Town Council Rolls the Dice on Interest Rates
By GEORGE SOUTHERN
Cape Charles Wave
November 13, 2013
Cape Charles Town Council is poised to refinance nearly $1.2 million in debt at its Thursday, November 14, meeting, when Council members are also expected to endorse a proposal to borrow an additional $1 million.
Most of the existing debt was for water and sewer infrastructure. Money allocated to hook up new wells was instead used to buy the new library building, so now the Town needs to borrow $300,000 for the wells, among other projects.
Current Town debt is at a fixed interest rate. But the Town has contracted with a Richmond financial advisor, Davenport & Company, who recommends paying off two fixed-rate loans in favor of a cheaper variable-rate loan.
Anyone with a home mortgage is likely to understand the difference between fixed-rate and variable-rate loans. Fixed-rate loans are issued at a higher interest rate because the bank bears the risk if interest rates go up in future years. Variable-rate loans have lower rates at first, because the customer (in this case the Town) bears the risk of future interest hikes.
In 1992 the Town borrowed $1.58 million to construct the water tower. That was a 40-year loan at a fixed rate of 5 percent, and there are 19 years left to pay. Davenport recommends paying off that loan and replacing it with a 20-year loan from PNC Bank. The PNC interest rate would be 2.65 percent for the first 10 years, which amounts to a substantial reduction in annual payments.
But there’s a catch: In 2023 the interest rate would change to reflect whatever the rate might be at that time. While that future rate is anybody’s guess, almost no one thinks it will match the present historically low rates. And some people fear that hyper-inflation could bring sky-high rates in future decades. [Read more…]
SATURDAY 11/16: Rootstone Jug Band at Palace Theatre
SUNDAY 11/17: Wine & Cheese Benefit for New Spay Service
Eastern Shore Spay Organization is holding a wine & cheese benefit 2-5 p.m. Sunday, November 17, at Chesapeake Bay View (212 Bay Avenue) in Cape Charles. [Read more…]
