Saturday, December 5, 2009

Adjustable Rate Mortgages

Adjustable Rate Mortgages

I just received my annual rate adjustment notification, and for the second year in a row, my payment is dropping. We started out with a $1298 mortgage payment; then it dropped to $1134; now it is about to drop (starting February 1) to $1044.

It would be nice to think to think that it is going to drop more, but that's not realistic. The interest rate is one month LIBOR + 2.75, and even though the one month LIBOR yesterday was .255% (even a bit below what it was when this adjustment happened), I think it most unlikely that the one month LIBOR is going to zero.

At some point, either the economy is going to recover, or serious inflation problems are going to happen, and my mortgage will start rising again. But there's a limit to how much it can rise each year, and I think for at least the next two or three years, the increase will be pretty minor. The good news is that all of the increase will be interest, which is deductible on Schedule A. This means that every dollar of increase in my mortgage payment will be, net taxes, only about a $0.65 increase.

Of course, it also means that the amount of interest I'm paying now is less, so I get less tax advantage--but even once I start work for the State of Idaho, I'm not going to be in that high of a tax bracket.

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