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Interest Rates & Mortgage Options

Once you’ve been pre-approved for a loan and found a house you want to buy the next step is determining the type of mortgage to use and when to lock in your interest rates. Due to the real estate decline and sub-prime mortgage meltdown, lenders and brokers are more careful with how they lend, what they lend, and who they lend to. You’ll need to consider the following when choosing a mortgage:

Interest Rates

About two months ago, the rates were at an all-time low. You could get an interest rate for less than 5%, which is crazy, but it happened. Now, you’ll see interest rates somewhere between 5.5% and 6%, which is nothing to cry about. This is purely my opinion, but I would lock in the rate as soon as possible, because with inflation rearing its head in the future and energy prices going back up, the interest rates will most likely continue to rise.

Points and Origination Fees

A mortgage point is equivalent to 1% of the loan amount, so if the price is $200,000, a mortgage point is $2,000. You can buy one of these points to buy down your interest rate, typically .25% for every point. A point is basically pre-paid interest. You pay mortgage interest up front. I wouldn’t suggest doing this, because the interest rates are so low right now.

An origination fee is usually charged by brokers, and it is a processing fee. Again, I wouldn’t deal with a broker that charges an origination fee. But be aware that if you don’t pay points or origination fees, many brokers will offer you an interest rate above prime, typically .25% above the prime interest rates.

Which Mortgage Is Right For You?

Stay away from interest only and adjustable rate mortgages. Ask anyone currently going through foreclosure if an adjustable rate is a good idea. People were buying houses with teaser rates of 1 or 2 years, then their rates were jumping up drastically, and the monthly payments were more than homeowners could afford. An interest only loan will never pay down the principal, so why own a home if your not going to gain any equity?

With rates as low as they are, I think fixed rate mortgages are your best option. A 15, 20, or 30 year fixed mortgage is the best way to go. If you know that your income will increase in the near future, consider getting a 30 year mortgage, because you can always pay a 30 year mortgage like a 15 year mortgage in the future. It will amortize the same. Don’t spend the extra money to refinance into a 15 year mortgage.

Next, we’ll get deeper into the down payment, private mortgage insurance, and second mortgages.

Erik Folgate is a personal finance writer and social media consultant.

Written by Erik · Filed Under Real Estate >Comments (0) 

Mortgage Pre-Approval When Buying a House

A mortgage pre-approval letter was very helpful for my wife and I when we started looking for houses about 8 months ago. My wife’s mom is a real estate agent, so she helped us every step of the way, but many agents won’t deal with buyers who aren’t pre-approved for a loan. They don’t want to spend a lot of their time to find out later that their buyer can’t qualify for a mortgage.

Buying a house, no matter what the market is like, should never be taken lightly. Owning a home isn’t always a good idea. You should only buy a house when you are financially and mentally prepared to go through with the biggest purchase of your life. Here are some questions to ask yourself before you start looking for houses with a real estate agent.

How much home can I afford?

Generally, about three times your gross pay is a good figure to start with. So, if you make $50,000 a year, you could look for a house somewhere between $125,000 and $175,000. Use this mortgage calculator to play with different purchase prices and mortgage types to see what your mortgage payment will be. If the payment exceeds 30% of your gross pay, then you should start lowering your target purchase price.

Where should I apply for a loan?

This depends on your situation and how much you are going to contribute to a down payment. If you shoot for putting 10% down, you’ll have a larger pool of options. Conventional loans from your big commercial banks typically require that you put down a 10% down payment and a stellar credit rating. They will give you prime rates and their fees have become more competitive since the housing meltdown. Credit unions are also a great option, but they also require larger down payments and good credit scores.

If you have a less than perfect credit score and you were planning on doing a 5% down payment, then consider applying for an FHA loan or for a loan from a wholesale lender. Mortgage brokers are better at offering these types of loans, because they can shop around between dozens of different companies. Just make sure that you don’t get nickel and dimed by the broker.

What’s on my credit report?

Before you start applying for a loan, request a copy of your free credit report from Equifax, Experian, and Transunion. If you are married, pull all three for you and your spouse. Make sure there are no mistakes on the credit reports. If there are, all three agencies now have an online system for credit report disputes. If you have any outstanding bad debts on your credit report, those most likely be required to be paid before you can close on the loan or get pre-approved.

What Documentation Do I Need To Provide To Get Pre-Approved?

  1. Copy of your driver’s license and social security card.
  2. Copies of all pay stubs from the past 30 days
  3. Bank statements showing all cash and investment assets
  4. Federal tax return W-2’s for the past two years.
  5. Any proof of other income such as alimony, child support, side business, etc.

There may be other documentation required later in the process or even for pre-approval, but these are the major documents required by most lenders for pre-approval.

The Advantages

You’ll be treated with more respect by buying and selling agents and they’ll be more willing to help you find the right home. Sellers will be more likely to accept your offer if they know that the deal will go through. You’ll also close more quickly, because the loan processing can be the part that hangs up a real estate deal the most.

Next up, interest rates and picking the right mortgage product.

Written by Erik · Filed Under Banking, Real Estate >Comments (1) 

Credit Report Disputes

One potential way to improve your credit score is to look through your credit reports for any misreported information, such as a late payment, and dispute your credit report. 

1) Start off by getting a copy of your free credit report and looking for any errors.

2) If you find anything, check to see if the mistake shows up on your reports from other credit bureaus. You will need to file separate disputes with each credit bureau that shows the mistake.

3) Go to each bureau’s Web site for instructions on how to file a dispute, what happens after the bureau receives a dispute, and what actions to take if you think your identity has been stolen:

4) Clearly identify each error in the report and explain why you think the information is wrong.
Keep detailed records of what corrections you requested, along with copies of supporting documentation.

5) Don’t send any original documents if you submit your dispute in the mail; make photocopies and send those instead. 

6) Keep a record of when and how you contacted each credit bureau, noting any follow-up phone calls and the names of the people with whom you spoke. In case the correction isn’t resolved smoothly, these records and notes will come in handy.

7) If you find any evidence of identity theft, such as an open account that you know you never opened, make sure to follow the credit bureau’s instructions for reporting identity theft.

The credit bureau should respond to your dispute in writing within four to six weeks. If the bureau agrees with you, the bureau will correct the mistake. If there is a dispute over the corrections you’ve requested, or if you think that someone has stolen your identity and is using your credit, be prepared for a long period of back-and-forth communication with the credit bureau and your creditors.

The burden of proof lies with the bureau, if it can’t prove that the information in question is correct then it has to delete it. However the process of resolving a dispute or unraveling a case of identity theft can be complex and lengthy. Good luck!

Written by Ben · Filed Under Credit, credit report, credit score >Comments (0) 

Three Money Traps to Avoid

When money is tight, it’s tempting to turn to quick fixes but some of them can have lasting consequences for your money and your future. Obviously times are tough and many people are faced with decisions they thought they’d never have to make but here are three money traps to watch out for.

Cashing in your 401(k)

You may be tempted to claim the money in your retirement plan to pay off debts or fund a major expense. If you do, you will not only affect your future, but you may lose a big chunk of money in taxes and fees. When you cash in your 401(k) early, a substantial portion of the funds are diverted to pay for income taxes as well as penalties for early withdrawal.

Consolidating Credit Card Debt into a Home Equity Loan

Combining your high-interest loans into a single low-interest home equity loan may seem like a wise move. But unless you also cancel your credit cards and stop overspending, this consolidation of debt may simply allow you to build even more debt. And if you fall behind in the payments on a home equity loan, you will lose your home.

A better approach is to cut back on your spending and use the money you save to pay off credit card debts. If you are having trouble meeting the payments on loans, call your creditors and explain how your financial situation has changed. Set up a payment plan that you can live with.

Payday Loans

Although payday loans may be easy to come by they usually also carry outrageously high interest rates. They will only put you deeper into debt so avoid them like the plague.

Written by Ben · Filed Under Debt, Personal Finance >Comments (0) 

Divorce and Your Money

Summer is wedding season and we’ve written about different ways you can save money on your wedding reception, wedding pictures, your honeymoon, wedding dress, and wedding planning.  Unfortunately, not all marriages last forever so here are some tips on dealing with the finances of divorce.

Find Experienced Divorce Advisors

All the advisors you use in the divorce process should be familiar with major issues such as division of marital property, exclusion of non-marital property, and various ways to structure ongoing financial contributions from one party to another. Qualified Domestic Relations Orders – known as QDROs (pronounced “Quad-Rows”) assure that pension assets will be shared fairly.  

Most of the legal cost in a divorce is based on the presumption that assets are being hidden. If divorcing couples were to consult a financial planner and a tax advisor prior and draft a financial statement agreeable to both parties, legal fees could be dramatically reduced.

Know the Tax Ramifications of Alimony

It is possible to deduct some alimony payments, but you need to get the advice of a qualified accountant first. There are seven requirements that need to be made, including:

  • The payment must be made as part of a legally binding written agreement.
  • That agreement cannot state that the payment is not alimony.
  • Payment must be made to or on behalf of your ex-spouse unless there are payments diverted to others directed in writing by your ex.
  • After you are legally separated or divorce, you and your ex-spouse cannot live in the same residence of file joint tax returns.
  • Payments must be made in cash or cash equivalents.
  • Alimony cannot be treated as child support.
  • Your obligation to pay ceases if your ex-spouse dies.

Value the Assets Before You Agree to Take Them

If you’re getting the house, does it have a 20-year-old furnace and a roof that’s about to cave in? A thorough inspection by a licensed inspector could help.  If you’re getting the family car, is it past warranty with a funny sound coming from under the hood? If your spouse runs a lucrative business that you’ve worked for or invested in, how do you know you’re getting the right share?

Hiring a valuation expert may be necessary.  Divorcing spouses need to make sure they have enough money to finance repairs and replacement of assets that they’ll be paying for as a single person.

Think of the Kids

In many states, college-age children have the right to demand financial support or college funding at the state level so their education isn’t interrupted. While both parents should advocate in their kids’ best interest, this isn’t always the case. Be aware of your state’s divorce laws with respect to secondary child support.

File Taxes Wisely

There are always special situations in a divorce that will determine whether a couple will need to file jointly or separately during the last year that the marriage exists. It’s best for both sides to get some assistance filing their taxes during their divorce year and the year afterward.

Get Help Documenting Child Support

Child support guidelines vary from state to state. If your state has a special program that allows a spouse to pay into a special account so child support is recorded every month, consider it. It provides a paper trail and enforcement system for assuring that kids get the money they need.

Federal law requires all child support payments be made by wage assignment and health insurance by Health Insurance Orders. A majority of child support orders go unpaid. Make sure you know the laws to force compliance.

After the Divorce

Watch the spending: Budgeting early in the process may cut down on the risk of overspending, which is a temptation after a painful event.  Both necessary and unnecessary spending after a divorce is a key reason the newly single tip into bankruptcy. Make sure it doesn’t happen to you.

This post about divorce and your money is produced in association with the Financial Planning Association (FPA), the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning.

Written by Ben · Filed Under Personal Finance >Comments (0) 

Rule of 72 & Compound Interest

Ruleof72

The rule of 72 is a formula that can help you approximate how your investments will grow in a retirement or other investment account.

The rule has its history in the 15th century and reached common knowledge when Albert Einstein explained his thoughts on the power of compounding interest. Basically, the rule calculates how long it takes to double your money at any given rate of return.

For example, if you contribute a deposit into an investment account, and you anticipate a rate of return of 8%, simply divide 72 by the rate of return and you will have the number of years it will take to double your money. This rule assumes that interest is compounded annually.

72 ÷ 8 = 9

You can also use the rule of 72 to also determine the rate of return needed to double your money over a specific period of time. For example, if you have $10,000 that you want to double for college tuition in 10 years, dividing 72 by 10 will give you the rate of return you’ll need annually compounded to reach that $20,000 goal.

72 ÷ 10 = 7.2%

Now go out and compound some interest!

Written by Ben · Filed Under Investing >Comments (1) 

Discover Credit Cards in Cereal Boxes?

CerealCashCard

When I went to recycle an old box of Honey Nut Cheerios last night a small silver package fell out of the container.  Now I’m sure my wife would have just thrown it away without opening it but I’m a sucker for free stuff (even if it’s a toy in a box of cereal) so I peeled open the plastic.  I was certainly surprised to see what was what looked to be a Discover credit card! 

I flipped the card over and read the back; turns out it’s a cash card, ours is loaded with $5.  I went to the website listed on the back and typed in my card number and special code to activate it.  According to the instructions, it can be used anywhere Discover is accepted.   It says to have the cashier ring up the card as credit, not debit. Apparently one in 10 boxes of certain General Mills cereal has one of the “prizes inside” and the amounts range from $5, $10, $20, $25.

I’ve never gotten a credit card in a box of cereal before, I’m used to seeing cheapy little toys that end up getting stuck in the vaccuum cleaner, so this was a cool surprise.  It’s only $5 but it’s enough to buy another two boxes of cereal : )

Have a good weekend, here are some money articles you might want to check out:

Written by Ben · Filed Under Credit Cards >Comments (2) 

Start A Side Business in the Lazy Days of Summer

The summer can be a great time to start a side business because life tends to be a little more laid back. People are going on vacation and taking time off to hang out with their kids so your day job may be a little more relaxed. Plus there’s nothing on TV to distract you at night : )

Many other personal finance bloggers have written about the benefits of starting a business such as My Two Dollars and Man Vs. Debt. Although starting a business isn’t easy it can be rewarding, here are some steps to get you started.

Turn your passion or hobby into a business

You’ve already read about this a hundred times from other bloggers, but the reason we keep saying it, is because we are living proof that you can earn extra money by starting a business that you are passionate about. The reason you choose a hobby or something you love to turn into a business is because you are more likely to stick with it when you aren’t making any money from it.

For instance, if you are good at math, but you hate the subject and you are not a patient person, then you shouldn’t start tutoring high school kids on Algebra and Calculus. Here is a quick list of some good examples for side businesses to start:

  1. Math or Science Tutoring
  2. Camping/hiking trip guide
  3. Landscaping
  4. IT Consultant
  5. Musical Instrument Instructor
  6. Photographer/Videographer
  7. Personal Trainer
  8. Mail Order Baked Goods Company
  9. Specialty Arts & Crafts business
  10. Professional Organizer (yes, some people enjoy organizing stuff!)

Focus On Getting Business Before You Set Up Your Business

If your business is a skill that you have, then focus on getting clients first. So many people focus on getting business cards, a website, setting up a business bank account, start an LLC, and they don’t even have any customers yet. The truth is, you don’t have a business until you have customers or clients. Start networking with people, tell your friends and family what you’re doing, and get some commitments from paying clients first. Worry about the details later.

Bootstrap Your Business

Since most service-based businesses can be started for less than $1,000 you probably don’t need to take out a loan to get started.  Drum up some paying customers and use that money to pay for any initial expenses you may have.

It’s trickier if your business involves a product that you make since you may need to buy the raw materials.  I think the best way to do it is to create the product on demand. Don’t go out and by hundreds of dollars in materials, make a bunch of widgets, and let them sit there and collect dust.

Instead make a sample or two, target your audience, invite them to your house for a demonstration or display show, and start taking orders on demand.

Network to Market Your Business

Have a presence on Twitter and Facebook and incorporate a blog into your business website.  Be sure to connect with other small business owners through local business organizations like the chamber of commerce or a Business Network International chapter. Let all of your friends and family know about your side business, strike up a conversation about it when appropriate. 

The most important part about starting a side business is to be patient. You won’t be rolling in extra cash right away. It takes a few months to get your name out there, and you’ll get rejected a lot. Be persistent and be patient.  Who knows, someday your side business could end up turning into your full-time business.

Erik Folgate is an associate writer for Money Smart Life. He also writes about personal finance, social media, and personal life issues on ErikFolgate.com.

Written by Erik · Filed Under Business, Erik, Personal Finance >Comments (2) 

Money and Your Health

Being healthy isn’t just a matter of feeling good and living longer, it can have a big impact on your wallet as well. I’ve made some poor decisions about my health over the last few years and it ended up costing me a big chunk of change and time off work.

I was lucky compared to many people, the cost of a major health issue is all it takes to financiallly devastate some U.S. families.   During his March healthcare summit, President Obama referenced statistics that the cost of health care now causes a bankruptcy in America every 30 seconds and by the end of 2009, could cause 1.5 million Americans to lose their homes.

Some medical conditions we have no control over but there are definitely ways we can help reduce our risks and control our health care costs, here are a few:

Take off the weight: While dealing first with the numbers on your bathroom scale will have immediate health benefits, it will also make your health insurance options and potential out-of-pocket costs more affordable over time. A recent Stanford University and Rand Corporation study reported that lifetime medical costs related to diabetes, heart disease, high cholesterol, hypertension and stroke among the obese are $10,000 higher than among the non-obese. It added that lifetime medical costs could be reduced by $2,200 to $5,300 following a 10 percent reduction in body weight.

Grill your agent or HR person: Whether you buy health insurance through an agent or your employer, insist that they explain exactly what you’re getting for your premium, and where deductibles do and don’t apply. If you’re purchasing your own insurance policy, compare the premium savings from a higher deductible plan with your usage pattern of health services. What you save can often cover your high deductible.

Weigh life insurance options while you’re healthy: Make sure you’re carrying the right amount of life insurance to support your family and other heirs as well as cover any remaining medical bills that might remain after you die.

Discuss potential cost of any diagnosis: If your physician diagnoses a particular illness that requires tests, prescription drugs, a hospital stay or ongoing therapy, be very blunt about what you’ll be charged, from the doctor’s bills to ongoing ancillary costs associated with treatment. Ask the doctor or his office manager to possibly negotiate a discounted fee for service. It’s possible to get discounts through cash payments as well.

Ask for generics and samples: Many physicians are willing to recommend a generic substitute or at least supply you with a few samples of the drug they’re already prescribing. While doctors can’t get away with passing sample drugs to all their patients, always ask.  As long as they are prescribing the medication, samples with the proper dosage can provide cost savings to patients.

Check local pricing resources: In non-emergency situations, you should always compare prices on treatments. Check with local medical boards and state health officials to see if they have online databases on costs for various medical procedures. Also, if there is a support group for your condition, talk to members about what they paid locally for care.

Investigate long-term care: If you or a family member is diagnosed with a chronic illness, that’s a financial issue that requires a plan. As tough as it may be to focus on money issues at a stressful time, make an appointment with a tax professional or planner to discuss affordability options that will safeguard your assets.

Begin negotiations before there’s a problem:  The best time to speak with hospital bean counters isn’t when you’re behind on your payments. Once a diagnosis is made, either you or someone you designate as your agent needs to contact the hospital business office to check on payment schedules and possible discount plans if you are uninsured or fear your insurance may not cover a significant portion of costs. Any creditor appreciates a customer who’s willing to come to the table first.

This post about money and your health is produced in association with the Financial Planning Association (FPA), the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning.

Written by Ben · Filed Under Health, Personal Finance >Comments (0) 

Day Trading Overview

Day trading by individual investors became really popular when online brokerage accounts came onto the scene.  You probably remember the late 1990’s, when the market was running faster than Olympic sprinters, people were re-financing their homes and taking withdrawals from their 401ks to dive into the day trading pool. Unfortunately, many of these people lost a lot of their money when the technology bubble popped.

Day Trading Strategies

Day trading is not for the timid or emotional, but it can produce positive results. The key is to have a well-defined strategy; one that you must stick to. This strategy must be specific in when to buy and sell a stock. Every step must be clear and in place before you make your first move. This helps remove the emotion from the decision making process.

Day trading is not a hobby. It’s not a game and certainly not something you “play” with. Day trading is a business and must be treated as such. Without the proper planning and/or experience in place, you will fail before you even start. Your trading strategy should define two things:

  • Buy/Sell Signals
  • Risk Management

Buy/Sell Signals

All day trading strategies start with where you will buy into and sell out of a position. These signals must be as objective and as specific as possible. They must be quantifiable and measurable. Choosing a stock based on whether it is “trending up” is too subjective and general.

Once a “Buy” trade has been placed, this investor needs to know exactly when they will get out or “Sell that position. The exit signal could be a specific percentage profit or a maximum loss. These “Sell” signals must be followed. Discretion can be very dangerous when playing with your profits. Using that same philosophy, a pre-set price must be followed in which you would realize your loss.

Risk Management

In the world of day trading, the use of a “stop-loss” is extremely important. All traders must know before entering into a position, where they will be getting out if the market goes against them.

Traders must be as disciplined in the use of stop-losses as they are in protecting their gains. All emotion must be removed and replaced with your strategy. An effective strategy will have very clear steps on where and how they will be exiting a position.

Day trading is all about capital. Every penny must be protected to fight another day if the market turns against you. Yes, you can hold off to see if the market turns around, but the danger of more losses will become more prevalent with each minute you leave yourself exposed.

Day Trading vs Long Term Investing

When you compare day trading to long term investing, please remember that in some day trading strategies, all you need to succeed is a stock price movement as little as $.25. The idea is to take advantage of these little spikes and move on.

Long term investing looks at building a portfolio that can stand the test of time, where you don’t even blink at tiny moves in price of a stock.

Written by Victor · Filed Under Investing, Stocks >Comments (1) 


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