Borrower beware! (Student Loans)

Parents Forum
141

<p>I think that calmom has had the better of the argument, though I wonder if I understand itstoomuch. I am not going to spend more time on it.</p>

<p>However, itstoomuch is very right that the present value of money is not taught enough, nor is the basic ins and out of consumer finance and investing. Instead there is an emphasis on pre-calc and caculus that is IMHO an academic subject that only 5% or less of working Americans have use for. (Don't misunderstand me. As most highschool students don't know if they might be in that 5%, go for it) Meanwhile 95% of Americans are screwed by their lack of understanding of basic consumer finance issues.</p>

<p>Among the non-college bound crownd, 0% use precalc, much less calc in their lives while again most are screwed by financial ignorance. </p>

<p>At times it seems like a conspiracy to keep Americans dumb.</p>

142

<p>
[quote]
the money you have already paid in interest is gone no matter what. When you refinance, your payoff will be based on outstanding principle and unpaid interest accrued through the date of payoff; you stop paying interest to lender #1 and you start paying interest to lender #2. If you were paying 7% interest to lender #1 and you are paying 5% interest to lender #2, then obviously you are going to come out ahead.

[/quote]
</p>

<p>That's not all there is to it. Look at any amortization schedule. On a 30-year loan, the front end is very heavily weighted with interest payments, and a miniscule amount goes towards principal. And that weighting causes you to have principal=interest right around Year 22. Every time you refinance, you are paying mostly interest in the first 75% of the loan-term. Therefore, you are "throwing away interest" faster than you are reducing principal. </p>

<p>And whoever is clubbing me with itstoomuch; please don't; I can't understand him either.</p>

143

<p>chocoholic, how about just getting an interest only home loan and make payments to yourself on the side to build up equity? Interest rates are much lower with interest rate only home loans. Sounds like if you keep refinancing, in essense you have an interest only loan with a higher rate and higher fees anyway.</p>

144

<p>Dstark, I do not claim to be in the loan business, even though itstoomuch has said that he and I are (????). Supposedly interest-only loans allow you to free much more of your mony to use for other purposes, like paying for college, or buying another property, and your principal never goes up. Yet, (supposedly) you can make a principal payment, randomly, when you wish. I am sure there are unscrupulous lenders out there, and I would be very careful with something like that. It may be good if you are getting a fabulous return on your "saved principal payments". Also, interest-only loans are a type of ARM, so right around the time you have to start making principal payments, (5 years?), the interest rate may be adjusted up 2%. So now is the big shock, of a monthly payment that includes principal +even higher interest. This is not for you and me.</p>

<p>I cite this example by a lender, makes it look good, but his fine print was not even visible to my naked and naive eye.</p>

<p>Interest-Only Loan vs. 30-Year Fixed Loan 5-Year Savings</p>

<p>Example 1: $450,000 loan
Loan Type Monthly Payments
30-Year Fixed Loan @ 5.625% $2,590 Principal + Interest
5-Year Interest-Only ARM
(30 Years) @ 4.875% $1828</p>

<p>Monthly Savings: $762
5-Year Savings: $45,900</p>

<p>Example 2: $230,000 loan
Loan Type Monthly Payments
30-Year Fixed Loan @ 5.5% $1,306 Principal + Interest
5-Year Interest-Only ARM
(30 Years) @ 4.25% $815</p>

<p>Monthly Savings: $491
5-Year Savings: $29,700</p>

145

<p>We refinanced our prinicipal balance from a 15-year to a 30-year with a slightly lower rate, then figured out payments needed to pay it off in 13 years - the remaining years on the original 15-year mortgage. Payments (including the closing costs rolled in) are $2 a month lower than 15-year payment. (chicken feed, I know!) At 5.75% for the 30-year mortgage, making payments as if it is a 13 year mortgage, our payment to principal = payment to interest at 12th payment - in exactly one year's time. Thereafter the interest portion goes down as the payment to principal goes up. Accelerating payments makes good sense and it doesn't end up like this....
[quote]
Sounds like if you keep refinancing, in essense you have an interest only loan with a higher rate and higher fees anyway.

[/quote]

I know it's weird to go from a 15-year to a 30-year, but we wanted some payment flexibility in case college fees were more than we could handle, or one of us lost a job.</p>

146

<p>To Chocoholic --
It is true that the proportion of payments going toward interest is always higher in the early years of an amortized loan, but it is NOT true that the figure is always 75% -- the percentage depends on the length of the loan and the interest rate. The longer the loan term and higher the interest rate, the higher the percentage going to interest. So with a 30 year loan for $200K at 7% interest, the first payments have 87% of the money going toward interest; if the interest rate was 5%, the percentage would be only 77%; if it was a 15 year note at 5% interest, the percentage for the first payment is only 52% -- which is the same as it would be in year 16 of the 30-year loan with the same interest rate. The issue isn't how close you are to the beginning of the loan; it is how close you are to the end. </p>

<p>So, lets take a hypothetical 30-year, $200,000 loan at 7% - the first payment breaks down as follows:
Principal: $ 163.94 Interest: $ 1166.67 - total monthly payment: $1330.60</p>

<p>At the end of the 15th year, the balance owed on the loan is $ 147,570.68. The homeowner has paid out $187,546.61 in interest; if that loan is maintained, the homeowner will pay out an additional $91,471.19
in interest over the life of the loan.</p>

<p>In the first month of year #16 (when there is 15 years left), the breakdown of the payment will be:
Principal: $ 467.05 Interest: $ 863.55 (65% of the payment)</p>

<p>Lets say that the homoeowner now decides to refinance to get a lower interest rate - with closing costs, the new loan is for $150,000. The homeowner chooses a 15 year note, with a 5% interest rate. With the refinance, the monthly payment goes down to $1,186.19</p>

<p>For the first payment - the breakdown between principal and interst is as follows:
Principal: $ 561.19 Interest: $ 625.00 (52%)</p>

<p>As you can see, with the refinance for the 15 year note, the homeowner is now paying almost $100 MORE toward principal with the first payment - AND the monthly payment is $144 less - more money in the homeowners pocket. </p>

<p>The balance of interest that would be paid over the life of the new loan is $63,514.28 - a savings in interest of almost $28,000 over the remaining 15 years. If you add in the value of the lower payments - a net out-of-pocket savings of almost $26,000 -- the refinance saves the homeowner $54,000 over the life of the loan. </p>

<hr>

<p>This really isn't rocket science. Any loan with lower interest and equivalent or shorter term is going to save money over the higher interest loan - the problem is simply that a lot of people opt to refinance in a way that extends the loan term. </p>

<p>Obviously, it gets more complicated because people rarely refinance exactly in the middle of the loan term -- so the typical homeowner with a 30 year mortgage, 7 years into their first loan, may have a harder question when contemplating whether to opt for a 30 year or 15 year mortgage on a refinance. Plus there are other issues depending on the age and family circumstances of the homeowner -- and tax bracket. </p>

<p>But again -- all the homeowner really has to do is print out the amortization schedule for the current note compared with the new note - and do a little bit of math to figure out where the savings come in. </p>

<p>I do agree with everyone who says that we should all be looking at the numbers carefully -- you particularly want to look at the numbers that show the total amount you will pay over the life of the loan. I just don't believe that it is all that complex to figure out. The people here who are involved in finance probably do have clients who don't do the math in the first place - the people who want to run out and refinance every couple of years to get the advantage of every drop in rates - but I'm hoping that those of us who are trying to juggle college tuition and our retirement plans in the mix are going to take the time to look at the big picture.</p>

147

<p>From Page 7:</p>

<p>
[quote]
Wow! That's awful - and would explain the "loan and bank paranoia" of itstoomuch and chocoholic. I've only financed cars through credit unions, and have always paid them off by adding extra money to scheduled payment with no pre-payment penalty. I've never heard of a car loan like Chocoholics!!!! It sounds almost as bad as the interest-only arrangement that the OP, (7 long pages back) had.

[/quote]
</p>

<p>Hahahaha. I had skipped page 7, and now I see people have made some pretty far-stretched assumptions.</p>

<p>(1) I am a mommy, as in female
(2) I have never taken out a car loan, always paid cash
(3) I have no loan and bank paranoia, never had a bad experience, always asked a lot of questions, and am not agreeing with a lot of what itstoomuch says, but it is exhausting to figure out what............
(4) our home mortgages have been from GM, Fleet and Merc. As I said, never took a car loan in my life.</p>

148

<p>Calmom, I was merely trying to point out that one has to be careful of refinancing constantly. One could be stuck in an interest-only loan limbo. Obviously, the 75% was a generalization, and I was referring to a 30-year loan. I myself have a 10-year ;)</p>

<p>The borrower certainly has to do his own homework. And so many factors come into play, like how far into your loan-term are you, how much lower are the rates, what are the points/closing/title search costs etc. I was very fortunate to refinance with my employer, with no costs. (and I don't mean that we refinanced the costs)</p>

<p>I have no clients, and the only finance I am involved in is my own. I am very happy with numbers, except for the number of grey hair on my head, and the number of fillings from being a chocoholic.</p>

149

<p>OK, Chocoholic - I'm sorry - I didn't know that GM and some of the other companies you mentioned did home mortgages. But when I just ran a Google search for "Fleet mortgage" all I come up with is page after page of lawsuits and complaints against them initiated by state officials and agencies-- so maybe their practices are a little shady. I don't know whether the lawsuits are valid of course - just that it's something of a red flag if the attorney generals of various states are going after the company. </p>

<p>I would like to say one thing. I do NOT ever talk to anyone who calls me to try to sell a mortgage or refinance -- I mean, I am always getting emails and phone calls, even though my phones are all on the federal do-not-call registry - and I refuse to talk to them -- even during the past month when I was in fact refinancing, I wouldn't talk to the telemarketers. ( I am bringing this up because one of the complaints I saw against Fleet concerned its telemarketing practices.)</p>

<p>I'd like to note that I got a good deal on a refinance by getting a written quote from a local mortgage broker, and then faxing that to my exising mortgage holder -- their own mortgages are offered at a somewhat higher rate, but they offered to match whatever I was offered, including the fees quoted for various closing costs. For example, the mortgage broker quoted me $200 for an appraisal - the charge would have been about $350. So basically, I am doing an entire refinance with the company that already has my loan -- because of this, I also was not required to prove income, etc.</p>

150

<p>Calmom: </p>

<p>Sorry that it took so long to reply. Just as a stat (not saying that it's good or bad or anything), but about 35% of law school grads have over $100k in debt. Obviously, 35% of them aren't going to be on Wall Street. I think that a lot of them will end up extending their loans out for 20 years or so just to pay it (which will also really up the amount of interest that they pay)... not fun. </p>

<p>Most law schools run about $50k/year now. A fair amount of states (Mass. being one of them) just don't have public law schools. You can do the reciprocity thing, but that would have been in-state + 50% tuition. Not a bad deal, but not a great one, either.</p>

<p>Anyway - from my experience, I figured out my montly repayments (which, at my "cheap" school, are still darn scary) and figured my worst case scenario: I can return to being an engineer - and, with a ton of scrimping, I could pull it off on a 10-year loan. Most people, though, really don't have that type of fall-back (or any type of fall-back), so I see where you are coming from. Yes, there are too many lawyers, and there are too many law students. </p>

<p>$750/year... I imagine that, even adjusting for inflation, that would not be a debt the size of a mortgage, which is what a lot of student loans look like. Now, it's almost impossible to go to law school, paying your way through, and get out for less than $80k in debt (that's assuming a lot of scrimping, a lot of saving, a cheap school, and some scholarship). Paying your way through the expensive schools will run most students about $160k total.</p>

151

<p>Aries, I realize that you don't have much of a choice -- I think tuition at the public law schools in California runs at least $22,000 a year these days, maybe more -- and honestly, I wouldn't want my kids going into debt for that. If I had to face the same thing when I was younger, I don't know if I would have opted for law school. I wanted to do some sort of public interest law; I would not have wanted to be a lawyer if it had meant carrying debt that would have forced me to abandon those goals. I don't know what sorts of scholarships are available to law students these days ... maybe there is some source of funding for students interested in pursuing some of the less financially lucrative fields of law.</p>

152

<p>I did verify something today.
If I mail in a $20,000 payment to my lender, and mark it "Principal Only", my per diem interest will immediately go down from $17.25 to $14.91.
So at the end of 365 days, I will have saved $854.00
Now, do I really want to save $854.00 over a 12-month stretch? Since I see interest rates going up, and I am locked into a nice 4.25% apr, I may wait a bit, and put that $20,000 into a CD, where it would earn me the same interest, but be more accessible.</p>

<p>I am sure that the taxes lost on the CD interest would be pretty close to the deductions lost on the saved mortgage interest.</p>

<p>I don't even make sense to myself :confused:</p>

153

<p>Hope everyone is enjoying this thread, I am. I would like to remind everyone that this is a discussion. No right or wrong answers or replies. </p>

<p>What I am trying to do is help people understand that If people can see the Lender's point of view; You (borrower) can be more efficient in maximizing the use of your money so that you can pay less in interest costs, get out of mortgages faster, not having a overwelming student/PLUS loans, and reach retirement with enough $ to live the way you want.</p>

<p>Let's try the game metaphor again: The game is called "Borrowing for Living". The players: Lenders and Borrowers. Lender's makes the rules. Lender's tells Borrowers how to play the game. Fair enough? Hopefully everyone relies with with resounding NO! Knowing How to play this game is vastly different from Knowing the Rules.</p>

<p>Is this clear?</p>

154

<p>Istoomuch -- keep in mind that everyone's situation is different. I live in California, where my home has almost tripled in value over the past 16 years since I purchased it. Even assuming a more moderate rate of appreciation over the next 15 years, the fact that my equity increases at a significantly higher rate than my payout is an important factor in planning. That is, I am probably better off to borrow to invest in California real estate than to put cash in bonds or CD's. Bottom line - no matter what I have paid on my mortgage over the past 16 years - it probably is no where near what the house is now worth. </p>

<p>You are right that mortgage financing can be viewed as a game, but wrong to say that the ball is entirely in the hands of the banks. </p>

<p>I would be in a lot worse position financially than I am now, were it not for the fact that I could borrow in order to buy property that has appreciated in value. I think interest rates were still in the double digits when I purchased my house in 1988 -- but I had an adjustable mortgage where the interest rate went DOWN every 6 months ...great for me, not so great for the bank. Because my payments were going down and my equity was going up, I was able to qualify for a 2nd,also an adjustable, which I used to buy out my husband when we divorced. Because of the declining interest, my son's college was more affordable than expected -- in fact, I didn't have to borrow as expected, because when my son went off to college my monthly payments ultimately went down about $300. Now I realize that I had Alan Greenspan to thank, not the banks ... in fact, the banks seemed to be rather disgusted with the whole thing, as they kept selling off my mortgage to different banks. </p>

<p>I'm refinancing now because I know that my days of winning the adjustable rate game are over .... and here's the thing: the deal I struck with the bank with the ARM is that if the rates went down, they had to give me the benefit of declining rates -- there is no way legally that they could pull out of the deal -- but if the rates started to go up ... I did have the ability to pull out, by refinancing on whatever terms I could get in a highly competitive market. So I really don't think anyone needs to feel sorry for me for being at the mercy of these evil lending institutions. Obviously, if rates go up over the next several years... I'm sitting pretty, having locked in my rates now.... and if rates were to go down significantly again, I can always refi once more. </p>

<p>I have learned that it helps to have really good credit -- so life is not so good for those who get in over their heads. If anyone has a lot of power over the consumer, it is the credit reporting agencies who can really make life miserable if there is misinformation in their files. I honestly had a rough time of it at first because of my ex's miserably bad credit ... but fortunately I am clear of that now.</p>

155

<p>Does everyone know what is the Federal Reserve Bank? It is the bank that is the bank of banks, The one the Chairman Alan Greenspan runs. </p>

<p>This article came up on my home page, Market Watch: "Play the name game, How Wall Street blurs linews between brokers and advisors." <a href="http://www.marketwatch.com/news/yhoo/story.asp?guid=%7BC32C6698-53C5-4D1F-A405-06DF275CC420%7D&siteid=myyahoo&dist=myyahoo%5B/url%5D"&gt;www.marketwatch.com/news/yhoo/story.asp?guid=%7BC32C6698-53C5-4D1F-A405-06DF275CC420%7D&siteid=myyahoo&dist=myyahoo&lt;/a&gt;&lt;/p>

<p>Here is the link that is related but deals in mortgages from the Federal Reserve Board of Governers. "Looking for the Best Mortgage."
<a href="http://www.federalreserve.gov/pubs/mortggae/mortg_1.html%5B/url%5D"&gt;www.federalreserve.gov/pubs/mortggae/mortg_1.html&lt;/a&gt;&lt;/p>

<p>Specially read "1st section (2 paragraphs) Obtain Information from Several Lenders. But I want you to read the whole article (7 pages with further reading links.)</p>

156

<p>I have a older sis in Bay Area, who also was in tech, but now mortgage broker. An older bro (macro-micro economist) who used to work for Federal Reserve, NY and now works for major NYC bank. I am a generalist financial guy. </p>

<p>Calmom. Good for you. You are playing the game well. I don't want to give anyone the impression that everyone is NOT playing the game well. I'm just saying that WE can all play better! I too am learning on this board's thread, and consequently even with my training and family connections, I can eventually, play better.</p>

<p>We (siblings) are all financial consumers. Some of us play the game better than others, I want everyone to play the game better because this way (selfishly) I will utilmately pay less in taxes, be wealthier, and everyone (USA) will better off financially.</p>

157

<p>From Federal Reserve Board of Governors:
<a href="http://www.federalreserve.gov/pubs/mortgage/mortb_1.htm%5B/url%5D"&gt;http://www.federalreserve.gov/pubs/mortgage/mortb_1.htm&lt;/a&gt;&lt;/p>