A Hassle Free 6 percent...
Seems relatively elusive these days.
As readers of our blog know, Miel and I have set the priority of paying off our second mortgage. We currently owe $16,700 at 9% on that loan. One way we wanted to address the debt is to refinance part of it into accounts with smaller balances. For example, we could borrow $5,000 at a rate lower than 9% and pay off part of the mortgage balance. So, we're using a "divide and conquer" strategy.
Well, over the past couple of mornings I've been making calls to the banks we do business with. So far I've canvassed Washington Mutual, PNC Bank, Schwab and ING direct. Unfortunately, none of these business have been able to offer a hassle free product with an interest rate that's low enough to meet our needs.
Since our current rate is at 9%, I anticipate that we'd need an interest rate of about 6% to make the transfer worth our while. This is translates to about a $510 difference in interest payments per year. Since we plan to discharge the debt by September 30th, the rate has to be sufficiently low - for us that's around 6% - to make the hassle of transferring economically rewarding. No luck so far.
At this point there two options currently on the table: 1) A zero balance credit card transfer. This would slash the interest costs, but increase the probably that we'd be hit with hidden fees. 2) Borrow via a lending service like prosper.com or LendingClub. We've never borrowed using these services, so their rates and repayment terms are an unknown.
Best,
James
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4 comments:
At one point you were considering investing money in Prosper as a lender. Did you ever do that?
With Lending Club they have set rates so you know right away what your interest rate is going to be as a borrower. If you decide to try to get a rate bid down at Prosper you can use the LC rate as a benchmark.
Tom from Prosper Lending Review
With your kind of net worth, assuming you have great credit you should be able to get a 12-month 0% rate with a 3% transfer fee and no other fees. Currently HSBC has a $99 cap on the 3% fee.
Over the years I've borrowed at 0% from several different companies: Chase, MBNA, Citi, Discover, American Express, and HSBC. In some cases-- like Discover about a year ago-- there wasn't a fee of any kind. But one thing I can say about all of them: while I appreciate the stories of people who have been hit with unexpected fees because they missed a payment or whatever, NOT A SINGLE ONE of these companies HAS EVER hit me with an unexpected fee. If they say it's 0% for 12 months with no transfer fee, then that's what it is; if they say it's 0% for 15 months with a 3% fee capped at $75, then that's what it is. Admittedly, this has only been my own personal experience, and admittedly I've never tried to see what would happen if I was late on a payment (I can guess), but I've never been given any reason to worry about "hidden fees."
A few years back, when I knew I was about to get a huge raise (by changing jobs), I put more than $30k that I didn't have into my wife's 401k and mine, and her Roth and mine; I borrowed that money at 0% and took 3 years to pay it off (I had to transfer balances a couple more times). There was never any interest, but sometimes there was a balance transfer fee (not "hidden", of course), and never any additional fees. If I consider the transfer fees (when they existed) as "interest", then my APR worked out to about 1.2% during that time. My first thought was to pay it off within the first year (it was a good raise) but ended up stretching it out over 3 years because I was interested in putting more money into the stock market each month.
(This is off topic, but incidentally, after loading up those 401ks basically on our way out the door, I then rolled them over to a traditional IRA so I didn't have to hold it in the high expense-- like .80% or whatever-- mutual funds that the 401ks were charging).
But to return to topic, though having only my own expense over about the last 8 years to go by, I'm skeptical that "hidden fees" are a very high risk for anyone who chooses to pay on time each month.
If your plan is to discharge the debt on Sept 30... and your having difficulty finding a lender willing to do 6% for a net savings of $150 in interest - why not just keep the 9% and be flexible on the target payback date - ammending it to November 30?
One other factor. The 9% interest you are paying is tax deductable. If you go with a rate that is less, what is your actual net savings because of the tax benefits you were getting because the 9% was a second mortgage?
Also, if you do get a lower rate, or when you pay off the loan, remember to review your withholding deductions so that you won't get a tax owed next year because you didn't adjust for the deductable interst you had been paying.
Thanks Annie,
We actually have only tax deductible debt. There is a little on credit cards, but my wife Miel generally pays that off.
So, for us the tax deductability is a wash, its all deductible.
Therefore, all things being equal, it makes the most sense to pay off our highest interest debt first. In this case, its the 9% second mortgage.
Thanks for commenting! We love that.
Best,
James
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