With mortgage rates dropping like a brick, it’s becoming a no-brainer for us to refinance our home loan. Even though we just got a 30-year loan 2 years ago at 5.875%, we can get 30-year loans now for around 4.5% or lower. You might be in a similar situation.

Rule of Thumb

The rule of thumb I hear thrown around a lot is that if you can drop 1% off your mortgage rate, you should refinance. To get a more precise idea if refinancing is good for you, you should really take into account how long you expect to stay in your home and see if you break even on your refinance costs before then. A good tool for this is the Mortgage Refinance Breakeven calculator found here (thanks MyMoneyBlog).

Breakeven Point on Our Mortgage

I plugged our numbers into the tool:

• $180k original loan
• $235k appraisal
• 5.875%
• 28 of 30 years
• income tax rate of 25%
• $175k loan balance
• 4.5% new rate
• 30 years
• 0 origination and points
• $3000 in closing costs

The tool tells me that I’d break even on this refinance in 18-22 months. We’d save $177* per month on our payments, and so as long as we’ll be here for 2 years we’ll make up the refinance cost and then some. Since we are planning on staying here for at least 2 years, we should refinance.

* The spreadsheet says $147… must have used slightly different numbers.

Yes But

The only real questions now are (1) should we wait for rates to go lower and (2) what kind of loan should we get.

I’ll avoid (1) for now. I think there is a real chance rates go lower, but I don’t want to be too greedy. I want to take advantage of a good thing while we have the chance. So I’ll assume we can refinance at the current rates.

RE (2): if your home loan situation is anything like mine, you have a lot of options to consider when refinancing. In our case, we have a second mortgage for $30k which is interest only at a rate of prime plus 1% (I think about 4.25% right now). We also have more cash flow than we did 2 years ago and can afford a bigger payment if it means we’ll be paying off the mortgage sooner and saving money on interest rates.

So we have questions like:

• Should we roll the second mortgage (M2) into the new mortgage to lock in this low rate?
• Should we get a 20 year loan (at 4.25%) instead of a 30 year loan (at 4.5%)?
• Should we keep the M2 loan as is and make principle payments toward it?
• Should we refinance the M2 separately?

A Spreadsheet!

Calculating all of this can make your head explode. I created a spreadsheet that calculates just some of the factors, while leaving others out, and focuses on the most promising options for us. You can see it here: Coleman Family Refinance Options.

The main scenarios I focused on are:

1. The status quo, i.e. keeping our current loans.
2. Refinancing just our first mortgage (M1)
3. Rolling our second mortgage (M2) into M1 (we’d pay PMI for 3.5 years since we’d have less than 80% equity)
4. Refinance M1 for 20 years
5. Roll M2 into M1 for 20 years (PMI for 3.5 years again)
6. Refinance M1 and pay difference into M2
7. Refinance M1 for 20 years and pay extra $2k/year into M2

The columns of the spreadsheet show:

1. The scenario #
2. A description
3. Rate on M1
4. M1 monthly payments
5. M2 monthly payments
6. PMI payment if applicable
7. Total monthly payments
8. Term of M1
9. Annual Payment
10. Total M1+M2 debt in 2 years
11. Total M1+M2 debt in 4 years
12. Total M1+M2 debt in 10 years
13. Lifetime cost of loan (rough rough estimate)
14. Notes

Note on the columns. Some of them are updated when you tweak the numbers, but the 2, 4, 10, lifetime columns were entered by me after running numbers in that break even calculator linked above.

The second table has the same columns as the first, but shows the difference in payments/debt/etc compared to the status quo. So it can tell us how much we’d save (or spend extra) on payments and how much more (or less) debt we’d have after 2, 4, and 10 years.

There is also a table at the bottom of the spreadsheet showing expected returns if we made monthly investments at a 6% return. This is to help us calculate what we could be making with that extra $147/etc per month if we didn’t use it to pay off M2 or get a 20-year loan.

Some Pre-existing Notions I Had

Before I pull some numbers out and explain how we’re leaning, let me relay a few biases I had going into this.

1. I’m okay with our interest-only second mortgage. At 4.25%, that is a cheap price to borrow money right now. We’re making more than that on our money that we invest in our business and in our retirement accounts. Paying toward the principle on that loan would be like buying a 4.25% bond. Decent return, but not as good as we’re getting elsewhere. So I’m happy to loan at that amount indefinitely basically. However, I do think that rates will go up in the mid-long term. I don’t want to get caught with higher rates that are a strain to pay. Our idea has always been that we would use some kind of windfall (e.g. if we sell one of our website properties) to pay off that loan in one foul swoop. However, we should at least consider somehow locking in a rate for this.

2. I’m against paying PMI in theory. (That’s why we got a second mortgage before instead of one loan with PMI.) If you have the credit, other options are probably better for you. Some good info on PMI here.

Findings From the Spreadsheet

The key columns to focus on to compare options is the Annual Payments and the difference in debt in years 2, 4, and 10. The second table shows the difference in these numbers compared to the status quo. And so I can see that if I go with option #2 (refinance just the 1st mortgage), we’d save $1,764 per year and have $5,966 less debt/more equity after 10 years. If we held the loan the whole 30 years, we’d pay $21,985 less.

Now if I rolled M2 into M1 and payed PMI, we would still save $435 per year ($1,500 per year after 3.5 years) and have $12,538 more equity after 10 years since we’d in effect be paying principle on that M2 now. However, we would spend an extra $3725 or so on PMI those first 3 years, and sometimes it can be difficult to get PMI removed once you do have enough equity in the house. Overall though, it seems like using our savings from the refinancing to pay down M2 is a good use of our capital. It lowers our debt risk in the future.

You should be reminded here that not only do we have $5-12k more equity after 10 years, we could have invested the saved payments to have an extra $18-24k in our retirement accounts. Refinancing really is a good deal.

One option I really wanted to calculate was keeping our interest-only M2 and making principle payments to it instead of rolling it into the new mortgage or refinancing on its own. This would avoid PMI or additional refinance options. If we are disciplined, we can pay off M2 just as fast… but we’d also have some flexibility if we needed some monthly cash flow. Scenario #6 lays this out. We would end up paying as much per month/year as we do now. So no savings there, but we’re really okay with our current payments. We would however have an $31,336 less debt across both mortgages.

Scenarios #4, #5, and #7 basically come down to paying a little bit (or quite a bit) extra per month in exchange for less debt in the future and less interest payments over all. One nice thing about these plans is that 10 years out, we could have nearly $50k in equity built up in the loan. Combined with an appreciation in home value (I know, but we’re talking 10 years from now… let’s hope) we could have a nice size chunk to use as a down payment on a larger home.

Summary

I’ll let you know what we decide when we go through with things. I think I’m leaning toward refinancing just the first loan and making principle payments on our second mortgage/line of credit. Some things we need to think about:

• Can we really get 6% on investments on money saved? 4.25-4.5% might be a good return for our extra cash in this market.
• What is the risk that interest rates go much higher in the future, raising our minimum payment on M2?
• What do we want our debt situation to be 2, 4, 10 years from now?
• Can we really get the rates/fees I’m assuming here?
• Are deductions for interest payments, reductions in PMI or M2 payments, or other things I’m leaving out important?

I hope this helps people in a similar situation as me. And as always, I appreciate any feedback or advice you might have based on this. Cheers!

I said previously that I would maintain a wiki and blog at the same time. That way with the wiki you get a good overall view of things, and the blog are thoughts from the moment.

Well…

That did not work out so well. My blog went downhill, and so did my wiki. I got nowhere!

Then I decided to look back and see what is going on. I realized something interesting, and it was blogging is not where its at anymore. Recently I joined a chat room and people asked me, “what’s my twitter id”. I gave them my id (christianhgross), but added I hardly twitter.

Recently a very good friend of mine came by to visit me. Josh works at Microsoft and his job is to keep in close contact to the community. What struck me as interesting was that he blogged a bit, but twittered more. So after I joined the chat room I thought, if Josh twitters maybe there is something to this.

Indeed there is…

Hence from this point on I have come to the hard decision that I will broadcast my twitters to my blog, and write my articles on my wiki.

As they say, adapt and survive, and I am adapting…

I still own a few shares of GOOG. It’s felt overpriced recently, but I’m holding onto a minimal amount at all times and trying to add more over time. So I’m hoping the price drops a bunch so I can pick up more cheaply.

Do a search here for GOOG for my previous thoughts (years old), but I basically think that the world will continue to be drowned in data. Google’s goal to organize the world’s information and their expertise at scaling Internet apps puts them in a great position to be a contender in just about any future technology.

Anyway, I’ve recently read Phil Town’s new book Payback Time. The title there, like most investing books lately, takes advantage of the recent drop in the stock market to entice readers. However the content and tone of the book isn’t as whiny as you might think, and is generally applicable to investors in all markets.

We were big fans of the first Phil Town book, Rule #1, mostly because it described things in layman’s terms and gave readers a clear method for putting the books theories into practice.

Payback Time works the same way and repeats a lot of the ideas in Rule #1. There are still the 4 M’s (Meaning, Moat, Margin of Safety, and Management) for example, but instead of using technical analysis (in the form of Rule #1’s red/green arrows) Payback Time recommends a form of dollar cost averaging, Town calls “stock piling”.

Of course, Town has a section in the book titled “Why This Isn’t Dollar Cost Averaging” that I’ll try to summarize here. Town says (emphasis his), “DCA means investing a fixed dollar amount at fixed intervals no matter what the price of a given stock.” He then goes on to list the numerous flaws and criticisms of dollar cost averaging.

For further reading, Christian writes why you should consider “Averaging Down“, and here Steve “The Undertrader” describes his stockpiling-like investing style.)

So Town calls stockpiling “DCA with a brain”. You don’t buy any time or on predefined schedules. You buy when the stock price is within your Margin of Safety. And you don’t hold indefinitely. You sell if the stock price goes about your Margin of Safety.

I’ll buy that. And I like this a little better than using “the tools” or “the arrows” or technical analysis to judge a stock because it’s one less thing to calculate. If you are calculating a “sticker price” and MOS price anyway, might as well use them to trade. If you thought of stocks as commodities or discounted dollars, this kind of trading would make even more sense. I value $1 at $1. If the market is pricing it at $0.80, I buy. If the market is calculating it at $1.10, I sell. Sure I could have waited for the price to drop to $0.70 before buying, or $1.20 before selling. I would have made a better trade, but I’m always making a winning trade if I buy when the price is lower than what I value it at (plus my MOS) and sell when the price is higher than I value it at.

So the Payback Time strategy should be a little easier to follow than the technical analysis from Rule #1. Well, to a certain extent. Town introduces another calculation called “the payback time” (maybe that’s the true meaning of the title) to pretty much calculate the MOS from a different angle. And he brings technical analysis back in, talking about support and resistance levels. Here’s a good recent analysis from Hipegg on Google.

Alright, so that out of the way, let me share some of my calculations on Google stock (GOOG). I’m basically running through the Payback Time Spreadsheet found on the Payback Time website. It’s a handy tool.

Here I would want to do a large Google Moat analysis, but I’m lazy. So I’ll say hey, they have a huge margin and virtual monopoly in search. And while there stance is vulnerable (MSFT is gaining ground lately), this moat is fairly stable because (1) it takes a lot of knowledge and investment to serve billions of searches a day quickly and (2) advertisers and publishers benefit from consolidation and drive the market towards one winner.

Charlie Munger and Warren Buffet at Berkshire Hathaway like Google’s moat. Not sure if they are investing. Buffet shies away from tech.

Here I would want to do a large Management analysis, but I’m lazy. I’ll say hey, these guys strive to do no evil. Page and Brin seem like great folks who are in it for the long term. They are standing up to China vs. going for short term profits. They don’t fudge their numbers (other than tweaking the Adsense lever). They don’t mess around with finance gimmicks like splits, etc. They are smart and clearly have a better understanding of the future than the average C-Level exec.

Some numbers:
* 5 year EPS Growth has averaged 34%.
* 3 year OPS (operating cash flow per share) Growth has averaged 17%.
* 5 year Sales Growth has averaged 40%.
* 5 year BVPS (book value per share) Growth has averaged 58%.

Nice all around. You usually want to go as far back as you can on these numbers. We can’t go much further back than 5 years because Google only started trading in 2004. If you wanted to be more conservative, you could use more recent (last 2-3 years) numbers since Google basically went from nothing to a top 10 company in 2 years and since then has grown a little slower.

Some more numbers:
* ROIC (Return on Invested Capital) = 18%
* ROE (Return on Equity) = 18%

Nice again. BTW, you can get some of these numbers in chart and spreadsheet form at YCharts.

Google has no debt!

Now, let’s calculate a sticker price and MOS.

* EPS = 21.97 (according to Yahoo)
* Earnings Growth = 14% (That’s my number. Historically we’re looking at 34%, and analysts are estimating 19% for next year. Should do more “main street” analysis of this considering how large Google is.)
* Future P/E = 24 (that’s about average for Google. 2x earnings would be 28)
* MARR = 15% (This is my “minimal acceptable rate of return, i.e. I want to make at least this much per year)
* MOS% = 25% (Ideally you would want 50%, but that is hard to get with GOOG and I’m pretty confident in them.)

I get MOS numbers then like:
* EPS = 21.97
* EPS in 10 Years = $81.45
* Stock Price in 10 Years = $1,954.74
* Sticker Price Today = $483.18
* MOS Price = 3/4 = $362.39

So according to this, I am a seller above $483.18 and I am a buyer under $362.39.

For completeness, here is the Payback Time Analysis using these numbers. To recoup my investment in 8 years, I’d want to buy GOOG at $331.43. That basically means that if you bought all of GOOG at $331.43, you would earn that back in Revenues (assuming our growth numbers) in 8 years. That would be a good investment if you were buying a franchise, and should be a good investment when buying stock as well.

I hope this was informative. Feel free to pick apart my numbers. In particular, I am always interested in pondering what a company that grows at 14%+ for 10 years would look like in the future. I’ll do that in a future post.

At the beginning of May I said that the Greek demonstrations would drop off dramatically. Of course nobody listened… What has happened? Oh yeah the Greek demonstrations have dropped off dramatically.

So why did this happen? It is because the English speaking media does not understand mainland Europe. In fact the English speaking media is pretty ignorant of everything that is not English speaking.

Let me illustrate another misunderstanding. These folks are talking how the Euro dropping is bad, and that the European economies will do bad. YET, and here is the big YET… Oh this will be great to take a European vacation.

Don’t you get it? If you think on the one hand that the European mainland will collapse, but then travel there on vacation the economy will grow! In fact I hear it among all of the American’s. Oh great now we can vacation in Europe on the cheap. That means the Euro-zone economies will expand, while the strengthening currencies just keep loosing business. This is pure Schizophrenia!

Remember that mainland Europe does not care that much for financial engineering, and in a Swiss poll only one guy on the street said what was happening is a problem. Want to know why? Because he is a fund manager. The rest are just average people who really don’t care, or more aptly put they just want to make sure they make more money.

Having the Euro tank when Germany introduces stronger financial regulations only emboldens the people to stand behind the Euro. Take it from the perspective of somebody on the street. If they see stronger hedge fund regulations and stronger financial regulations resulting in the market tanking the person on the street is going to say, “good for the government”. It is populism in its purest form, but the hedgies are making themselves easy targets.

The hedgies are as stupid and greedy as ever. They think because they can push around the governments in America or Great Britain that they can do the same on mainland Europe. Sorry hedgies you are dumb! GIVE IT UP! The more you push the easier it will be to push through regulations against you. And the more, I as another market participant will have to suffer because of your lunacy!

What I wonder is how long the USA is going to watch this. After all with a strengthening dollar the US competitiveness has just gone out the window. How long before the US starts clamping down. After all, the populists fuse for the financial community has gotten mighty short.

Wow sell sell sell…  Why? Because Germany introduced a ban on naked short selling?

Germany will ban so-called naked short-selling from midnight, a lawmaker with the ruling Christian Democratic Union told Dow Jones Newswires. He added that Chancellor Angela Merkel will announce the plan in her speech to the lower house of parliament Wednesday morning.

Naked short selling—which differs from short selling in that the sold shares aren’t borrowed in advance—came under fire at the height of Greece’s struggle to refinance its debt, with many euro-zone governments saying such transactions in credit-default swaps, a type of default insurance, artificially inflated Greek funding costs.

Wow, Is naked short selling legal in the US?

Its not legal?

So Germany is introducing legislation on par with the US?

YEAH that’s REAL logical!!!

Or could it be something else? Could be that bears are trying to scare the market?

You decide… Logical or not?

I find the article from one of Germany’s biggest tabloid very interesting. It asks does Germany need the Euro? Would Germany not rather have the Deutsch Mark back?

First in this time of crisis I find it interesting that Germans are split 50-50 about the Deutsch Mark. You would figure that more German’s would want the Deutsch Mark back. I guess I can tell you anybody over 50 wants the Deutsch Mark, and anybody below 50 doesn’t want the Deutsch Mark.

The answer in the article is that Germans don’t want the Deutsch Mark because it would completely fatal for the German economy. In the tabloid article it clearly states that if Germany backed out of the Euro and the EU Germany would crumble and collapse within days. The strength of Germany is its ability to produce and export. But if that ability becomes impaired by a very strong currency Germany becomes unaffordable. Made in Germany then becomes too expensive Made in Germany.

This is the paradox of Germany and its relationship to the Euro. Yes it is the anchor to the Euro, but Germany also needs the Euro to make it spend. It is an example of how opposites attract each other. So while Germans complain about the free spending Spanish, but it is those Spaniards that cater to the Germans and make them spend. Remember this, Mallocra and Spain is a play ground for the Germans.

Just think for the moment what Europe would be like if all of Europe would be German? And think of what Europe would be like if all of it were like Spain? When you have Spain and Germany in a union it is that paradox that keeps the union alive…

So why does the rest of the world not get this? Very simple, the media is controlled by the English media. The english media is dominated by two nations; USA, and UK. Both of these nations are busy doing financial engineering, while Germany and the rest of EU are busy building widgets.

This is why I want to see a weak USD! I want America to start building widgets! I know American’s can, but time and time again the focus is on financial engineering. While some financial engineering is beneficial building widgets is better for everybody.

Greece and Turkey have met and begun the process of building ties between their two countries. Let me tell you a bit about this situation since my father was living and working in Boursa Turkey.

Athens and Greece have been enemies for a very long time. This dates back 400 years or more, back to the Ottoman empire and beyond. The Ottoman empire was a Turkish empire. This hate of each other has caused many problems including Cyprus and the ownership of a few islands in the black sea.

But when Greece and Turkey met to thaw their relationship I said, wow, now that is impressive. Greece per capita has one of the highest military budgets in Europe, likewise with Turkey. This military budget is defend their countries against their enemy, whether it be Greece or Turkey.

Now things are changing and it is interesting how this change is coming. Will it work? I say it will because both Erdogan, and Papandreou have a vested interest. Erdogan is a Muslim fundamentalist, but he is also a realist. He knows Turkish people cannot live on words alone. He knows that for his party and his country to succeed they must attract trade. Think of Erdogan as a sort of leader like those in Dubai. Thus his main roadblock is Greece! And if Turkey needs to help Greece so be it! After all the turkish leader did come with an entourage of 300 business people. Think about that for the moment. 300 Turkish business people want in on trade with Greece. That says it all.

Papandreou on the other hand wants to rebuild Greece and he wants to save his country. He is willing to battle the unions (remember he is a left sided politician), willing to battle the nationalists (those who would never talk to Turkey) to save his country. He is the sort of politician that you don’t meet very often. One that truly wants to save his country.

With these two politicians you have the possibility of two countries building deeper trade ties, and probably with Turkey doing most of the heavy lifting. I actually think it will be Turkey that will “bail out” Greece, and not the EU.

Why would Turkey do this? Trade!

First consider the location of Turkey.

Turkey is in the lower right. Let’s say that Turkey and Greece do indeed open trade routes it means that the EU can easily do trade with Syria, Lebanon, Israel, and Iraq. Of course you might say, “but hey can’t they do that already?” Well not really. Turkey is a pivot stone between East and West. Greece was blocking that pivot stone. But now with trade ties being established that pivot stone will become the grease for east west trade.

Take it from the perspective of the EU and Greece. All of those countries with several hundred million people will now be open trade. The EU can build/expand pipelines of gas and oil thus reducing their dependence on Russia. The EU can in turn sell their products to the East using Turkey as their middle entity.

Thus I think you can understand why Turkey will end up bailing out Greece and not the EU. If you want to get a further understanding of what I am thinking about listen to the following video. Skip ahead to around 10 minutes for the part that relates to my thinking.

In the end this is very very good news! And it means finally Greece has a way to grow its economy! Who would have thought that at the end it will come to Turkey bailing out the EU with the needed growth???

Funny…

I know I am going to hear a lot about the naysayers…

BUT look at the following article, Greece and Turkey have called a truce. They have both agreed to a massive reduction in military budgets and increased trade between the two countries.

Die griechische Schuldenkrise ermöglicht eine historische Annäherung zwischen Athen und Ankara. Um die Staatskasse zu schonen, wollen die beiden Rivalen ihre Rüstungsausgaben massiv kürzen.

People pigs just flew! And to think people doubted that Greece could change! Congrats Greece you are making history. I am more optimistic than ever.

I have no idea if I caused this, but it is interesting to think about. First let’s look at the article and you will see what happened.

He said an earlier rumor that France’s credit rating could be in jeopardy accelerated the selloff in the euro, as it added to the markets’ contagion fears.

"That scared the heck out of everybody," Cashin said.

When I heard this I thought, “you have got to be f****g kidding me?”

On Friday early in the morning CET time I was talking with some people in the stockguy22 chat forum about the Euro. We were having a rational discussion about the Euro zone and sovereign debt in general.

I then said, “you know this fear over Greek, Spanish, Italian, and Portuguese debt is completely overrated. I actually think that those country’s debt costs are overrated. Then I said, if you really wanted to find debt inconsistencies then look at France, the UK, and the USA. I said those three countries with their ratings were masking a true debt problem.” You only need to look at my debt picture from previous blog entries.

So I left the discussion as I thought it was just a discussion. Then later on in the day I start hearing about some other users who twittered that French debt is a potential next problem! I thought WTF? I said nothing in the forum since I was in disbelief. Then it dawned onto me, what was happening is a negative feedback loop.

I am thinking it was my comments because up to that point nobody said anything about France! Nothing, nada, zip, zilch zero! And on Friday morning I talked about France. Thus this probably was blogged, twittered and shared around.

Now comes the question what does this mean? It means once and for all that the Euro is in take down mode. SOMEBODY wants the Euro to fail! After all when the US did the exact same thing everything worked out for the best. Yet when the ECB and does these things it all fails? Why is that? As I have said before, when all answers have been depleted the only logical answer is what remains, and that is that the Euro is in taken down mode.

What surprises the heck out of me is that people are so easily fooled by rumours, and I feel sorry that Fitch had to come out and say that France was ok. So in the end do I think France is a problem? Absolutely, but I also think the UK, and the USA have problems. Do I think that these countries will go under? Absolutely NOT! These countries like Greece will emerge for the better.

Do I truly believe my statements? Absolutely! When I graduated from university in 1992 Ontario and Canada had one of the worst recessions in a very long time. Canada had lots of debt, no growth, no dynamics. It was very much a situation like Greece. Don’t believe me look at the stats and compare how bad Canada was compared to the rest of the world at the time. I remember in our graduating engineering class only 1/3 could get jobs. It was a very bad situation. But with the liberal government slashing budgets, Canada bounced back. Many might say, “oh Canada had commodities”. Sorry, but no commodities made a dent in the Canadian budget after 2000. Before that it was Canada doing the heavy work!

That’s why I truly believe Greece and all of the other countries can make it back. However, what I also see is that back then if people had pounded Canada into the ground like they are Greece or the Euro, Canada as a country would not have survived!

So that’s why I say people take a deep breath and think rationally!

Great overview and background on Gold as a Commodity over at Crossing Wallstreet.

The summary for current investors is…

My view is that the Federal Reserve will raise interest rates earlier than expected. I don’t know exactly when that will be but it will put gold on a dangerous path. For now, my advice is to stay away from gold, either long or short.

… but you should read the whole thing for a lot of interesting tidbits on the history of gold and how to track and trade it. Here’s another quote from the article, but you should really read the whole damn thing.

Here’s a good rule of thumb. Gold goes up anytime real rates on short-term U.S. debt are below 2% (or are perceived to stay below 2%). It will fall if real rates rise above 2%. When rates are at 2%, then gold holds steady. That’s not a perfect relationship but I want to put it in an easy why for new investors to grap. This also helps explain why we’re in the odd situation today of seeing gold rise even though inflation is low. It’s not the inflation, it’s the low real rates that gold likes.