[(former)FormerSanDiegan]

I agree it depends on the circumstances:

Example:
Let’s say I have an interest-only loan for $500K that I took out last year and resets 4 years from now and the current rate is at 5.625%. The interest-only payment would be 2344 per month.

Let’s say that this loan has a fully amortized rate of 7.656% if it were to reset to today’s 1-year T-bill plus a margin of 2.75%. (See E-loan.com)

Let’s compare that to todays 30-year fixed rate, NO-cost loan (for simplicity) at 7.75%. Payment is 3582 / month.

Since I am not clairvoyant I don’t know if rates will be higher or lower 5 years from now, though I’ve seen arguments both ways. Right now am I better off paying an additional $1238 per month for 48 months for a total of $59,424 ?

In what scenario would this make sense ?

Case 1. Rates stay the same. No brainer here. Better off not paying the $59K. Keep the IO

Case 2. Rates drop. Another no brainer. Saved the $59K PLUS I would pay less than what I would have with the fixed at todays rates.

Case 3. Rates Rise a couple percent
Let’s say rates go up by 2% from TODAY’s rates at the time of re-set. That would make my fully amortized rate at reset 9.656%. With 25 years left on the loan my payment would skyrocket to 4422 (from 2344 in the IO period). A payment increase of 2078. It would take 28 months (59,424/2078) to get to the point where one would break even with the fact that I overpaid for the 30-year fixed for 4 years. So, 48 months more on the IO, plus 28 months = 76 months or nearly 6.5 years, for the two scenarios to break even. This ignores the time value of the 59K. Let’s assume that amounts to the equivalent of a few more months to break even. This hurts a little, but it happens over a 6-7 year period.

In 6-7 years how much will my income increase ?
If I am on a professional career path, and interest rates are higher than they are now, it’s a safe bet that I will keep up with inflation, so assume 4% raises over 6 years, annual compounding gives me an increase in my wage of about 26% over this period. If I could service the original loan with 35% of my income, then I am in good shape.

Case 4. Rates rise explosively.
The CAP in the original IO would typically be 5% above the original rate. SO if rates skyrocket beyond that, the person is sitting pretty with a “low rate” loan at 10.5%), when everyone else is paying 14%.

[(former)FormerSanDiegan]

I might invest in a gas station in Yuma.
I would not buy raw land there.

[(former)FormerSanDiegan]

People are flocking to Yuma …

… to fill their gas tanks and stop for fast food on their way to Texas in their U-Haul trucks.

[(former)FormerSanDiegan]

PS –

I apologize if you took my post to mean that I thought you were predujiced. Just trying to point out an irony, which I found amusing. Perhaps my sense of humor is too dry. My comment was directed at the statement, not the author.

Here’s what I said …
Quote- – ‘Stating that “midwesterners are prejudiced” is in itself a prejudiced statement. ‘ – end quote

Anyway, back to your point. As a Kansan by birth and a southern California resident by choice, and having spent a week in Yuma one night I don’t understand what the draw would be to anyone living in the Midwest or any reasonably sized city in the US. You would have to be coming from an area whose climate, business environment, recreation or cultural activities are better in Yuma than in your current situation. I think that as far as other parts of the US are concerned, that is a pretty small pie from which Yuma could take its slice. I would not be buying into Yuma.

[(former)FormerSanDiegan]

“Midwesterners are prejudiced”

Definition:
Prejudice is, as the name implies, the process of “pre-judging” something. When applied to social groups, prejudice generally refers to existing biases toward the members of such groups, often based on social stereotypes.

Stating that “midwesterners are prejudiced” is in itself a prejudiced statement.

[(former)FormerSanDiegan]

Simple.

Example: Put down 200K on a million-dollar property.
Case 1. Property value goes up 10%.
You make 100K, 50% of your original investment on a 10% move.

Case 2. Property value declines 10%.
You lose 100K, 50% of your original investment on a 10% move.

50%/10% = 5 => 5 times

[(former)FormerSanDiegan]

Good Rental Reference ….

American Heritage Properties has quality rentals. http://www.renthomes.com
As a property owner I’ve used them as my property manager off and on since 2000.

[(former)FormerSanDiegan]

On the other hand … Opportunity Cost:

Not that I agree with the analysis of the original post, but I want to point out something about the opportunity cost of tying up the down payment ($120K in this example).

Consider the flip side: If rents increase by 5% per year: By choosing NOT to buy, the renter would face a cumulative INCREASE in rents of about 96,000 over a 10-year period. And $229,000 over a fifteen year period. So the TRUE opportunity cost is the difference between what was earned on the $120K investment outside a home and the $120 K down payment “invested” to avoid potential future rate increases.

I believe that the numbers still highly favor the renter in this (over-inflated) rent example. But someday they will not.

[(former)FormerSanDiegan]

1996 Rent versus Buy

To put things in perspective…
At some point we will get to where the cost of purchasing is equal to or less than renting. An example, based on personal experience in San Diego: In early 1996 we reached a point where we could put 5% down, pay PMI, mortgage at 8.25% for about the cost of renting (after taxes). That was the most recent low point in the SD housing cycle.

Your example is well short of this.

[(former)FormerSanDiegan]

Value Range Works in Sellers’ Market

From my personal experience as a homeowner. We listed our home in April 2005. At that time things were still pretty hot in our area with little available inventory. Doing a CMA in that environment was difficult if not impossible. There were basically no homes listed at the time between 600K and 900K, so we (and buyers) had no idea how to narrow it down to a number. Decided to list at 789 to 849K (my choice, not the agent). Lowest offer came in at > 800K. Sold for > 820.

In todays environment EVERY price point is covered with today’s listings. There are no gaps in inventory. So it does not make sense to do this kind of pricing in today’s environment in San Diego. Just want to point out that there are times where this strategy makes sense and is justified.

[(former)FormerSanDiegan]

More Like and HUMMER H1 Alpha versus a Lexus GS450H

[(former)FormerSanDiegan]

Get it Now !

[img_assist|nid=938|title=2003 TONY GWYNN LEAF LIMITED AUTOGRAPH JERSEY 6/19|desc=Check it out on Ebay !|link=node|align=left|width=400|height=284]

This post is not intended to be a solicitation.
Amarillo by mornin’

[(former)FormerSanDiegan]

Garage Sale

I am planning on having a garage sale in a few weekends to clear stuff I won’t need. But since this forum seems to be the place to sell things, I’ll check here first …
Anybody need a Three Boogie boards, surfboards, Three wet-suits, a case of sun screen, 4 beach blankets, 4 beach chairs, An earthquake survival kit, Padres 1/2 season tickets (remaining games), One (1) Tony Gwynn Jersey.

I was wondering if any other bloggers were interested in me or anyone else trying to sell them something here.

[(former)FormerSanDiegan]

[img_assist|nid=936|title= So Cal for less than Amarillo|desc=Sick of living in the West Texas real estate Bubble ? Tired of all that Beef ? Like to eat your your salad with fruits and nuts ? We’ll they are all out here in sunny southern California. This house is listed at $460K, for 3142 sq. ft. Much cheaper than Sandy Hills. Come West y’all.|link=node|align=left|width=400|height=274]

Maybe I should go into real estate sales.

[(former)FormerSanDiegan]

Nothing against Texas.

I grew up a few miles north (Kansas). I have family in Fort Worth and friends in Austin, Dallas. I’ve spent time in Lubbock, Midland …(not just a day, but weeks). I love to visit the state and unwind, enjoy good barbecue, family, friends, etc.

You know nothing about my quality of life. I live 2 miles from work, can walk to my kids’ school, walk to some of best restaurants on the west coast. For the record, I do love Beef.

People in general just don’t appreciate people abusing Blog forums to PEDDLE their WARES. When you post advertising, you will get abused.

P.S. –
“I remember the screaming two years ago about California energy costs. ”
Are you referring to the period where companies such as Enron (Ken Lay, rest his soul), ILLEGALLY robbed us by manipulating the derregulated electricity industry ?

[Author]

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