would probably opt for a fixed mortgage if some of the following were true:

• I had any certainty that we would stay in our house for 10 years or more.
• We didn’t have a plan to have savings available to pay off our mortgage after the adjustment period.
• I was risk averse.
• We couldn’t afford the maximum interest rate change that ours could adjust to.
• We couldn’t afford our house without an ARM.

Examples of situations where an ARM was not appropriate:

• Stupidity got us into this mortgage mess
• The Housing Bust Aftermath is Turning the American Dream into an American Nightmare

Other Considerations

While I believe a 5/1 ARM is right for us, I probably wouldn’t feel comfortable with a 1 year or 3 year ARM. Five years is about the minimum I would go. If the price difference wasn’t substantial between the 5 year ARM and the fixed rate, I would likely choose the fixed rate.

We also didn’t finance our entire house with our mortgage. We put down 20% and do not pay PMI. We also financed some of our house with student loans locking in really low rates that will not adjust. So in a sense, we do have a fixed portion.

I’m a risk taker. I’m willing to take the risk that the interest rate will adjust in exchange for a cheaper price upfront. It’s the same reason that I don’t lock in long term savings vehicles like CDs. I’m willing to go where the market will take me. Sometimes it will be up and sometimes it will be down. I’m willing to take the risk that I might not come out ahead for the chance that we will save significantly.

Are evil adjustable rate mortgages the root of the housing crisis?

ARMs are being blamed as part of what got us into the housing mess. However, it’s the choices that people made and not the product itself that is the root cause. There are definitely people that should not use an ARM, and then there’s a group of people who the ARM makes perfect sense for. Since I fall in the latter group, I’d hate to lose a product that suits us because others couldn’t use it wisely. I’ll be watching the government regulation to see what becomes of the current lending practices.

I do have compassion for people who used a trusted advisor, or believed they had someone working on their behalf and got an ARM without understanding how it works and what would happen when it starts to adjust. It’s why I also believe financial education needs to have more emphasis on it to empower people to learn and make the right decisions.

Action Plan

I paint a pretty picture for our house and an ARM, and the truth is that the worst can happen to anyone. However, I feel that we have put appropriate safeguards in place to guard against it. We’ve saved a lot of money by choosing the right financing to meet our needs.

This article was featured in Home Finance: All you need to know about home ownership at rocket finance. Here’s the rest of the articles in the series.

My Thoughts On This Whole Mortgage Crisis And Why I Don’t Feel That Bad @ My Two Dollars

Why renting is right for us right now @ Mrs. Micah

Homeowners – Avoid Forclosure by Thinking Like Investors @ Two Wise Acres

Debt-To-Income Ratio and Why It Matters @ Moolanomy

Catch a Falling Knife – Buying the Housing Slump @ Millionaire Money Habits

Can we afford the Payments @ PaidTwice

Pay off Credits Cards with a HELOC @ Debt Free Revolution

So You Want to Buy a Fixer Upper @ Remodeling This Life

Frugal Hacks For Your Home @ Being Frugal

American Subprime Crisis—Should We Care @ Plonkee Money

Mortgage escrow accounts Explained @ Cash Money Life

Don’t Use Your House to Pay for Your Life @ Rocket Finance

Why the Sub-Prime Crises has not Affected Canada Yet @ Four Pillars

That Damned Rent vs. Buy Question @ Blueprint for Financial Prosperity

Predatory Mortgage Lending and the Subprime Market @ Chance Favors

After Foreclosure Guide to Housing: It Ain’t Easy @ DebtKid

How to Avoid Foreclosure – The Definitive Guide @ Credit Withdrawal

Photography by rucativava.

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That’s what readers wanted to know when I started to describe some of the details of our accounts. I’ll highlight my various strategies in a series of upcoming articles, this being the first.

I track most of the information in Microsoft Money including credit limits and account numbers. However, I have lots of doublechecks and information stored elsewhere to make the process efficient.

Bill Pay Strategies

When running a $200,000 credit card arbitrage plan, it’s important to keep the bills paid. Here’s some of the strategies that I use:

• All regular bills are set up on autopay, including the mortgage.
• I do not use ebills, but rather paper statements. Because not all the companies allow ebills it was becoming more work to track some in paper and some electronically. Therefore, I switched to all paper. It’s not environmentally friendly, but it is organizationally friendly.
• I stack up all the bills I receive throughout the week and pay them all at once. (FIA makes it easy to pay multiple bills quickly).
• I pay bills weekly, usually on Fridays.
• All bills are paid with my FIA credit card to enable an extra month of float and to simplify my checking account.
• Each credit card at 0% is paid the amount due plus $10 rounded up. (For example a $117 minimum payment becomes $130).
• Once each bill is paid, I enter it into Microsoft Money when I get around to it.

Safety Checklist

I have a list in excel of all bills and the approximate day of the month the bill is due. I delete them as I pay them. This is not really necessary, but it’s a doublecheck to make absolutely certain that I don’t miss a due date and it only takes a few extra seconds.

Here’s what this spreadsheet looks like:

Anti-Filing System

Filing isn’t really all it’s cracked up to be. I used to file all my paperwork by account in neat little folders in a file cabinet. However, that started taking up too much time…. so now I just take all the papers for the the year, stuff them in a bankers box and put them in storage. I rarely have to go back and dig out papers over a year old, so it’s saved me quite a bit of time. The exception is tax papers; all of which are filed neatly by year.

Action Plan

I keep an excel spreadsheet dedicated to various aspects of my finances that don’t fit nicely into the Microsoft Money program. I’ll work on putting together more examples of the other spreadsheets that would be beneficial. In addition, see how I’ve made Microsoft Money more efficient for my finances.

How do you stay organized?

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We have purchased various assets while financing other items we already own to get a lower interest rate. Let’s take a look at some examples that we have done:

Finance a house with a student loan

When I was in graduate school, the going rate for student loans was 4%. In addition, during school the loan was subsidized, essentially 0% while I was in school. Because we knew we would likely be in the market for our first house within 2 years, I took out the student loan and earmarked the money toward a bigger down payment for our house. This resulted in savings two-fold: a lower interest rate than if we financed more on our mortgage at 6%, and the avoidance of PMI.

Finance a recreational vehicle with a standard vehicle

The rates on boats, motorcycles or other recreational use vehicles are usually higher than cars. Take a car that you already own and finance that instead. At Pentagon Federal Credit Union, cars are 5.29%, motorcycles are 6.49%, and boats, RVs and trailers are 6.15%-9.15% depending on the terms.

Finance a vehicle with a credit card

With the going rate of 5.29% for vehicles and 0% for some intro credit cards, this one has a great potential for savings. Since the credit card offers usually expire at the end of one year, you need to be willing to find another one and move the money around. This one is a little more risky because the offers could dry up sometime in the future, but one that I implement routinely. The Sun is actually considering paying off a car with a credit card right now.

Action Plan

There’s always more that one way to look at things. Being creative has saved us thousands of dollars. Many of these strategies come with all the standard warnings and disclaimers. To save more money, don’t overbuy and get a good price. Don’t use financing alone to justify buying an item that is too expensive. If you’ve determined you can afford the item, then put these strategies into play to spend even less.  

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$223,270. Yes, you read that correctly. However, it’s all at 0% and accounted for. It is actually making and saving us money! It is spread over 6 credit card companies with staggered ending dates for the introductory rates. If I actually had to pay interest, we wouldn’t have any.

Here’s a breakdown of what the money is from:

Heloc/House

This is money that I didn’t put into our mortgage. Our mortgage is at 5.625%. If we carried it on our Heloc, it would be prime – .5%. This strategy is saving us about $4740 annually.

High Yield Savings

This money is parked in a savings account, currently earning 5.05%. This is what some people refer to as credit card arbitrage. At the current rate, this earns us about $3200 annually.

Budget Busters

This is a category I created to track money that we spend on items not in our budget. I prefer not to use money in our savings and rather earn the money to pay it off. The reason it is so large is because I dreamt it up to motivate us to work toward a very strict budget. Crazy? Yes, but it saves about $1800 annually by leaving the savings untouched.

Tax & Investment Holdings

Here’s another one I dreamt up. I like to fund our retirement accounts as soon as possible, then pay ourselves back over time. It’s similar to the concept of a Flexible Spending Account where you can spend the money before it is deposited. Think of it as a reverse escrow. It gives the investments about six months extra on average to accumulate, earning roughly $1,000 extra per year.

Vehicles

Finally, is the vehicle category. When we buy our cars I like to give myself a loan for the money and pay it back over time. Had we financed it with a company the going rate at the time was 4.75%, saving us about $850 per year.

Total

The total amount of money saved and earned is $11,590 annually. I use spreadsheets to keep track of the categories and end dates and Microsoft Money to monitor the bill payments. There is a lot of paperwork but it’s pretty easy once it is set up. The return is worth the effort too.

Cards We Have

Here’s some of the cards we currently use or have used in the past. (Please make sure to verify the terms before applying for any of them as programs frequently change.) 

• Advanta Platinum Business Card with Rewards
• Chase Platinum Business Card
• Miles by Discover Card

Mind Games

After reading the descriptions you might say all but the first category are arbitrage and I have just created fictitious categories to trick myself. You are right! So why then do I separate them like that?

• Knowing what I’m paying for reminds me of how much money I’m spending. I’ve stated previously that cars suck money for us. “Paying myself” each month keeps that thought in the front of my mind.
• We are more frugal with our spending if we have to “finance” it from ourselves, instead of spend our savings.
• It motivates me to earn extra money to pay it off, as if it were a true debt.
• If something happens and I need to pay off all our cards immediately, I know where to take the money from.

While the way that I account for the money may be a bit silly, it is a strategy that I don’t take lightly. It is very profitable, but could be very costly if I made a mistake.

See how much our credit limits are to support this strategy.

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The million dollar number is often set as a personal goal for many people. Has anyone ever gone the other way and made it to the dark side of a million? Could someone really owe $1 million? And I don’t mean holding a $1,000,000 mortgage, I mean someone who has a negative net worth of that much.

Emotions and Money

There are many instances when the emotional side and the rational side of money are confused. I’d like to say that earning, saving and investing are all just numbers, but I know better. I know that money makes you think in funny ways. For example, I will Sell Coupons on Ebay for a couple dollars but won’t Sell the Car to save thousands. It doesn’t make sense.

Even though emotions are present in all levels of wealth, does the $1 million number elicit more emotional attachment than other milestones? After all there are many blogs that are detailing the trip to $1 million already or in the future:

• Million Dollar Journey
• Million Dollar Countdown
• Millionaire Mommy Next Door
• 2million is even documenting the trip to $2 million

Would the same magical number hold true reaching a negative net worth of $1 million? Would it make people think differently, act differently or approach debt differently?

The Search

As you can imagine, I didn’t find anyone (excluding famous people and corporations). Which, I’m actually pleased about. What I did find is interesting:

1. I searched networthiq and found the person with the lowest net worth to be person 334442debt at ($367,535). However their user id leads me to believe that their net worth has actually gone down since they joined. In addition, I noticed that the comments include a goal to get out of debt in 24 months. That sounds pretty tough.
2. The families highlighted on Oprah recently revealed only the amount of debt they had, $300,000 ($230,000 in student loans and $60,000 in cars… hmmm… that doesn’t add up), and not their net worth. Although not likely, they may actually have a positive net worth.
3. CNN Money highlights a family that has a net worth of ($445,741) and it looks like they are going to keep going backwards for the near future. This could be the family that can make the negative millionaire status. Hopefully they will provide updates! (Credit to Living Almost Large for finding the family in: Bergmans…millionaire?)

Here’s some bloggers in the negative that I found:

• ($39,083) Blogging Away Debt
• ($114,409) Mrs. Micah

I searched up and down and found lots of people in debt, but not $1 million. Apparently it’s tough to get close to a negative $1 million. Or the credit bureaus cut them off. Maybe we won’t ever know if there is a negative millionaire out there.

And so my search continues… ideally I don’t really want to find anyone in this state, as I want everyone to succeed financially. It was a fun challenge though!

Read the third article in the millionaire series when I look at our credit cards and lines and see if we can’t hit $1 million in credit limits!

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