0% APR Credit Card Offers to Pay Off Mortgage
Author: bobo
Joined: 12 Feb 2005
Posts: 4
Location: san diego
Posted: Sat Feb 12, 2005 2:55 am
Post subject: Anybody paying off their mortgage with these 0% offers?
I am curious if anybody out there is paying off their mortgage with these 0% credit card offers? I just got a Marriott Rewards card for $25,000 for the points. My credit is perfect, all balances have been paid off monthly for over 20 years and I made just over $200,000 last year. I think I could get some serious credit card limits if I choose to, but I want to go about this the right way if I go this route.
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Author: radicimo
Joined: 12 Feb 2005
Posts: 11
Posted: Sat Feb 12, 2005 3:06 am
You need to consider how much of a mortgage you plan to finance that way, and how long you would have before paying it down fully. Reading back through the archives here, I saw that others have done it. Just plug mortgage into the site search field.
I would lock in the lowest rate you can get on a 30 year note and pay it down over 30 years or until you move. You need to consider what would happen if interest rates continue going up for the next 2 to 5 years (which I think will happen). What if the Prime rate goes above 5%? above 7%? Do you think the credit card issuers are going to keep on offering 0% APR at that point? Most 0% APR deals allow the issuer to change the rate at any time for any reason with no recourse. Even if they honor their agreement, you are placing faith in the idea that another 0% transfer will be available to move the balance over at some later date. Seems like a lot of risk, when the 30 year rate is around 5%-6% right now, at historical lows.
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Author: bobo
Joined: 12 Feb 2005
Posts: 4
Location: san diego
Posted: Sun Feb 13, 2005 2:19 am
Post subject: Mortgage
radicimo wrote:
You need to consider how much of a mortgage you plan to finance that way, and how long you would have before paying it down fully. Reading back through the archives here, I saw that others have done it. Just plug mortgage into the site search field.
I would lock in the lowest rate you can get on a 30 year note and pay it down over 30 years or until you move. You need to consider what would happen if interest rates continue going up for the next 2 to 5 years (which I think will happen). What if the Prime rate goes above 5%? above 7%? Do you think the credit card issuers are going to keep on offering 0% APR at that point? Most 0% APR deals allow the issuer to change the rate at any time for any reason with no recourse. Even if they honor their agreement, you are placing faith in the idea that another 0% transfer will be available to move the balance over at some later date. Seems like a lot of risk, when the 30 year rate is around 5%-6% right now, at historical lows.
Quote:
Thanks Radicimo. I have a mortgage at 4.625% for 15 years of about $125,000. 0% sounds really tempting though and I have $20,000 sitting in the bank as a back-up earning very little interest. I usually pay most of my loans off early. I could probably pay this off in about four years at 0% interest so I am not overly concerned about rates going through the roof in that time. I was not able to find anybody else doing this in archives. Do you know of anyone?
Also, I see on www.debtsmart.com that Scott Bilker has about 80 credit cards. Any reason that anybody would get that many? I know there used to be a guy from Hanford, CA named Tim Taylor who also advocated getting dozens and dozens of cards. Just curious.Quote:
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Author: Board Monitor
Board Monitor/ Administrator
Joined: 05 May 2003
Posts: 550
Posted: Sun Feb 13, 2005 9:56 am
bobo,
Thanks for your post and welcome to the board! Scott Bilker is great- he's one of our partners. He takes an unconventional approach to credit cards. He likes having so many cards because, among other things, it gives him the flexibility of having many open lines of credit and thus he has a greater chance of getting attractive balance transfer offers.
At any rate, this can and has been done, but as radicimo points out...you should be very careful and have a back-up plan is place. Let us know how things turn out!
Out of curiosity, how did you find out about our website?
Best Regards,
Curtis Arnold
Board Monitor
U.S. Citizens for Fair Credit Card Terms, Inc.
http://www.cardratings.com
501-663-0314 PH
501-301-8474 FX
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Author: Polonius
Credit Expert (100+ Posts)
Joined: 19 Jan 2004
Posts: 481
Posted: Sun Feb 13, 2005 12:43 pm
Here's how I look at money. It's all one big pot. If you owe money and have a good job and good credit availability, then you do what you can to pay off higher interest loans with cash or lower interest loans, taking into account all the fees involved and figuring in your own time as well.
I used credit cards to pay off my mortgage some years ago. Part of it was on 0% offers, part on 2.9%, part on 3.9%, part even on 5.9%. My mortgage was at 8.25% at that time. I wound up with $160,000 in credit card debt on which I was paying about 2.5% per year.
I had trouble reducing the size of the debt for various reasons, but I kept the amount fairly stable. There was no downside for several years until one bank noticed that I was carrying $160,000 in debt. It cancelled 5 of my 6 credit cards with it and lowered the limit on the sixth. In response, my credit score went down, prompting another bank to cancel an unused card. In response to that, two more banks lowered my credit limits. None of this really hurt me because I still had no trouble handling the debt, but it was starting to take more and more of my time--and the very low interest credit offers stopped coming.
One of the techniques I used to keep the interest down was to do free balance transfers (treated as purchases) on my six cards with one bank, Chase. That was great--I'd balance transfer a day after the statement closing date and have 45 days without interest or fee to repay the balance transfer. I'd use another account to do the repayment, wait a week, and then start all over again. But late in 2004 Chase decided to put in a $75 balance transfer fee on each transaction, which made this technique a lot more expensive.
So I got a home equity line of credit from Citibank and paid off most of my credit card debt last month. I'm paying prime - .25% in interest, so that's 5.25% now. I paid off $12,000 of that already with a 3.9% offer (good for life of loan), and I'll probably do another $40,000 payment with a 4.99% offer (good for life of loan), simply because my Experian credit score dropped a fair amount when the HELOC hit my credit record, since I was using over 90% of its credit limit. Also, the HELOC is variable rate, tied to the prime rate; so I'm eager to change to a fixed rate loan at roughly the same rate. (If prime goes down, I'll pay off the fixed rate loans with the cheaper HELOC funds.)
I wouldn't recommend this technique to everyone. But, bobo, with your credit rating, credit availability, and the size of the mortgage involved, it looks like a no-brainer to me. You've got a great fixed interest rate of 4.625%--and you probably won't be able to get that today if you pay off the loan. But why pay even 4.625% when you can pay off at 0% or use that savings account money, which might be earning only 1%-2.5% tops? (I don't understand why people with good credit would keep any money in a savings account. What emergency couldn't be handled with a credit card? If it's used for checking account overdrafts, you can always get a separate overdraft credit line, usually without fee.)
There are some tax considerations, too, since the mortgage interest is tax deductible and the credit card interest is not. On the other hand, your savings account interest is taxable, so you're earning less than the putative APR. And remember that if you're using a time-limited 0% offer, you better be ready to pay that off when your time expires. If you have to pay much more than 5% at that time for the money, this plan might not work out very well for you in the long run.
Polonius
"Neither a borrower, nor a lender be; For loan oft loses both itself and friend"
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Author: radicimo
Joined: 12 Feb 2005
Posts: 11
Posted: Sun Feb 13, 2005 4:48 pm
Quote:
I have a mortgage at 4.625% for 15 years of about $125,000. 0% sounds really tempting though and I have $20,000 sitting in the bank as a back-up earning very little interest. I usually pay most of my loans off early. I could probably pay this off in about four years at 0% interest so I am not overly concerned about rates going through the roof in that time. I was not able to find anybody else doing this in archives. Do you know of anyone?
I did see some other discussions of this in the archives, but searching w/ mortgage as a key word is not great help. I think Polonius explains some of the work and time commitment involved in such a deal. Why would you want to create so much extra work for yourself? With a mortgage at 8.25% maybe, but not at 4.625% over 15 years. Is there any reason you want to pay off that mortgage so quickly, besides getting out from under it?
I see a lot of petty interest rate arbitraging going on here, but what is your net savings. Did you do the math on what paying off the mortgage in 4 years at 0% would be versus 15 at 4.625%? What about opportunity cost?
Why not take your $20,000 and put it in a 6 month NZD CD at 5.32% APY or better Mexican Peso or South African Rand at 6.09%? http://www.everbank.com/direct.asp?Idpage=hme_t1
Frankly I would look to draw out the 4.625% mortgage for the full 15 years, and pay absolutely minimum payments. I would put my spare $$ into foreign currency CDs and petroleum companies with large proven reserves and paying high yield dividends. Actually I would look for much higher risk / higher yield opportunities, but I'm not a financial advisor. I think if you look at the big picture regarding where interest rates are heading, as well as opportunity cost, you'll find that there are lower risk, higher yield ways to arbitrage the mortgage that you have. Why not take advantage of the low interest rate on your mortgage and use the opportunity to put your free money to work at higher yields elsewhere? I bet you could find a mix of foreign CDs and dividends to generate a yield above 7% on your cash. If I were to embark on a plan to move my mortgage to credit cards, I'd do some math and compare some options, while factoring in intangibles like risk and time.
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Author: Polonius
Credit Expert (100+ Posts)
Joined: 19 Jan 2004
Posts: 481
Posted: Sun Feb 13, 2005 5:55 pm
radicimo, your advice then is to borrow money to speculate in foreign currencies. (If you choice is to pay back money already borrowed OR to invest in such foreign currency instruments, then in effect you've decided to borrow that money instead of paying down your debt.)
I was a futures trader for many years. There were big ups and downs. But I never kidded myself into thinking the risks were low. Do you realize that when you invest in New Zealand dollar-denominated CDs you run the risk of losing substantial amounts of money if the NZ$ moves in a way you don't anticipate? I remember a book that presented a "foolproof" way of investing in Mexican pesos. You bought future contracts and redeemed them near expiration date. When the book was published, that method had been successful for the past dozen years.
The year the book was published, Mexico devalued the peso and the value relative to the US $ was cut in two. Anyone buying the contract on margin lost every penny put into it--and then some.
And, by the way, if you do the math, $125,000 amortized at 4.625% for 15 years works out this way:
180 payments
Periodic Payment*: 964.25
Total Payments: $173,565.00
Total Interest: $48,565.00
If you're urging spending that $48,565.00 in interest, then come up with a reasonably riskless way to make more than that with the funds. I can think of many ways that might work out--or might not.
As far as the work goes, what work is involved in setting up recurring payments from your bank account? If you can do it to repay the mortgage, you can do it to repay the credit card debt too. It's not really a big deal IF your income is steady and the funds are available. My own time problems came about because I was juggling dozens of different accounts. That's not the scenario here.
Polonius
"Neither a borrower, nor a lender be; For loan oft loses both itself and friend"
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Author: radicimo
Joined: 12 Feb 2005
Posts: 11
Posted: Sun Feb 13, 2005 7:42 pm
Polonius, I don't want this to digress into a discussion about which way US interest rates or the dollar are headed. But, OTOH, it would be unwise not to take into account your perceptions of where these are headed if you were to get into arbitraging interest rate differentials -- which is what the topic is really about in the end.
Really I was only throwing out foreign CDs as one alternative. You chose to ignore my entire argument about opportunity cost. My point was that there are alternatives to have your money work for you that don't involve taking a risk on juggling credit card debt and the beneficence of credit card companies to keep the rates low. I'll grant you that there is a risk in foreign currencies, which perhaps I understated. But don't fool yourself into believing that there is not a similar risk in US$ denominated currency, especially when compared to Kiwi dollar or even Canadian dollar. Further, buying currency contracts on 5% or 10% margin is vastly different risk than putting your money in a foreign denominated Certificate of Deposit at a guaranteed rate of return. They can't change the rate of the CD yield once you own it! That's why the terms are limited to 6 months. Sure there is a risk that the rate decreases the next time you go to roll over the CD. Also, you chose to ignore one part of my proposed alternative, which is high yield dividends in petroleum companies. I'll save the argument about peak oil and demand rising faster than supply, especially over the next 15 years.
In sum, I personally don't think it will be possible in the next 15 years to borrow $125,000 at such a small interest rate (less than 5%), and I think it is intelligent to borrow against that (as you call it Polonius). What I'm suggesting is that over the life of that loan you will be able to find much better opportunities to make far in excess of 5% on your money. The smallest risk in the entire equation is that the 4.625% 15 year note is going to increase in APR. The credit cards could ask for more or less. An investment could yield more or less. The dollar could buy more or less. Even the house could increase or decrease in value. If you pay down the debt early, you incur an opportunity cost, and part of that opportunity is the benefit of such a large low-interest loan fully collateralized. And, I don't see what is so riskless about attempting to float a mortgage on 0% credit cards. If I had to assess the risks one versus the other, I would suggest that NZD yield staying above 5% over the next 4 years has less risk than credit card interest rates staying at 0% for the next 4 years.
There are countless ways to approach this scenario: If the note has $125,000 left at 4.625%, and he thinks he can pay off in four years, one way to approach it would be to start stashing the money into NZD CDs for the next 4 years at 5.32%. That gives you a positive yield of +.695%. When the full $125,000 is available in the account, then pay off the note in full. So, counting the full interest of $48,565.00 is somewhat misleading. Geeze, this is starting to sound like a discussion of Social Security reform.
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Author: Polonius
Credit Expert (100+ Posts)
Joined: 19 Jan 2004
Posts: 481
Posted: Sun Feb 13, 2005 8:08 pm
Look, three years ago the New Zealand Dollar was worth around 41 cents; now it's worth around 71 cents. Buying $NZ and similar foreign currencies instead of investing in US instruments worked out incredibly well in the past few years. But it's still a mistake to focus on the interest paid. Suppose it goes the other way? Buy 10,000 $NZ today for US$7100 and sell it three years from now--if the price goes back down to 41 cents, you'll get US$4100, a LOSS of over 40% on your investment. Throw in a 5-8% interest rate and you still have a huge loss. The currency fluctuation far outweighs the higher interest paid. That's why interest rates are higher--because the market knows the investment is risky. And, yes--you are underestimating that risk.
I'm not predicting where currency rates are going and I'm not disagreeing with you about the direction of interest rates and the dollar. It's a matter of age and risk. If you follow your argument through, everyone should mortgage their homes for the maximum amount possible while interest rates are still relatively low, and invest that money in something that has good odds to bring higher returns. If you're young and you can recover from a loss, that's OK. If not--and you are wrong and the market does the unexpected (which it usually does, sooner or later)--then you've lost your investment and you can't pay your mortgage so you may lose your home as well.
I'm not ignoring the opportunity cost. I'm just balancing reward and risk. MOST people pay move in 5 years or so, paying off their mortgage in full when the house sells. So most 15-30 year mortgages rarely last more than 5 years. If the mortgage is paid off and the credit card offers at a lower rate disappear, the house can always be refinanced--and you'll have saved those years of interest payments.
I was a crazy wild-eyed speculator in my youth, making and losing millions. I'm not kidding. I was young and single and rich and greedy. I made some big mistakes. Now that I'm approaching 60, I have a wife and a family. I have more responsibilities. I have to be more careful with the money I have, because I don't have the time to make it back if I blow it. Most financial advisors suggest paying off your mortgage when you approach retirement so that it's one less thing to worry about. I don't know how old you are, but I suspect you're younger than I am--and I suspect you'll feel the same way I do when you approach my age.
Polonius
"Neither a borrower, nor a lender be; For loan oft loses both itself and friend"
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Author: radicimo
Joined: 12 Feb 2005
Posts: 11
Posted: Sun Feb 13, 2005 8:36 pm
Polonius,
You're at least 20 years older than I am, perhaps 25.
When I approach your age I hope to have made and not lost the millions you did, without the greed. We all learn through mistakes, so I'll accept those. The rest of this isn't worth arguing any more, since we seem to have different opinions on risk and the different natures of speculative ventures, which may be attributable to age or not. I hope I have argued my primary point well enough, that there is a certain degree of risk in 0% interest introductory APRs from credit card companies. I'm sure you've read the fine print, allowing them to change the terms at any time. If interest rates continue up at a "measured pace" or faster, those deals will be no longer available within 1-2 years. I wouldn't bet the house on their availability. And if you refi at that point in time, you surely won't get under 5% let alone under 6% on a note.
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Author: bobo
Joined: 12 Feb 2005
Posts: 4
Location: san diego
Posted: Tue Feb 15, 2005 2:12 am
Post subject: Re: Anybody paying off their mortgage with these 0% offers?
bobo wrote:
I am curious if anybody out there is paying off their mortgage with these 0% credit card offers? I just got a Marriott Rewards card for $25,000 for the points. My credit is perfect, all balances have been paid off monthly for over 20 years and I made just over $200,000 last year. I think I could get some serious credit card limits if I choose to, but I want to go about this the right way if I go this route.[/quote
Polonius, Radicimo:
You have both given me a great deal to think about. Perhaps I should be paying the mortgage down in some big chunks rather than paying it off. Yes, the main resaon I want to pay it down is to get rid of it sooner rather than later. I will be 50 in two years and I would like to retire early if possible. I alreadt have another house paid for and it feels great.
Curtis, I found your website on Google.
I guess I still don't see the wisdom of getting a bunch of credit cards if you are not going to do something with them.
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Author: fire3000
Joined: 16 Feb 2005
Posts: 9
Posted: Wed Feb 16, 2005 1:24 pm
Post subject: Paying Off a mortgage with credit card money
It is only a good idea if you have a ready supply of low rate credit available or a CD that will mature in a few months. The card money must be paid in full to avoid the new sky high rates that take effect after the introductory period. My mortage was paid long ago. I now invest low rate credit card money in short term interest bearing securities and pocket the difference in rates.
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Author: bobo
Joined: 12 Feb 2005
Posts: 4
Location: san diego
Posted: Fri Feb 18, 2005 10:08 pm
Fire3000:
What kind of interest rates are you finding doing this and how long do you do it for?
Bobo
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Author: fire3000
Joined: 16 Feb 2005
Posts: 9
Posted: Sat Feb 19, 2005 7:34 pm
Post subject: Reply to BOBO's question
I invest in mortgage backed securities issued by Fannie Mae and Freddy Mac -talk to your stockbroker for more information. Rates are 5.5% for 1 to 3 years. I have over 100K of low rate home equity credit available to pay off the credit cards at least a week prior to the dates the low rates end.
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Author: Board Monitor
Board Monitor/ Administrator
Joined: 05 May 2003
Posts: 550
Posted: Sun Feb 20, 2005 9:53 am
fire3000,
Interesting! Do you have to have a full service broker to buy these?
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Author: fire3000
Joined: 16 Feb 2005
Posts: 9
Posted: Mon Feb 21, 2005 3:23 pm
I buy them through my broker, Legg Mason.
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Author: Board Monitor
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Joined: 05 May 2003
Posts: 550
Posted: Mon Feb 21, 2005 6:14 pm
Thanks for the follow-up fire3000.
By the way, there is a good brand new article related to this thread here:
http://www.smartmoney.com/debt/advice/index.cfm?story=conveniencechecks2005
Best Regards,
Curtis Arnold
Board Monitor
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Joined: 12 Feb 2005
Posts: 4
Location: san diego
Posted: Sat Feb 12, 2005 2:55 am
Post subject: Anybody paying off their mortgage with these 0% offers?
I am curious if anybody out there is paying off their mortgage with these 0% credit card offers? I just got a Marriott Rewards card for $25,000 for the points. My credit is perfect, all balances have been paid off monthly for over 20 years and I made just over $200,000 last year. I think I could get some serious credit card limits if I choose to, but I want to go about this the right way if I go this route.
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Author: radicimo
Joined: 12 Feb 2005
Posts: 11
Posted: Sat Feb 12, 2005 3:06 am
You need to consider how much of a mortgage you plan to finance that way, and how long you would have before paying it down fully. Reading back through the archives here, I saw that others have done it. Just plug mortgage into the site search field.
I would lock in the lowest rate you can get on a 30 year note and pay it down over 30 years or until you move. You need to consider what would happen if interest rates continue going up for the next 2 to 5 years (which I think will happen). What if the Prime rate goes above 5%? above 7%? Do you think the credit card issuers are going to keep on offering 0% APR at that point? Most 0% APR deals allow the issuer to change the rate at any time for any reason with no recourse. Even if they honor their agreement, you are placing faith in the idea that another 0% transfer will be available to move the balance over at some later date. Seems like a lot of risk, when the 30 year rate is around 5%-6% right now, at historical lows.
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Author: bobo
Joined: 12 Feb 2005
Posts: 4
Location: san diego
Posted: Sun Feb 13, 2005 2:19 am
Post subject: Mortgage
radicimo wrote:
You need to consider how much of a mortgage you plan to finance that way, and how long you would have before paying it down fully. Reading back through the archives here, I saw that others have done it. Just plug mortgage into the site search field.
I would lock in the lowest rate you can get on a 30 year note and pay it down over 30 years or until you move. You need to consider what would happen if interest rates continue going up for the next 2 to 5 years (which I think will happen). What if the Prime rate goes above 5%? above 7%? Do you think the credit card issuers are going to keep on offering 0% APR at that point? Most 0% APR deals allow the issuer to change the rate at any time for any reason with no recourse. Even if they honor their agreement, you are placing faith in the idea that another 0% transfer will be available to move the balance over at some later date. Seems like a lot of risk, when the 30 year rate is around 5%-6% right now, at historical lows.
Quote:
Thanks Radicimo. I have a mortgage at 4.625% for 15 years of about $125,000. 0% sounds really tempting though and I have $20,000 sitting in the bank as a back-up earning very little interest. I usually pay most of my loans off early. I could probably pay this off in about four years at 0% interest so I am not overly concerned about rates going through the roof in that time. I was not able to find anybody else doing this in archives. Do you know of anyone?
Also, I see on www.debtsmart.com that Scott Bilker has about 80 credit cards. Any reason that anybody would get that many? I know there used to be a guy from Hanford, CA named Tim Taylor who also advocated getting dozens and dozens of cards. Just curious.Quote:
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Author: Board Monitor
Board Monitor/ Administrator
Joined: 05 May 2003
Posts: 550
Posted: Sun Feb 13, 2005 9:56 am
bobo,
Thanks for your post and welcome to the board! Scott Bilker is great- he's one of our partners. He takes an unconventional approach to credit cards. He likes having so many cards because, among other things, it gives him the flexibility of having many open lines of credit and thus he has a greater chance of getting attractive balance transfer offers.
At any rate, this can and has been done, but as radicimo points out...you should be very careful and have a back-up plan is place. Let us know how things turn out!
Out of curiosity, how did you find out about our website?
Best Regards,
Curtis Arnold
Board Monitor
U.S. Citizens for Fair Credit Card Terms, Inc.
http://www.cardratings.com
501-663-0314 PH
501-301-8474 FX
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Author: Polonius
Credit Expert (100+ Posts)
Joined: 19 Jan 2004
Posts: 481
Posted: Sun Feb 13, 2005 12:43 pm
Here's how I look at money. It's all one big pot. If you owe money and have a good job and good credit availability, then you do what you can to pay off higher interest loans with cash or lower interest loans, taking into account all the fees involved and figuring in your own time as well.
I used credit cards to pay off my mortgage some years ago. Part of it was on 0% offers, part on 2.9%, part on 3.9%, part even on 5.9%. My mortgage was at 8.25% at that time. I wound up with $160,000 in credit card debt on which I was paying about 2.5% per year.
I had trouble reducing the size of the debt for various reasons, but I kept the amount fairly stable. There was no downside for several years until one bank noticed that I was carrying $160,000 in debt. It cancelled 5 of my 6 credit cards with it and lowered the limit on the sixth. In response, my credit score went down, prompting another bank to cancel an unused card. In response to that, two more banks lowered my credit limits. None of this really hurt me because I still had no trouble handling the debt, but it was starting to take more and more of my time--and the very low interest credit offers stopped coming.
One of the techniques I used to keep the interest down was to do free balance transfers (treated as purchases) on my six cards with one bank, Chase. That was great--I'd balance transfer a day after the statement closing date and have 45 days without interest or fee to repay the balance transfer. I'd use another account to do the repayment, wait a week, and then start all over again. But late in 2004 Chase decided to put in a $75 balance transfer fee on each transaction, which made this technique a lot more expensive.
So I got a home equity line of credit from Citibank and paid off most of my credit card debt last month. I'm paying prime - .25% in interest, so that's 5.25% now. I paid off $12,000 of that already with a 3.9% offer (good for life of loan), and I'll probably do another $40,000 payment with a 4.99% offer (good for life of loan), simply because my Experian credit score dropped a fair amount when the HELOC hit my credit record, since I was using over 90% of its credit limit. Also, the HELOC is variable rate, tied to the prime rate; so I'm eager to change to a fixed rate loan at roughly the same rate. (If prime goes down, I'll pay off the fixed rate loans with the cheaper HELOC funds.)
I wouldn't recommend this technique to everyone. But, bobo, with your credit rating, credit availability, and the size of the mortgage involved, it looks like a no-brainer to me. You've got a great fixed interest rate of 4.625%--and you probably won't be able to get that today if you pay off the loan. But why pay even 4.625% when you can pay off at 0% or use that savings account money, which might be earning only 1%-2.5% tops? (I don't understand why people with good credit would keep any money in a savings account. What emergency couldn't be handled with a credit card? If it's used for checking account overdrafts, you can always get a separate overdraft credit line, usually without fee.)
There are some tax considerations, too, since the mortgage interest is tax deductible and the credit card interest is not. On the other hand, your savings account interest is taxable, so you're earning less than the putative APR. And remember that if you're using a time-limited 0% offer, you better be ready to pay that off when your time expires. If you have to pay much more than 5% at that time for the money, this plan might not work out very well for you in the long run.
Polonius
"Neither a borrower, nor a lender be; For loan oft loses both itself and friend"
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Author: radicimo
Joined: 12 Feb 2005
Posts: 11
Posted: Sun Feb 13, 2005 4:48 pm
Quote:
I have a mortgage at 4.625% for 15 years of about $125,000. 0% sounds really tempting though and I have $20,000 sitting in the bank as a back-up earning very little interest. I usually pay most of my loans off early. I could probably pay this off in about four years at 0% interest so I am not overly concerned about rates going through the roof in that time. I was not able to find anybody else doing this in archives. Do you know of anyone?
I did see some other discussions of this in the archives, but searching w/ mortgage as a key word is not great help. I think Polonius explains some of the work and time commitment involved in such a deal. Why would you want to create so much extra work for yourself? With a mortgage at 8.25% maybe, but not at 4.625% over 15 years. Is there any reason you want to pay off that mortgage so quickly, besides getting out from under it?
I see a lot of petty interest rate arbitraging going on here, but what is your net savings. Did you do the math on what paying off the mortgage in 4 years at 0% would be versus 15 at 4.625%? What about opportunity cost?
Why not take your $20,000 and put it in a 6 month NZD CD at 5.32% APY or better Mexican Peso or South African Rand at 6.09%? http://www.everbank.com/direct.asp?Idpage=hme_t1
Frankly I would look to draw out the 4.625% mortgage for the full 15 years, and pay absolutely minimum payments. I would put my spare $$ into foreign currency CDs and petroleum companies with large proven reserves and paying high yield dividends. Actually I would look for much higher risk / higher yield opportunities, but I'm not a financial advisor. I think if you look at the big picture regarding where interest rates are heading, as well as opportunity cost, you'll find that there are lower risk, higher yield ways to arbitrage the mortgage that you have. Why not take advantage of the low interest rate on your mortgage and use the opportunity to put your free money to work at higher yields elsewhere? I bet you could find a mix of foreign CDs and dividends to generate a yield above 7% on your cash. If I were to embark on a plan to move my mortgage to credit cards, I'd do some math and compare some options, while factoring in intangibles like risk and time.
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Author: Polonius
Credit Expert (100+ Posts)
Joined: 19 Jan 2004
Posts: 481
Posted: Sun Feb 13, 2005 5:55 pm
radicimo, your advice then is to borrow money to speculate in foreign currencies. (If you choice is to pay back money already borrowed OR to invest in such foreign currency instruments, then in effect you've decided to borrow that money instead of paying down your debt.)
I was a futures trader for many years. There were big ups and downs. But I never kidded myself into thinking the risks were low. Do you realize that when you invest in New Zealand dollar-denominated CDs you run the risk of losing substantial amounts of money if the NZ$ moves in a way you don't anticipate? I remember a book that presented a "foolproof" way of investing in Mexican pesos. You bought future contracts and redeemed them near expiration date. When the book was published, that method had been successful for the past dozen years.
The year the book was published, Mexico devalued the peso and the value relative to the US $ was cut in two. Anyone buying the contract on margin lost every penny put into it--and then some.
And, by the way, if you do the math, $125,000 amortized at 4.625% for 15 years works out this way:
180 payments
Periodic Payment*: 964.25
Total Payments: $173,565.00
Total Interest: $48,565.00
If you're urging spending that $48,565.00 in interest, then come up with a reasonably riskless way to make more than that with the funds. I can think of many ways that might work out--or might not.
As far as the work goes, what work is involved in setting up recurring payments from your bank account? If you can do it to repay the mortgage, you can do it to repay the credit card debt too. It's not really a big deal IF your income is steady and the funds are available. My own time problems came about because I was juggling dozens of different accounts. That's not the scenario here.
Polonius
"Neither a borrower, nor a lender be; For loan oft loses both itself and friend"
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Author: radicimo
Joined: 12 Feb 2005
Posts: 11
Posted: Sun Feb 13, 2005 7:42 pm
Polonius, I don't want this to digress into a discussion about which way US interest rates or the dollar are headed. But, OTOH, it would be unwise not to take into account your perceptions of where these are headed if you were to get into arbitraging interest rate differentials -- which is what the topic is really about in the end.
Really I was only throwing out foreign CDs as one alternative. You chose to ignore my entire argument about opportunity cost. My point was that there are alternatives to have your money work for you that don't involve taking a risk on juggling credit card debt and the beneficence of credit card companies to keep the rates low. I'll grant you that there is a risk in foreign currencies, which perhaps I understated. But don't fool yourself into believing that there is not a similar risk in US$ denominated currency, especially when compared to Kiwi dollar or even Canadian dollar. Further, buying currency contracts on 5% or 10% margin is vastly different risk than putting your money in a foreign denominated Certificate of Deposit at a guaranteed rate of return. They can't change the rate of the CD yield once you own it! That's why the terms are limited to 6 months. Sure there is a risk that the rate decreases the next time you go to roll over the CD. Also, you chose to ignore one part of my proposed alternative, which is high yield dividends in petroleum companies. I'll save the argument about peak oil and demand rising faster than supply, especially over the next 15 years.
In sum, I personally don't think it will be possible in the next 15 years to borrow $125,000 at such a small interest rate (less than 5%), and I think it is intelligent to borrow against that (as you call it Polonius). What I'm suggesting is that over the life of that loan you will be able to find much better opportunities to make far in excess of 5% on your money. The smallest risk in the entire equation is that the 4.625% 15 year note is going to increase in APR. The credit cards could ask for more or less. An investment could yield more or less. The dollar could buy more or less. Even the house could increase or decrease in value. If you pay down the debt early, you incur an opportunity cost, and part of that opportunity is the benefit of such a large low-interest loan fully collateralized. And, I don't see what is so riskless about attempting to float a mortgage on 0% credit cards. If I had to assess the risks one versus the other, I would suggest that NZD yield staying above 5% over the next 4 years has less risk than credit card interest rates staying at 0% for the next 4 years.
There are countless ways to approach this scenario: If the note has $125,000 left at 4.625%, and he thinks he can pay off in four years, one way to approach it would be to start stashing the money into NZD CDs for the next 4 years at 5.32%. That gives you a positive yield of +.695%. When the full $125,000 is available in the account, then pay off the note in full. So, counting the full interest of $48,565.00 is somewhat misleading. Geeze, this is starting to sound like a discussion of Social Security reform.
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Author: Polonius
Credit Expert (100+ Posts)
Joined: 19 Jan 2004
Posts: 481
Posted: Sun Feb 13, 2005 8:08 pm
Look, three years ago the New Zealand Dollar was worth around 41 cents; now it's worth around 71 cents. Buying $NZ and similar foreign currencies instead of investing in US instruments worked out incredibly well in the past few years. But it's still a mistake to focus on the interest paid. Suppose it goes the other way? Buy 10,000 $NZ today for US$7100 and sell it three years from now--if the price goes back down to 41 cents, you'll get US$4100, a LOSS of over 40% on your investment. Throw in a 5-8% interest rate and you still have a huge loss. The currency fluctuation far outweighs the higher interest paid. That's why interest rates are higher--because the market knows the investment is risky. And, yes--you are underestimating that risk.
I'm not predicting where currency rates are going and I'm not disagreeing with you about the direction of interest rates and the dollar. It's a matter of age and risk. If you follow your argument through, everyone should mortgage their homes for the maximum amount possible while interest rates are still relatively low, and invest that money in something that has good odds to bring higher returns. If you're young and you can recover from a loss, that's OK. If not--and you are wrong and the market does the unexpected (which it usually does, sooner or later)--then you've lost your investment and you can't pay your mortgage so you may lose your home as well.
I'm not ignoring the opportunity cost. I'm just balancing reward and risk. MOST people pay move in 5 years or so, paying off their mortgage in full when the house sells. So most 15-30 year mortgages rarely last more than 5 years. If the mortgage is paid off and the credit card offers at a lower rate disappear, the house can always be refinanced--and you'll have saved those years of interest payments.
I was a crazy wild-eyed speculator in my youth, making and losing millions. I'm not kidding. I was young and single and rich and greedy. I made some big mistakes. Now that I'm approaching 60, I have a wife and a family. I have more responsibilities. I have to be more careful with the money I have, because I don't have the time to make it back if I blow it. Most financial advisors suggest paying off your mortgage when you approach retirement so that it's one less thing to worry about. I don't know how old you are, but I suspect you're younger than I am--and I suspect you'll feel the same way I do when you approach my age.
Polonius
"Neither a borrower, nor a lender be; For loan oft loses both itself and friend"
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Author: radicimo
Joined: 12 Feb 2005
Posts: 11
Posted: Sun Feb 13, 2005 8:36 pm
Polonius,
You're at least 20 years older than I am, perhaps 25.
When I approach your age I hope to have made and not lost the millions you did, without the greed. We all learn through mistakes, so I'll accept those. The rest of this isn't worth arguing any more, since we seem to have different opinions on risk and the different natures of speculative ventures, which may be attributable to age or not. I hope I have argued my primary point well enough, that there is a certain degree of risk in 0% interest introductory APRs from credit card companies. I'm sure you've read the fine print, allowing them to change the terms at any time. If interest rates continue up at a "measured pace" or faster, those deals will be no longer available within 1-2 years. I wouldn't bet the house on their availability. And if you refi at that point in time, you surely won't get under 5% let alone under 6% on a note.
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Author: bobo
Joined: 12 Feb 2005
Posts: 4
Location: san diego
Posted: Tue Feb 15, 2005 2:12 am
Post subject: Re: Anybody paying off their mortgage with these 0% offers?
bobo wrote:
I am curious if anybody out there is paying off their mortgage with these 0% credit card offers? I just got a Marriott Rewards card for $25,000 for the points. My credit is perfect, all balances have been paid off monthly for over 20 years and I made just over $200,000 last year. I think I could get some serious credit card limits if I choose to, but I want to go about this the right way if I go this route.[/quote
Polonius, Radicimo:
You have both given me a great deal to think about. Perhaps I should be paying the mortgage down in some big chunks rather than paying it off. Yes, the main resaon I want to pay it down is to get rid of it sooner rather than later. I will be 50 in two years and I would like to retire early if possible. I alreadt have another house paid for and it feels great.
Curtis, I found your website on Google.
I guess I still don't see the wisdom of getting a bunch of credit cards if you are not going to do something with them.
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Author: fire3000
Joined: 16 Feb 2005
Posts: 9
Posted: Wed Feb 16, 2005 1:24 pm
Post subject: Paying Off a mortgage with credit card money
It is only a good idea if you have a ready supply of low rate credit available or a CD that will mature in a few months. The card money must be paid in full to avoid the new sky high rates that take effect after the introductory period. My mortage was paid long ago. I now invest low rate credit card money in short term interest bearing securities and pocket the difference in rates.
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Author: bobo
Joined: 12 Feb 2005
Posts: 4
Location: san diego
Posted: Fri Feb 18, 2005 10:08 pm
Fire3000:
What kind of interest rates are you finding doing this and how long do you do it for?
Bobo
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Author: fire3000
Joined: 16 Feb 2005
Posts: 9
Posted: Sat Feb 19, 2005 7:34 pm
Post subject: Reply to BOBO's question
I invest in mortgage backed securities issued by Fannie Mae and Freddy Mac -talk to your stockbroker for more information. Rates are 5.5% for 1 to 3 years. I have over 100K of low rate home equity credit available to pay off the credit cards at least a week prior to the dates the low rates end.
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Author: Board Monitor
Board Monitor/ Administrator
Joined: 05 May 2003
Posts: 550
Posted: Sun Feb 20, 2005 9:53 am
fire3000,
Interesting! Do you have to have a full service broker to buy these?
Best Regards,
Curtis Arnold
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Author: fire3000
Joined: 16 Feb 2005
Posts: 9
Posted: Mon Feb 21, 2005 3:23 pm
I buy them through my broker, Legg Mason.
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Author: Board Monitor
Board Monitor/ Administrator
Joined: 05 May 2003
Posts: 550
Posted: Mon Feb 21, 2005 6:14 pm
Thanks for the follow-up fire3000.
By the way, there is a good brand new article related to this thread here:
http://www.smartmoney.com/debt/advice/index.cfm?story=conveniencechecks2005
Best Regards,
Curtis Arnold
Board Monitor
U.S. Citizens for Fair Credit Card Terms, Inc.
http://www.cardratings.com
501-663-0314 PH
501-301-8474 FX
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posted by CardRatings.com at 12:58 PM
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