May 1, 2008, 5:49 am

Take The Power Back

by: The Financial Blogger    Category: Pay off your Debts,Personal Finance
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For those who remember the rock band Rage Against The Machine, you will remember the signer yelling “You Gotta Take The Power Back!“. Well this is exactly the right timing to get ahead in your finance. Interest rates are super low, markets are down and highly volatile; everything is set for smart people to make money. Most people will listen to the media and will panic. But TFB readers won’t, they are smarter than that 😉


This is the right time to pay back your debts

Variable interest rates are starting to get very interesting. For a mortgage in Canada, there is about a 1% to a 1,5% difference between a 5 years fixed rate and the variable rate. This means that you can save almost 2K in interest charges for the first year on a 200K mortgage.

So if you can negotiate a 5,5% 5 years rate, you would probably get 4,25% variable rate (P-0,5%). If you can make monthly payments of $1000, you can borrow 162K over 25 years with the fixed rate or 184K with the variable rate for the same amortization. However, if you decided to take the power back from the financial institution, here is what you can do:

You can setup a global HELOC that will contain your variable rate mortgage. Therefore, as the months pass, you will decrease the amount owned (capital) and increase the available limit of your HELOC. This will help you out building an emergency fund in a form of a line of credit. On top of that, if you are really taking the power back, you will keep the same payment and reduce your amortization to 20 years and get the 162K loan with the variable rate instead of a 184K mortgage.

If governments are trying to stimulate the economy by reducing interest rate, it doesn’t mean that you have to be the sheep that goes to the credit card slaughter house. Pay down your debt while people are struggling.

This is also a perfect timing to consolidate your debt under a variable rate loan. You can verify with your financial institutions as many of them allow clients to convert their variable loans (mortgage or personal loans) into a fixed rate financial product in the future without any penalties.

Why are they doing so? No, it’s not because they are nice people (even thought some bankers are 😉 ). It is simply because fixed rates are always higher than variable rate. So anytime you want to convert to a fixed rate, your financial institutions profitability will increase.

So don’t let people tell you that you can buy more or bigger, take the power back and become a smarter (black) sheep 😉

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Comments

That said, I started a blog to discuss the current wave of redemptions and poor perfromance in the hedge fund industry. Though I cover articles of note regarding the entire industry, my focus is on hedge funds and the manner in which they handle possible regulation as well as the tidal wave of investor withdrawals. I will be highlighting funds that fail to meet their obligations to investors.

http://www.HedgeFundBlogMan.blogspot.com

If you have a chance, please check it out, and I would certainly appreciate a link from your site if you find the content worthwhile.

Thanks,
(The Hedge Fund Blog Man)

That said, I started a blog to discuss the current wave of redemptions and poor perfromance in the hedge fund industry. Though I cover articles of note regarding the entire industry, my focus is on hedge funds and the manner in which they handle possible regulation as well as the tidal wave of investor withdrawals. I will be highlighting funds that fail to meet their obligations to investors.