Sunday, May 6, 2012

The Small Scale of Huge Decisions

Deciding whether to save between $200 and 500 per month on our mortgage could have long-reaching ramifications.

Good problems. Before I get into the discussion, I want to acknowledge that this is a good problem to have. We are able to refinance our house. We already have a good rate and have the opportunity to get a better rate. For the people who are "under water" in their house, I cannot stress enough how much that must suck and the crappy decsions you have to face.

In this decision making process, I decided to ask three different brokers about my situation.

The first person I asked, Broker A, has been my mortgage broker for several years. He refinanced our condo and did the lending work for our house including one refinance. What I didn't like was that, upon my inquiring into refinancing this time, there was no discussion initiated into what our current situation was, what our future held. I felt very much like a commission. Hindsight suggested that he might not have made all of the right moves in the past for us, so I decided to talk to two others to get some perspective.

Broker B I found by way of his radio show. I decided to email him on a Saturday afternoon. He called me from home almost immediately and we talked for around half an hour. I suppose I set him up to ask a lot of questions because I came from a disappointing conversation with another broker. Any salesperson will tell you that the best customer is one who had a bad experience elsewhere. At any rate, he quickly gave me several scenarios based on the different ways our life could lead. I was very happy with his honest, creative approach.

Broker C was a personal reference. He wasn't as responsive nor as creative. However, he did go the extra mile in having a friend do an unofficial appraisal of our house to see whether or not we would qualify for certain rates. That saved us a lot of time. Else, he was very friendly and also ran some scenarios to demonstrate our potential monthly payments.

It felt really good to talk to several people. What none of them could do was tell us what was right for us. 30 year fixed? 7 year ARM? 5 year ARM?

But, wait, you say, what's with all of the uncertainty?

Most of you probably know that a conventional 30-year fixed mortgage is the best way to go for people planning on staying in their houses indefinitely. Therefore, you can guess that we were not certain that we would stay in our house permanantly. Why not?

We live in the City of Chicago. We bought into the school district and for the proximity to Wife's work. We got a lot more than that. Our city block of neighborhood is on a short, one-way street. On it, there are 27 kids under age ten. The families have become good friends. We are within one of the best elementary school districts in chicago. Wife's commute is fifteen minutes in the morning and twenty-five to thirty minutes at the height of traffic. Shopping and dining opportunities abound.

On the other hand are the suburbs. The legend of those blissfully safe communitites whose grand schools are the source of great migration lure many in our situation. More house for your money. Your own yard. A sense of community. A more homogenous environment. (Okay, the neighborhood I'm in isn't exactly a wealth of diversity.)

The bulk of our extended family lives in the suburbs of Chicago. A number of our "old" friends have been moving that way and it seems likely that more will follow. It's also inevitable that our neighborhood will change over time. Someone will change jobs, want a new house, or have had other plans all along.

So now Wife and I have to make a major financial decision based on an uncertain future. If we do an ARM and decide to refinance later, what will the rates be? Will it be worth it in the long run? What is the long run? What are our other financial goals and how will this decision affect those?

Again, these are good problems to have. Wife has a good job and is important to her company. We have terrfiic credit. We have some savings for a safety net as well as retirement.

On the other hand, like pretty much every American homeowner, our house is less valuable than when we purchased it four-and-a-half years ago. We have illusions of grand remodeling that we can't possibly afford anytime in the immediate future. By choosing the lowest rate possible, we can pay down our total long-term debt faster within the fixed portion of the contract. What happens when we decide that we want to continue living in our home? What will the interest rates be at that time? I did a worst-case-scenario and it didn't look pretty. With such doubt, going with the most stable investment seems the smart choice.

Sometimes the smart choices are the hardest ones to make.

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