30 Year Mortgage vs 15 Year Mortgage

“Would you like a fifteen year or a thirty year mortgage”? You are sitting in a tiny chair with an anxious mortgage broker staring back at you, visibly impatient and waiting for an answer. For you it’s a major decision, but to the broker your just another customer in a long day at work.

So, what will it be? 15 years or 30 years? In some ways it seems like such an arbitrary decision. Yet deep down you know this is the rare decision that is powerful enough to make or break your financial future. So, what factors should you consider when determining what is the best mortgage length to choose? Thanks to contributor Chris Thomas for this article.

There are several factors to consider when selecting the best mortgage length. The major factor everyone tends to focus on is the monthly price differential between a 15 year or 30 year mortgage. For instance, if you are purchasing a $260,000 home, your monthly minimum payments might be something like: $1,800 for a 15 year mortgage and $1,450 for a 30 year mortgage. To be sure, the monthly payment probably is the biggest factor for the average person to consider when selecting a mortgage term. However, the analysis should not end there, for there are a number of other factors to consider when selecting a mortgage length.

Factors for Comparing Mortgages

1) Job Security and Predicted Future Income Levels
At the time you apply for a mortgage, the bank is looking at your finances at a static point in time. However, your financial reality is in fact much more of a moving picture than the snapshot photo the lenders are using. For instance, when my wife and I recently purchased our house, our financial profile “snapshot” was as follows: a young couple with decent jobs, a decent amount of money in the bank, but an even larger amount of student loan debt. That was an accurate portrayal of our current financial reality at the time we applied for our mortgage.

However, as we only recently received our graduate degrees, the hope is that we will with time earn much higher salaries. That is one of the reasons we went with a 15 year mortgage. Although nobody can predict the future, many of us possess an inherent knowledge as to our own job security and expected earnings, both in the near and long-term future. Your age, the amount of years you wish to continue working, and your health should also be considerations when choosing a mortgage length.

2) Future Plans for the House
How much work does the home need? Is it a money pit waiting to happen? How about just your ordinary everyday fixer upper? On the contrary, perhaps the house looks to be completely sound and you do not anticipate many repairs other than basic upkeep for the foreseeable future. These are factors you will have to consider when choosing a mortgage length, because they go to disposable income available, and may dictate which type of mortgage length would be best for you to choose.

To be sure, your expected disposable income/money must be examined in its entirety along with debts/investments as a whole. Simulated budgets reflecting the various monthly payments would also be a smart tool to utilize in determining the proper mortgage length. Finally, you will want to consider how much money you have saved should illness, a job loss, or any other unanticipated issue arise.

3) Interest Rates
Along with the monthly minimum payments, the interest rate is probably the biggest mortgage length factor to consider. If you can swing a 15 year mortgage at a 4.0% interest rate rather than a 30 year mortgage at a 4.8% interest rate, then the amount of money you could save in interest over the life of the loan might be well-worth the extra monies you would have to pay each year. In some cases, you might actually be surprised by how close the monthly payments are as and between a fifteen year v. a thirty year mortgage.

4) Budgetary v. Long-Term Monetary Freedom
If you go with the 30 year mortgage you will likely have more breathing room in your budget each month. At the same time, if you force yourself to instead choose the 15 year mortgage, you will in theory halve the amount of time you carry a mortgage. This will provide you the chance to do things like take on more investment opportunities, to start your own business, or to purchase an investment/vacation property in the future.

Although there generally is no penalty for paying down a mortgage faster than its specific term, you will still miss out on the lower interest rate a fifteen year mortgage offers. Also, despite your best intentions, if you are not careful you may very well find yourself slipping into only paying the minimum mortgage amount each month. Weighing the present budgetary freedom with the long-term freedom of owning 100% of your house sooner is a big consideration.

5) Taxes
You will have to factor in the property taxes (as well as utilities, etc), in determining just how much mortgage you can afford each month. On top of that, there are tax benefits to owning a home. Although the tax code is always subject to change, at the present moment the longstanding federal income code home mortgage tax deduction is perhaps the most powerful deduction offered to the average American.

I know several people that have said this home mortgage tax deduction is the reason why they have not paid off their mortgage in full, even though they could. For me, I would rather have the mortgage paid off. Moreover, I note that the math is challenging at best to try and prove that more money is saved by putting off full repayment of a mortgage note. That said, it is a factor that must be considered in the overall mortgage length landscape.

6) Private Mortage Insurance
This type of insurance protects the mortgage company (note holder) if you default on your loan and the house goes into foreclosure. It is generally required if your down payment is below 20%. However, sometimes there are exceptions depending upon whether you are utilizing a 15 year or a 30 year loan.

For instance, FHA loans generally waive the PMI costs if you take on a loan that is 15 years or less and put down 10% or more. That means that the same 10% down payment on a 30 year FHA loan would likely trigger the requirement of PMI insurance. By the way, if you’re not familiar with it, PMI insurance can run pretty steep.

Additionally, this could mean that between the extra monthly PMI payments and the extra interest, the initial monthly payments on a 15 year FHA loan may not be noticeably different from that of the 30 year mortgage note.

7) Time Value of Money, Economic Outlook, & Inflation
I offer here a sort of a “mixed bag” of other factors you may want to consider when determining the best mortgage length for you and your family. The “time value of money” principle basically says that money is worth more now than in the future. This is due, among other reasons, the magic of compounding interest and the historical trend towards inflation. So, if you select the 30 year mortgage and then turn around and invest the extra money in your budget each month, it could cut down on the extra amount of interest you might pay.

At some historical mortgage interest levels this argument might be much weaker, but now that the interest rates on a house are 1-3% points lower than the traditionally “low interest” federal student loans, this argument might now have some traction. Just like nobody can time the market, nobody really knows whether the long-term global/national economic outlook is favorable or not to a 15 year v. a 30 year mortgage.

Even economic experts disagree on whether we are entering an era of rapid inflation, stagflation, or deflation. However, there are various charts and economic trends you may want to consider prior to making a mortgage length decision.

Conclusion

So, hopefully by now you have a better idea of what factors to consider when choosing the best mortgage length for you and your family. It is not an easy decision because so many of these factors are outside of our control. That said, it is important to look beyond just the monthly payments and to also consider other factors such as those addressed in this article.

By looking at this decision globally, you will have a better chance to make the best decision for you. Although this list is by no means exhaustive, it does provide a solid basis of some of the more important factors to consider in determining the proper mortgage length. As with anything, seeking the help of a proper financial expert may be necessary. Keeping all of these factors in mind is difficult, and ultimately is a decision you will have to make on your own (or with the help of a relevant expert).

So, what mortgage length do you think is best for you? Can you think of other factors that should be considered in determining a proper mortgage length? Did you know that some banks/lenders now offer 40 year mortgages?

---

5 Reasons Not to Join Angies List

Angies List is a great way for current or soon-to-be homeowners to find local contractors to do work on your house or property. We use Angies List and I’ve written about it a fair amount on this site but it’s not for everyone. I had a reader email me about the site after reading my Angie’s List review and it turned out that it wouldn’t make any sense for him to join because he lived in a town where local reviews aren’t collected.

Obviously, I’m all about saving money so I don’t want to suggest that you sign up for a membership that you can’t use. In light of that, I’ve put together a list of 5 reasons you might not want to join Angies List.

1) No Contractor Reviews in Your City

The main benefit of the service is hearing and reading the experiences other consumers had with individuals and companies they’ve worked with. If you go to search on a certain type of review and there are only two pieces of feedback for your area it’s not that helpful.

To avoid situations like this, Angies List has certain criteria they use to determine whether a city will generate enough consumer reviews to make it worthwhile to potential customers to sign up for the service. Here’s a list of cities with Angies List reviews, if you don’t live near one of them then the service won’t do you much good.

They are adding new cities as demand appears, if you want to signup for my newsletter, I can let you know when new ones are added.

2) Extremely Specialized Work

As I mentioned in the first point, the big value of Angies List is that you get a good sample of feedback on someone before you decide to hire them.  However, if you’re in need of a very specialized service that may only turn up one or two reviews in your area, then it won’t do you much good to check on that kind of work.

If you have a question about whether a specific service is reviewed you can contact Angies List, their customer service has always been helpful for me and they might be able to answer your question about a specific type of work in a certain area. 

You can also contact me with questions – I won’t be able to look at service providers in your city but I can get an idea of whether the kind of contractor you’re looking to hire gets reviews in a major metropolitan area – and if so how many.

3) Emergency Work Needed

The great thing about Angie’s List is that it helps you find the best service for your needs.  I’ve explained before that I like to choose three different providers that meet my criteria and get bids from all of them.  Then I pick the one with the best price and service for us.

If you’re having an emergency, you don’t need the best, you just need someone to fix your issue. For example, if the water main downstairs is spraying water and filling up your basement.

This does bring up the the other big benefit of Angies List, it helps you avoid deadbeats and people out to cheat you.  When I follow my process it accomplishes both, eliminates crooks and finds the best provider.  But if you’re in a major hurry you don’t have time to go sign up and search for providers.  If you’re already a member, it doesn’t hurt to go pull the most highly rated name and call them.  But if you’re not, call a person you really trust to get a quick referral who can show up immediately.

Pre-Screening Contractors

This also brings up the point that it’s not a bad idea to do some research before you have an emergency.  It’s probably worth your time to spend a few minutes finding the top providers for a few categories, like plumbers, electrician, heating/cooling, roof repair, etc.  Basically things that you might have to call about right away – like a water main break, if the heat quits middle of the winter, or a big leak in your roof on a stormy spring day.

Then over the following few weeks, call them up and find your favorite. Make a list of your tops picks and keep it somewhere handy.  You might want to pick two of each in case one is busy or unavailable when you do call in an emergency.

4) You Don’t Want to Give Reviews

Angies List has grown to the point that there are millions of users around the country leaving feedback, so chances are you can get first hand reviews of companies you’re thinking of working with.  Users have a vested interest in leaving reviews, particularly once you’ve found a good provider on the site.  If you find a quality company, you want to share it, with the understanding that the other members will do the same and you’ll be helping each other out.

Of course, you can still be a member and lookup reviews even if you don’t leave your own feedback but it’s not as helpful to the people in your community if you don’t.  I’ve actually felt guilty about that in the past year, I’ve been so busy I haven’t taken much time to leave my feedback. But what I’ve found out is that Angies List actually has employees whose job it is to just call up members and ask them to give their reviews over the phone.  While driving home from work last week I gave reviews on our HVAC contractor, pediatrician, dentist, and lawn mowing company.

5) You Don’t Think It’s Worth the Money

If you don’t want to pay for a membership, I know how you feel.  You already have enough expenses, you don’t want to add one more.  But I did give away some free Angies List memberships just a few months ago and I’ll be doing it again in the future. If you’d be interested in winning a free membership, enter your email below.

In terms of cost, Angies List has recently reduced the price of a membership.  Their logic in dropping the price seems to make sense. They know that the more people they have using the service, the more valuable it is to everyone. 

They realized that by reducing their prices they’d actually help consumers in two ways.  First off, the lower cost would save new members money and get more of you to join and give people more access to the service.  Secondly, the larger number of people using it makes the service more valuable – basically customers get a better price and more value.

So if you’ve checked them out before and price was a concern, you might want to take another look.  You can also save money when signing up with these Angies List discounts.

---

How to Use a Mortgage Calculator to Compare Home Loans

A mortgage calculator can be a great way to screen the home loans available to you online.  The nice thing about a good mortgage calculator is that it lets you quickly compare loans and gives you a snapshot of the costs you’ll have to pay.

Mortgage rates are pretty low these days but not all mortgages are created equal.  It’s possible that you could get a low interest rate but still end up paying more than you planned due to additional fees.  To help you find the best financing deals around, start out a mortgage calculator to screen the options and make sure you read the fine print of the loan offering very carefully.

Screening Home Loans
To get started let’s find a mortgage. For a decent list of banks offering financing in your area you can check out Bankrate’s mortgage finder.  Here’s an example of listings it gives me for a 30 year mortgage in Knoxville, TN.

You should notice pretty quickly that the first listed loan available isn’t the lowest interest rate. Even if it were the total cost is what matters. Thankfully Bankrate includes a lot of information for you to make an informed decision:

• Mortgage amount – how much you are borrowing. If you’re paying 20% of the home’s value as a down payment then this should be 80% or less of the home’s value. This is the principal balance that you will be paying off over the life of the loan.
• APR – the compound total interest rate you’ll pay over the year
• Rate (with any listed points) – how much borrowing the mortgage balance is costing you
• Fees in APR – any rolled in fees (origination fees, points, etc.) in the mortgage
• Estimated monthly payment – your estimated total monthly outflow to the bank, not including taxes or insurance

A loan could have a great rate, but also have a lot of fees tied up in the APR. What you want is a listing of the total cost, and the monthly payment is a great equalizer when it comes to understanding the total cost.

Check Monthly Loan Costs
If you don’t have the luxury of seeing all the fees that are being rolled into your loan simply take the loan’s interest rate and plug it into a mortgage calculator. One of my favorite calculators is DrCalculator’s Mortgage Calculator – note: you’ll need a newer browser to use it .

This gives you a bunch of different options to include as you look at your mortgage. Variables like principal amount, interest rate, length of mortgage, and then insurance and property tax information for the home you are buying. You can usually look up approximate property tax costs for a house online and add that cost into the calculations.

On the calculator it will also show the total interest over the life of the loan. This can be handy when comparing two different loans or types of loans.

Compare Mortgages Using Amortization Tables
As you are looking at mortgages and deciding to go with a 15 or 30 year fixed mortgage you’ll want to compare the total cost and monthly cost for each. An amortization table shows you how much of each payment of a loan will be interest and how much will be principal.

Here’s a monthly amortization schedule for a $250,000 loan with a 5% interest rate.

The total interest on the loan is $233,141. Now let’s compare to a 15 year loan at 4.5%:

You’ll notice the interest is about $100 lower per month (to start), but the principal payment is a whopping $675 more per month to make up the for the 15 years worth of payments you won’t be making. The total interest on this loan is only $94,247.

Doing comparisons like this — 15 year to 30 year, different interest rates for the same mortgage length, etc. — will show you how much money you could save for a different mortgage.

---

3 Ways to Buy More House for Less Money

When you buy a house, you are making a major purchase, probably one of the largest in your lifetime. Although buying a home will never be “cheap,” there are ways that you can get a little more for less.

Why does it seem like the place you want most when house hunting is often the one at the top of your budget?  Only you can determine how much house you can afford.  However, if you’re getting frustrated and having trouble finding homes that meet all your criteria and are in your price range, here are a few tips that can help lower the price of your home.

First we’ll look at lowering the cost of borrowing money to pay for your home.  Then we’ll move on to finding the square footage and features you want at a price you can better afford.

1) Lower Your Credit Score & Interest Rate
One of the best things you can do is work to improve your credit so that you get a better interest rate. The interest that you pay on a home purchase can make a big difference in how much you pay over the life of the loan. Indeed, you could pay tens of thousands of dollars more over the life of your mortgage just by having to pay an interest that is 1% higher.

The reason it makes such a big difference is because you’re often borrowing large amounts of money and then paying it off over 15 – 30 years.  Due to the way that banks amortize your mortgage payments, you’re paying mostly interest and only a small bit of principal during the first half of your home loan term.  Here’s more info about how your credit score affects your interest rates.

Credit Score

Your credit score is only of the factors that goes into determining your mortgage rate but it’s one that pretty universal for borrowers so it makes sense to work on it. Improving your credit is a great way to reduce what you pay in interest.

Work to boost your credit score by making on time payments, reducing your debt, and being choosy about the new debt that you apply for.   Remember, when you apply for a home loan it shows up on your credit report, so it’s best to check your credit first before just applying for a loan and seeing what rate you’re quoted.  If it’s lower than you’d like, you can work to raise your score before filling out any loan applications.

When you have a good score, you should be able to qualify for a lower interest rate. So this should help you buy more house with less –  since less of your payment will be going to interest. Saving up for a sizable down payment can also help, since you will be financing less of the home’s purchase price, and you will pay less in interest over time.

Credit score & Mortgage Rate Resources:

• How to Find the Best Mortgage Rates
• 12 Steps to Improve Your Credit Score

2) Home Bargain Hunting
All you have to do is drive around a few subdivisions and you’ll see the toll the housing market crash took on people who borrowed more than they could afford or who lost their job in the bad economy.

This has led to many foreclosures and short sales, which sometimes give you a chance to buy more house for less.  Obviously this is bad news for existing home owners but can be an opportunity if you’re looking to buy a house for a bargain.  According to CNN Money, foreclosures and short sales accounted for 26% of the total homes sold last year.  Based on a recent RealtyTrac report, their statistics show that foreclosures save you an average of 36% off regular home prices – and short sales typically get you a discount of 15%.

How to Use Home Savings

A 15–36% discount on a $100K-$200K house can certainly save you a lot of money. The question is do you use that discount to spend your existing budget on a bigger home, or get a smaller house and pocket the savings?  One thing to keep in mind is that if you’re buying a home that’s bank owned or in the process of foreclosure you’ll likely have to invest some money into it on top of the sales price.

Often home like these have been sitting empty for a while, which can cause problems for you as a new owner.  For example, if the utilities have been turned off then there’s nothing to power a sump pump and spring rains can mean wet and moldy basements.  Unfortunately, lack of care and maintenance isn’t the only concern.  Sometimes previous homeowners that are being kicked out by the bank will take their anger out on the house and intentionally damage the property before leaving.

How Much Will a Bargain Cost You?

There can be some unexpected costs when buying a foreclosed home, however, there are ways to anticipate some of them.  If you’re buying a house on the courthouse steps, which is an option right after a home has been foreclosed on, then it’s often sight unseen.  You have to bring cash to the auction and when you buy the house you may not know all it’s potential issues.

However, if you buy a home from the bank that foreclosed on the property then you have more time to do some research and anticipate your costs.  You can setup a time with the seller’s agent to bring in contractors to assess the damage and give you bids on what it would cost to get the house back into shape.  Not only does this information help you figure out how much you can afford to pay for the home and still do repairs, you can also include the estimates in your offer to the bank to justify the price that you offer.

Non-Foreclosure Bargains

If you don’t want to deal with a foreclosed home, there are still ways to save money on a house.  Start off by searching for homes that have been on the market for a while.  What you’re looking for are listings that indicate that the seller is motivated to sell since that gives you room to negotiate.

One frequent cause of this are home owners who are moving to a new home and don’t want to be stuck with two mortgage payments.  They may be more likely to give you a discount on price and get it sold than risk owning two houses for an extended period of time. 

Some companies that relocate their employees will actually guarantee them a sales price for their home if they’re willing to move.  Many of these companies work with re-location services to help sell homes and these can be a source of good deals for you.  The company isn’t in the real-estate business and doesn’t want to hang on to mortgage debt, they’re motivated to sell the house quickly, which gives you an opportunity to negotiate the price.

Short Sales

As I mentioned earlier, short sales are another alternative to foreclosures.  In these cases the bank hasn’t repossessed the property but the homeowner has asked the bank to let them sell the house for less than the amount owned on their loan.

The downside to short sales is that any offer you make has to be approved by both the home owner and the bank.  Banks are so swamped with short sales that it can take forever for you to get a response on an offer.  However, you can check the public records on a home and if you can find date it’s scheduled to go into foreclosure, this can give you leverage.

It’s often in the best interest of the property owner and the bank to get the home sold before going through foreclosure.  So if the home owner is coming up against a foreclosure deadline they may be willing to approve a pretty low offer, simply to avoid foreclosure.  Of course the trick is the bank also has to approve your offer so don’t make it so low that they simply dismiss it.

3) Know the Market

Understanding the local real estate market is a huge advantage when you’re trying to buy a house at a bargain. For example, anyone who comes to buy in my neighborhood is likely to pay $20,000 less than what the owner originally paid because there are so many homes for sale — and those that have sold have done so at a discount.

Real Estate Agents

One way to tap into market knowledge is to work with a buyer’s agent.  It’s best if you can work with someone who specializes in a certain area.  For example, if you really like a specific neighborhood and can find a buyer’s agent who actually lives in the neighborhood then you’re more likely to have access to property insights that you wouldn’t find with a random real estate agent you found in the phone book.

Technology

Whether you use an agent or not, you still want to do your own research.  The Web makes it pretty easy to keep your eye on developments in areas that you’d like to buy.  There are websites that allow you to save search critiera with your desired price range and house features.  They’ll send you emails when new properties are listed or when prices change on existing homes.  If you subscribe to a service like that for a few months you’ll have a decent feel for what’s available and what it will cost you.

Something else to consider is making use of a mobile device when you’re out “in the field” doing your research.  A lot of information about real estate is now accessible via your smart phone so if you run across something new or unexpected while out looking at homes you may be able to do your research and get your question answered while you’re in a house or sitting out front in your car.

Buying More House For Less

If you can lower your borrowing costs and find real estate that’s “on sale”, it’s definitely possible to get more home for your money.  Both of these require research, planning, and doing a fair amount of work before the actual purchase of a home.  However, the money you’ll save will make your efforts well worth the time you invest.

---

What You Really Want

When was the last time someone sat you down and asked what it was you really wanted?  I’ve done that with some of you over the last few months and I think it’s starting to pay off.

It all started when I was stuck in traffic one day, grumbling to myself about how I hate commuting downtown.  Spending part of every day crawling along the highway wasn’t really how I wanted to spend my time – “but no one asked what I wanted”, I thought to myself.

Here are Your Options…

This started me thinking that in our daily lives no one asks us what it is we really want. Whether we’re at work, at the store, at the gym, or just out to have fun – we’re offered lots of options but no ever asks what things we want more than anything else.

We’re allowed to choose from what’s on the menu, the approved list, the available spots, the monthly specials, the rate plan, etc.  But we don’t get to talk to someone and say, “all that other stuff is great – but this is what we really want”.

So I decided to ask some of you what purpose you wanted money to serve in your life.  Your responses have been thorough and detailed and I really appreciate you taking the time to share.  There are thousands of articles I could write about hundreds of personal finance topics but I want to be sure to include the ones that matter most to you.

What You Want

In a way, this is kind of a selfish request from me. If you’ve ever walked through the finance section in Barnes and Noble, you know from the rows of books that I could sit down in the morning and start writing about personal finance topics and write all day long every day and never cover everything. 

Of course that would never happen because I have to go to work every day and our two little kids never let me sit very long when I’m home and they’re awake.  However, even if I did have 24 hours a day to write I’d rather just talk about the things most important to you.

So what are these things? I’ve compiled all your feedback so far and the things you want to hear about most are:

• Investing
• Buying / Owning a home 
• Saving for College
• Earning Extra Money
• Retirement Planning

You gave me a lot more detail on the specific types of issues you want to resolve but this these are the topics at a high level.  If you haven’t had a chance to share but would like to have your topic considered you can still answer the 3 questions here.  The answers are anonymous so you don’t have to feel self conscious sharing your story and issues. Most people have gone into detail and really opened up so don’t be shy : )

Coming Up

So in the coming weeks I’m going to run a series of posts around these topics.  It was one year ago last week when we first met with our real estate agent and started the process of selling, then buying a house in one of the worst real estate markets in history.  I’m glad weren’t not going through that again this summer but the experience is still fresh in my mind so we’ll start off by covering your real estate questions.

After that we’ll go through investing, paying for college, earning extra money, and retirement planning. Since summer is coming up, I’ll give you a little break from all the finance content and throw in a week about saving money on vacation.

Like I mentioned, if there’s something specific to those topics that you’d like covered, or something else I didn’t mention then answer these 3 questions and we’ll add it to the list. Now that you know what’s coming up on Money Smart Life, check out what went on with money this week on the web.

Frugality

• Find Your Treasure at a Freecycle Event @ Lazy Man & Money
• How To Keep Eating Well On a Budget @ Generation X Finance
• Saving Money with PaperBackSwap @ Beating Broke
• Balancing Frugality and Fun @ Rainy Day Saver
• How To Be Frugal And Not Lose Your Social Life @ Cool to be Frugal

Taxes

• How to File a Tax Extension 2011 @ Suns Financial Diary
• Last Minute Tax Tips @ My Dollar Plan

Personal Finance

• What To Do When You’ve Got Too Much Debt @ The Digerati Life
• chinese water torture @ Brip Blap
• The Dark Side of Gift Giving @ Frugal Dad
• 5 Online Career Resources for Moms @ Wisebread
• 72 Questions to Find the Perfect House @ Fiscal Fizzle
• Claiming a Canceled Debt as Income @ Little House in the Valley
• How to Spend Your Way to Happiness @ Get Rich Slowly

Insurance

• Eliminating Preexisting Conditions in Health Insurance @ My Dollar Plan
• All About a Health Savings Account (HSA) @ Budgeting in the Fun Stuff

Investing

• Types of Stock Charts @ Million Dollar Journey
• Dividend and Conquer @ The Wealth Artisan
• Being an Active Investor is a Lot of Work @ Free Money Finance
• What is the Stock Market? @ Moolanomy
• Working with Financial Advisors @ Consumerism Commentary
• Investing in the Face of High Inflation @ The Oblivious Investor
• The Three Legged Stool of Retirement Planning @ Saving Money Today

Also, thanks to the following sites for featuring our posts in the Carnival of Personal Finance:

• How to Improve Your Credit Score @ Money Management
• 12 Steps to Improve Your Credit Score @ Financially Digital

---

Blue Cash Everyday(SM) Card from American Express

The rewards program for the Blue Cash card was one of the best cashback cards, in my opinion, and has recently gotten a little better. This has actually been one of the biggest years for our cash back payout, up to $560 so far, and now I don’t have to wait to redeem it.
Blue Cash Rewards

You’ve probably heard me mention before that I didn’t like having to wait a year to get the cash back we earned with our Blue Cash card. Two days ago I got a reminder email from American Express with the subject “Now get Blue Cash rewards when you want them” along with a link to their new rewards site.

As a side note on online security, I don’t click links in emails these days, instead I go directly to the site after reading the email. So I went out the American Express site to check out the enhanced rewards program. It had actually been a long time since I’d logged into my American Express account directly since our statement is always paid through online bill pay – long enough I couldn’t even remember my login.

After resetting my password and getting logged in I noticed the rewards program wasn’t the only thing that had changed.  The site design was a little different and I noticed a few more options in my account.  First I’ll go over the changes to the reward program and if I think they helped make the card better.

Rewards Program Changes

The card now offers more than just a cash back program, to reflect the change American Express now calls your earnings “Blue Cash Reward Dollars”.  Once you’ve accumulated 25 or more reward dollars you can redeem them – Hurray!

I’ve had my card for almost ten years now so I’m pretty used to seeing the rewards show up once a year as a statement credit.  I like that I don’t have to wait to cash them in but if you’re like me and accustomed to them being automatic, you’ll have to remember to request redemption.

Additional Rewards

Perhaps in an effort to offer the same flexibility as other cards from Citibank, Discover, Capital One, and Chase – AmEx now lets you use your reward dollars for other things, such as gift cards or merchandise.

I use this card for the cashback but I browsed through the gift cards to see what they had. I was hoping maybe they’d have an offer like the Discover card where you can actually buy a gift card for less than face value – something I talked about when I compared Blue Cash vs Discover .

For example, with Discover’s reward program, you can an buy a $50 Panera gift card for only $45. That’s like an extra 10% bonus cash back but unfortunately the American Express program didn’t have any deals like that.

They were more flexible than Discover, you only need $25 Blue Cash Reward Dollars to redeem for a gift card vs the $45 you have to accumulate for Discover.  The gift cards were all for restaurants and stores that you’ve probably heard of, and they did have tons of products you could buy with your rewards dollars.

However, like I said, I use this card for earning the cash rebate so I’ll probably just stick with that.

Earning Rewards

The way you earn cash back has also changed along with the rewards progrm.  The card no longer has a minimum amount you have to spend before earning cashback on everyday items, so American Express has renamed it the Blue Cash Everyday card.  It used to be that all everyday purchases earned the same amount of cash back but now they’ve split Supermarkets into it’s own earning category, paying the highest cashback.  They also removed pharmacies from the everyday spending cateogry and replaced it with department stores.

When you login to your account online it shows you the cash back percentages that you’re currently earning.  If you don’t get your statements online and they come in the mail instead, your printed bill also has a section that breaks out your earnings by cashback percentage.  You can actually access all your old statements online back to 2004, I went to checkout the ones from last year because I wanted to see what month our annual credit for the rebate used to show up.

One thing I saw on the statement that I hadn’t noticed before is that if you pay over $400 for a single purchase of gas you don’t earn the 2% back – but rather 1% back instead.  That’s a lot of money to fill up your tank but if you ever get close to spending that much in one transaction, don’t fill up all the way.  Just stop, pay the bill, and then start a second purchase so you still earn 2%.

Cash Back Levels

Obviously the biggest advantage of the card from an earnings perspective is the 3% back on groceries and 2% on gas and department store purchases.  You earn a 1% cash rebate on all other purchases.

As you can see in this glance at our account, our grocery spending has been the highest so it’s nice that supermarkets pay the most in cash back.  We also put all of our gas purchases on this card so we can earn the higher cash back.

One thing to note is that you don’t earn the 3% back on groceries or 3% back on gas at warehouse stores like Sam’s Club or Costco.  If you’re a Costco member, you can get the TrueEarnings card to earn higher cash back when shopping there.

Redeeming Cash Back Rewards

As I mentioned, the redemption of rewards is where the big changes come in.  As you can see from one of our statements from last year (below), the rebate used to show up as one big credit on your account every 12 months.

The good thing about the old setup was that one a month a year our bill was a lot lower than normal. Of course the bad thing was those rewards weren’t doing anything for me all year long. 

Now you can login and request your cash rebate as long as you have at least $25 accumulated.  So if a credit makes your bill $25 less than it would have been, that $25 you saved can be earning interest all year long.  The thing to watch out for is spending more money than you would have simply because you’ve earned cash back.

The graphic below shows how you request your statement credit once you’re logged into the American Express website.

You choose the amount of the credit you want to request and the quantity and click “Add to Cart”. 

The different redemption amounts American Express offers are $25, $50, $75, $100, $200, and $500.  You can mix and match the different amounts – for example, to request our $560 earned so far I could request a credit for $500 and 1 for $50.

The remaining $10.39 would stay in the account until I’d earned enough to redeem another $25.  The reason AmEx introduced the whole cart experience is that you can also turn in your rewards dollars for gift cards and merchandise.  However, I’m sticking with the cash back optin so I don’t worry about shipping or fees rewards.

Blue Cash Bonuses

American Express has been working on these upgrades to the rewards program for a while.  I remember when I got the first letter about the changes but as the date drew near they sent out another notice that the new program would be postponed. 

I’m glad they took their time to work out the kinks and get it right because I think the new program is definitely an improvement.  Based on the bonuses that they’re offering, American Express must also think that we’ll like the changes.  If you own and use the Blue Cash card, AmEx will give you a $25 credit if you refer a friend to the card and they’re approved.  I guess they figure with these recent enhancements they’re likely to get more recommendations.

In the past you would have had to wait a whole year to claim those $25 in bonuses but now you can get them right away.  If you want to check out the card and the bonuses just click here.

---

Bad Credit Score Immunity

Your credit score takes so many factors into account, some of my readers feel like anything they do could potentially send them on the road to a bad credit score. In several follow up emails to my post on ways to improve your credit score, I had people comment that they worked hard in one area of their finances to raise their credit score, only to have something else bring it down.

As banks look for more ways to make safe lending decisions, they’ll continue to add new criteria that help them make better decisions. If you’re feeling like it’s hard to juggle all the different factors that go into your score, I thought I’d share a few things that are immune to the FICO credit scoring calculations.

According to the myFICO website, these factors aren’t considered when determining your score:

1) Demographics Prohibited by Law
The Equal Credit Reporting Act makes it against the law for credit bureaus to factor the following into your credit score – race, religion, gender, nationality, marital status, and age.

If I had to guess, I imagine that companies would like to be able to look at these factors.  If you analyze data based on these criteria it’s possible you could see patterns based on some of those factors. Their models are complex and involve lots of variables so it’s not like any one of these things would make or break your score, just feed into their calculations. If they were able to find information they thought was predictive of your borrowing risk I imagine they’d use them.

However, the Equal Credit Reporting Act prohibits them from using those factors.

2) Your Age
Using your age as a factor is one of the things not allowed by the Equal Credit Reporting Act but I thought it deserved a closer look. Although your age isn’t factored into your score, it can indirectly have an impact if you’re young and just getting started in life.  If you don’t have any credit history at all it will hurt your score, no matter how old you are. 

But many people that don’t have credit history are just starting off in life. So if you’re young and your credit report doesn’t show any record of you borrowing and paying back money it can hurt your credit score.  If that’s you, check out this article on how to use secured credit to build your credit history.

3) Employment Information
If someone wanted to borrow a lot of money from you what’s one of the first things you’d ask them?  You’d probably want to know how they planned to pay it back.  If they didn’t have a job, or some way to generate income, would you want to lend them the money?

Well your FICO score doesn’t look at whether you have a job, how much you make, who you work for, how long you’ve had a job, or the various places you’ve worked in the past.

However, even though it’s not part of your credit score, if you’re looking to borrow money, the lender will certainly ask you to verify your income.  So if your FICO score is amazing but you just lost your job and have no income, would they still lend to you?  I guess it depends on the situation but maybe not – which is why it’s smart to have an emergency fund.

4) Where You Live
The city and neighborhood you live in don’t have any direct impact on your credit score.  However, if you took out a mortgage to buy the property you live in then where you live has an indirect effect.  If you had to take out an enormous loan to buy your home that will show up on your credit report and lenders will take this into account when they examine your debt to income ratio.

5) Current Interest Rates
If you’re paying really high interest on a loan or credit card you may be trying to raise your credit score so you can lower your interest payments.  The good news is – the fact you’re currently paying high interest rates doesn’t impact your credit score.  However, if you open a new line of credit at a lower rate, like a balance transfer credit card, that will show up on your credit report and will affect your credit score.

6) Non Loan Application Inquiries
Your credit can be accessed for reasons other than you applying for a loan. For example, if you just want to check your credit to see where it stands, that doesn’t count against you. Here’s a list of inquires that shouldn’t impact your credit:

• Requests you make for your credit report, in order to check it
• Requests from lenders for “pre-approved” offers
• Requests from lenders for account review
• Requests from employers

7) Other
Here are the remainging items that round out the list of things that shouldn’t raise or lower your credit score:

• Child Support Payments
• Rental Agreements
• Data not on your credit report
• Credit Counseling Status

So if you’re feeling uncertain about what criteria impact your score and in what way, at least you know a few things you don’t have to worry about. You can also check out the 12 steps to improving your credit to get a mix of short term tactics you can use plus longer term strategies for raising your credit score.

---

Tax Deadline TurboTax Giveaway!

Turbotax has given me three codes to giveaway for TurboTax Deluxe for all of you last minute tax filers.

As I mentioned the last time I offered free TurboTax codes, waiting until the last minute is no fun.  If you owe the IRS money like I did this year, I don’t blame you for holding onto your cash as long as possible.  However, the downside of waiting until the last minute to prepare your taxes is that if you need documents that you don’t have or can’t find then you’re in a pinch.

You don’t want to miss out on taking a deduction and you definitely don’t want to miss reporting any income and have it come back to bite you with fees and interest if you ever get audited.  Of course, you can always file for a tax extension if you have to but I’d rather get it over and done with if possible.

Anyhow, for those of you that are scrambling around searching for your W-2, 1099, or other tax forms I might be able to help ease your pain just a little by giving you free federal filing with TurboTax.  I usually hold a TurboTax giveaway at least once every tax season, this year’s been the best so far, I’ve been able to give away free access to the winners three different times.

Since the tax deadline is Monday I know you’ll need to get your return filed this weekend so it will be a quick giveaway. I want to be able to reach the winners quickly by email so if you want to enter, put in your email address below.  You’ll be added to my free email newsletter and entered to win TurboTax Deluxe Federal.

Upgrading & Downgrading TurboTax

I’ve dealt with several people who have filed using TurboTax this year through my previous giveaways.  One thing I learned through this process is that if you fill out your tax form online and then decide you want to upgrade or downgrade versions of TurboTax, there are options for that.

Upgrading Turbotax
The most common scenario is if you’re filling out your tax forms and run across scenarios that you need to account for that aren’t handled in the version of TurboTax you’re using.  You can upgrade from inside TurboTax online pretty easily.  The way to do it might change in the future but for now you just go to Home tab > Program Options and click on the Upgrade link.  So if you used the free version of TurboTax but realized that you need the Deluxe version you can upgrade.  The codes I’m giving away are for Deluxe so you can enter it when you file to waive the federal fee.

Downgrading Turbotax
On the other hand, if you started out with TurboTax Premier but think that you really only need the Deluxe version you can also downgrade.  This is unfortunately not as simple as upgrading but there’s a reason for it.  Before you downgrade, TurboTax will review your account, and make sure there’s no data that you’ll lose by downgrading.

From the TurboTax Support Contact page you choose the Buying -> Billing -> Account -> My Account and Downloads option and then get ahold of TurboTax with online chat or by calling them up.  If your tax return can be filed using Deluxe, they’ll help you downgrade.

I had one reader who won a previous giveaway run into this situation, TurboTax was very accomodating and worked with her to get it sorted out. So, if you still need to file, enter your email below to enter the giveaway, good luck!

  

---

12 Steps to Improve Your Credit Score

Improving your credit score quickly is possible if you’re talking about a small improvement but to raise your credit score significantly you’ll have to put in some effort.

Credit Score Strategy & Tactics

The best long term way to improve your credit score is to make regular timely payments and keep your balances low.  This is a good strategy regardless of whether you’re trying to raise your credit or just be smart with your money.  If you follow this approach year after year then your credit should be pretty solid.

However, there are certain factors that play a big role in your credit score and it does help to pay extra attention to them.  This is where credit score tactics come into play.  If you understand a few key things to watch out for, they can pay off nicely with an even higher credit score, we’ll go through them in a minute.

Of course, if you have bad credit and need to borrow money quickly at the lowest possible rate then the tactics can help you get somewhat of a score boost right out of the gate.

Credit Score Steps

I wrote recently about why a low credit score can be a problem and the factors you can work on to improve your credit score.  I mentioned that David Bach included a series of steps in his book that he recommends for raising your credit score.  Today I’ll finish out my look at “Debt Free for Life” by going over those steps and hopefully you’ll have a good basis for getting your credit score on track.

Why 12 Steps?

The negative to anything that takes 12 steps is that you could be overwhelmed by the idea of 12 things to do and not even start.  If that’s the case, I understand how you feel. 

The time rationing part of your brain might prioritize it to the back of the list.  You think, “12 steps – no time for that right now.  I’ll get to it when I have some free time”.  Of course the problem becomes that block of time never actually frees up.

Another way of looking at it, is that you only have to do one step at a time.  So, if it makes it easier to get started, you could call it a flexible 2 step program.  First do 1 step, then when you’re ready check the list for the next step.  Take as long as you want, keep going until the list is done.

Whatever mental approach works best for you, here are the things Bach recommends you do to raise your score.

1) Check Credit Report Errors 
Read the post on improving your credit score to see how issues with your credit report can impact your credit score and how you can correct them.

2) Automate Bill Pay 
I use online billpay to automate our payments and agree that it almost eliminates late payments.  Since your payment history is the biggest factors in determining your credit score, it makes sense to be sure your payments are sent.

3) Pay Off Missed Payments 
The bad news is that missed payments stick around on your credit history for 7 years.  The good news is that their negative impact decreases over time, so the sooner you pay off outstanding debt, the better it is for your credit score.

4) Keep Your Balance Far Below Your Credit Limit 
Bach uses the example of having a $1,000 balance on a card with a $2000 credit limit.  If your company suddenly cuts your limit in half, then you’re maxed out on your credit utilization on that card and that hurts your credit score.

5) Beware Continual Balance Transfers
Bach recommends against continually opening new balance transfer cards and moving your balance from card to card. He doesn’t explain the logic behind it but apparently having mutiple small balances on several cards is better for your credit score than consolidating all your expenses into one big one credit card balance.

6) Big Spender? Pay Off Early 
If you spend a lot on your card you can make payments before the end of your statement period to help your credit. That’s because the credit card companies report the Amount you owe to the credit bureaus at the end of your statement period.  Even if you pay off your card every month, those agencies are going to see high levels of credit utilization.  Paying off your balance a few days before your statement period helps keep the amount reported to Equifax, Experian, and TransUnion lower.

7) Don’t Close Old Accounts 
If you close old credit accounts it shortens your potential credit history and reduces the total credit available to you – both of which can be detrimental to your credit score. 

8 ) Use Old Cards Occasionally
Banks have been known to close inactive cards.  The impact of the bank closing your card is the same as if you closed the account – it has the same drawbacks that we just discussed above.

9) Show Responsibility 
This one falls under the credit score strategy I described earlier. It’s not a tactic as much as it is an approach to money.  Make sure you don’t borrow too much and pay back what you borrow on time. Only open new accounts when you need them.

10) Strategic Loan Applications
When you’re applying for a car loan or home loan, if you’re going to apply with more than one lender, do it all at once rather than spreading it out over months.  Each of those applications shows up on your credit report. Lots of those inquiries over time could indicate you’re trying to borrow money from multple places, which could mean you’re strapped for cash.  According to Bach, the FICO scoring system is setup to treat multiple loan applications in a short period of time as acceptable, to handle cases like applying with multiple lenders for a home loan.  If you spread out the applications over more than a month it could impact your credit score.

11) Limit “Hard Inquires”
When you check your own credit it shows up on your credit report as a “soft inquiry”, meaning that your credit wasn’t being checked with the purpose of lending you money.  In contrast, when you apply for a loan or line of credit, that creates a “hard inquiry” or a “hard pull” and the credit reporting agencies hold too many of these against you when calculating your credit score.  Make sure you understand the differnce between a soft and hard inquiry, and limit the hard pulls.

12) 3 in 1 Reports & Credit Monitoring
Bach thinks it’s worth your money to sign up for a 3 in 1 report that shows your credit scores from all three major credit burueas and also provides you with identity monitoring.  Based on all the things we’ve covered in the last few credit posts, he feels like your credit score is important enough that the cost of the report and monitoring is more than paid for by the benefits of knowing your score and being able to keep it an eye on it.

Improving Your Credit Score

Bach’s suggestions fall into three main types of categories: information gathering, credit tactics, and credit strategy.

Information Gathering

Information gathering are things like getting a 3 in 1 report, checking your credit report for errors, and using credit monitoring.  They let you know where you stand from a credit score perspective and help you keep an eye on your score.

Credit Tactics

Other recommendations are tactics – such as keeping old accounts open, submitting all your loan applications within a short timeframe, and paying off big balances before your statement period ends.  They’re all based on a knowledge of how your credit score is calculated and following those tips can keep you from getting negative marks that lower your credit score.

In reality they have nothing to do with the health of your finances but it’s good to know about them and make use of them to keep your score higher.

Credit Strategies

The last set of recommendations are more strategic approaches, like automating your bill pay and responsible use of credit.  These help you create long term habits that not only help your credit score, but also help your finances as a whole.

Any of these individually are good steps to take and can help you make progress towards raising your credit score.  The real benefit comes from combining all of these approaches together, do that and you can really see your credit score go up.

---

Disability Insurance 101

Disability insurance is coverage that you may be able to live without for years but if you ever need it, you’ll wish you had considered buying it.  I suppose the same could be said for other types of insurance but there is a difference between disability insurance and other types like car insurance or home owners insurance.

If you have some sort of unfortunate event that impacts your posessions and sets you back financially you can always work your way out of it.  However, if you’re injured and unable to work and generate income, then suddenly your ability to dig out of a financial hole and provide for yourself and your family is much more limited.

That’s where disability insurance comes into the picture and why we’re going to talk about it today.

What is Disability Insurance?
Disability insurance is another type of coverage that provides a benefit to you when you become disabled and cannot work. You receive a check based on the policy terms to pay for your living expenses. Just like with car insurance you pay into the “system” until you need to file a claim, then the company pays out the claim according to the coverage.

But disability insurance is an interesting product. When you file a claim for an automobile accident your insurance company has a fairly good idea of how much it is going to cost to make you whole. They know how much a car is going to cost if they had to replace it completely. That limits the amount they need to pay out.

That same is not necessarily true for disability insurance. We’ll get to how it works in a minute.

Why Do You Need Disability Insurance?
Disability insurance is often overlooked which is tragic. You are five times more likely to become disabled than you are to die. What’s sad is that if you’re unprepared for disability it is actually a much more difficult financial hardship for you and your family than death. If you’re disabled you still need food and shelter, and of course these cost money. If you die your costs are limited to your funeral arrangements.

When you combine the need for this type of coverage with a majority of people not being familiar with it you can run into serious financial dilemmas.

How Does Disability Insurance Work?
You send payments in to the insurance company just as you would with any other coverage. When you file a claim the monthly check your receive back from the company is dependent upon the policy. Some policies cover 60% of your gross monthly income. If you were bringing home $3,000 per month before you became disabled you would get a check for $1,800 every month for the length of the policy.

Policy length is determined by the coverage you select. Some companies provide coverage for a limited time frame such as 5 years. Others cover you until you reach retirement age.

Employer Disability Coverage and Additional Coverage
Many employers include basic disability insurance in their benefit package to employees. The coverage is usually up to your base salary; if you work in a job where commission is a significant portion of your pay you’ll need to purchase additional coverage unless you’d like to live off of a portion of your base for the foreseeable future.

When looking to augment employer coverage be wary of various clauses in policies. If your employer provides coverage then you need to find insurance that will work on top of that coverage. If you buy a 60% income replacement policy while your employer provides the same then there is likely to be a clause in your paperwork that says your employer’s coverage must be used rather than the one you purchased on your own.

Disability Insurance Alternatives

If you don’t have any disability coverage through your job then it’s even more important that you look into disability insurance alternatives.

Social Security Disability Insurance

If you’re disabled and not able to work there is a program called Social Security Disability Insurance (SSDI) that you might qualify for.  They base your payments and eligibility for the program on how much and how long you’ve been contributing to Social Security.

One thing to keep in mind about SSDI is that it doesn’t kick in right away if you become disabled so it would be good to have something in place to help pay the bills in the mean time.  Another caveat about SSDI is that it only covers you if you’re fully disabled. If you have a partial or short term disability you won’t qualify for SSDI.

Individual Disability Insurance Policies

You can also buy short term disability policies on your own.  Although these are probably more expensive than a group policy you would purchase through an employer they do have benefits.  For example, most group policies will reduce your benefits based on other sources of disability insurance you’re receiving, such as SSDI. However, most individual policies don’t have this limitation.  Another benefit of an individual policy is that if you switch jobs you keep the same policy, vs employer policies that change when you get a new job.

You definitely want to research the different insurance providers, you can compare disability insurance quotes and see which one makes the most sense for you.  Here are some of the well known providers of disability insurance policies:

• State Farm
• American Family Life Assurance Company of Columbus (AFLAC)
• MetLife
• Northwestern Mutual

 

---

Page 54 of 190« First«...102030...5253545556...607080...»Last »