Tuesday, December 09, 2008

My New Best Financial Decision

I posted a way back when about the best and worst financial moves of my life. Well, in the last year I entered into one which is now the new best.

Back in March/April of this year I really started to feel like the economy was on shaky ground and I really didn't think that interest rates were going up much for the foreseeable future. As a result I started shopping around for a new variable rate mortgage. Keep in mind that at this time I had been in my house less than 2 years and still had over 3 years left on my original mortgage. After extensive research, my boss put me in contact with his personal banker who quoted me a rate of prime -1%. At the time I was paying 5.35% fixed with ING and a rate of prime -1 worked out to 4.25%. Considerably better than what I was paying.

My next move was to call ING and see what the penalty was, and see what they could do about matching the rate. They had no interest in matching the rate and informed me that the penalty was 3 months of interest. In my case about $3,000. At this time the posted rate for a 5 year fixed was above 5.35%, had it been lower than 5.35% I would have paid the greater of 3 months interest or the difference between 5.35% and the current rate for the duration of my mortgage.

I crunched the numbers and determined that payback on this transaction was about 14 months. I looked at the implications over the life of the mortgage and decided I would go for it. I assumed that rates would not go up during those 14 months and guessed that I would average below 5.35% for the duration.

As you know, since then I have had nothing but luck. As of today I'm now paying only 2.5% on the mortgage and I have a line of credit at 3.5%. This works out to about $6,500 in savings per year (shrinking as my mortgage value declines) at the current interest rate level. In all likelihood this transaction has saved me $20,000 over the next 4 years. Not too shabby.