Home Mortgage Rates – 6 Key Factors

Home mortgage rates offered by your bank can vary from person to person; what determines the interest rate you’re eligible for? 

While the interest rates on 10 year Treasury notes have a major impact on whether mortgage rates rise or fall, there are many individual factors that go into determining your interest rate. Those individual factors are measurements banks can use to help calculate the amount of risk they take on if they give you a home loan.  Let’s take a look at six of the main factors that typically figure into your home mortgage rate.

1) Loan Amount: The bigger your loan amount, the larger the risk of default. A larger mortgage usually means bigger payments, and that means a bigger stress on your budget. If you are getting a jumbo mortgage, the increased risk can be reflected in a higher interest rate.

2) Amortization Schedule: When you borrow money, a schedule is created for repayment that’s known as an amortization schedule. It reflects how much of each payment goes toward interest and how much goes toward principal each month, in addition to determining when the loan will be paid off.

If you have a longer loan term, it means that you build equity (or ownership) in your home at a slower rate. A long mortgage term also means that you have more time to default. If you are willing to pay off your mortgage faster, you will likely see a lower interest rate.

3) Credit Score: You probably knew this was coming. Whether or not you think the credit scoring system is fair, the fact is that mortgage lenders use this system to evaluate your level of fiscal responsibility.

Your credit score is a reflection on your past behaviors related to borrowing money. A lower score means that there is a greater risk that you will default on the mortgage, or be late in paying. In order to make up for that, you will have to pay a higher mortgage rate. A good credit score can save you thousands of dollars (even tens of thousands of dollars) in interest charges.  You can read more on how your credit score affects interest rates.

4) Loan-to-Value Ratio: This number represents the amount of money you owe on your mortgage as compared to the value of the home. If you have a home that is worth $200,000 and owe $170,000, your loan-to-value ratio is 85%.

Many lenders consider a loan-to-value ratio of 80% or less to represent an more favorable situation, since it represents an amount of equity in the home that reduces the impact on the lender if your home ends up in foreclosure.

If you have a 20% down payment, you automatically get to the desired loan-to-value ratio, and can usually see a lower interest rate. When applying for a refinance or a home equity loan, a desirable loan-to-value ratio will also help you with a lower interest rate.

5) Loan Type: The type of loan you are getting matters as well. A variable rate loan, like an adjustable rate mortgage, generally starts out a little lower than a fixed rate loan, since the bank is hoping that interest rates will go up — meaning more money down the road.

A cash-out refinance loan generally carries a higher interest rate than a purchase mortgage, since a cash-out means you are taking more out against your home’s equity; this results in a greater risk for the lender.

A home equity line of credit that you tap repeatedly may have a variable rate, or a higher interest rate, as opposed to a fixed-rate home equity loan that is perceived as offering less risk.

6) Loan Program: Whether you’re borrowing using an FHA loan vs a conventional loan can affect your mortgage interest rate. An FHA loan, guaranteed by the government, often has a lower interest rate than a conventional loan. This is because the FHA insures the loan, reducing the risk to the lender. So, you might get a better rate than you would get under normal circumstance if you qualify for certain loan programs.

Lending Risk
In the end, the mortgage rate you end up with is all about the risk to the lender. A mortgage lender considers the facts of the loan, and then makes a decision on your interest rate based on how likely you are to default, and the amount of equity the home would have to cushion the costs associated with foreclosure. 

Your Interest Rate
These 6 factors aren’t the hard and fast rules for an interest rate calculator for every bank; each lender uses their own set of standards and these are some of the most common.  You can use them to estimate whether you’ll get a high or low interest rate relative to the market but the only real way to find out the mortage rate you can borrow money at is to fill out a mortgage application and get pre-approved for a specific loan amount.

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Free Moving Boxes for All!

Free moving boxes can help you save a little money when you move. I hated the thought of spending money on boxes I would only use once so I spent part of the weekend rounding up boxes to pack up our stuff. Here are five good places to look for free moving boxes:

1) Recycling Center Boxes
The cool thing about recycling centers is that there are TONS of free boxes up for grabs. I backed our CR-V up to one of the bins at a local recycling center and filled the back up with boxes. Typically the boxes have been broken down so you’ll need a tape gun to re-tape them once you get them home.

Of course they won’t all be standard size moving boxes, it’ll be a range of sizes. The really big ones aren’t good because they’re heavy to carry once you get them all full and the really small ones don’t hold much so they can be a waste of time to pack. But if you can find a local recycling center with a big bin of cardboard boxes you’ll be able to find plenty of medium sized boxes to pack with.

2) Grocery Stores Boxes
Grocery stores are a never ending source of free boxes since they’re constantly unpacking new shipments of food. Most of them do their restocking late in the evenings, if it’s a 24 hour store you can walk up and down the aisles and collect the empty boxes as they’re emptied. Even easier, if you call in and request boxes ahead of time some grocery stores will hold a bunch of boxes for you to come and pick up in the morning.

3) Office Boxes
If the company you work for gets any kind of deliveries you can hit them up for their empty boxes. For example, where I work the printing department always has empty paper boxes and the IT department periodically has empty computer boxes. Stop by and tell them you’re moving and ask them to let you know whenever they have boxes to get rid of.

Asking your co-workers can also be a good strategy if you let them know weeks in advance to save any empty boxes and bring them in for you. You won’t get enough boxes to pack up your apartment but every free box is one you don’t have to buy.

4) Craigslist Boxes
People who just finished moving are sick of hauling things around and want to get rid of all the boxes they just had to unpack. Trash companies often charge an extra fee to dispose of huge stacks of boxes so some people will offer free moving boxes if you just come pick them up. Keep your eye on Craigslist for people who just moved and are getting rid of all their cardboard boxes. If you can find the right family discarding a whole pile of them you might be able to get all the moving boxes you need from one place.

5) Moving Company Boxes
Some of moving companies that gave us bids to move our furniture offered 10-15 free boxes if we used their moving service. If you’re moving everything yourself this won’t help you but if you have movers coming to help with a house full of furniture you might be able to get some free moving boxes out of the deal. If you’re trying to decide whether or not hire movers or which moving company to use stay tuned because we’ll cover that later this week.

Good luck moving!

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3 Money Sucking Financial Innovations

Many fabulous financial innovations have been made in the last 15 years that have helped to make your life easier or better.  Unfortunately, not all the financial innovations over that time have been positive; there have been some products and services created that can be a major drag on your net worth and even on your quality of life.

We’re obviously not fond of these money suckers, as you’ll read below, but we’ve never been in the situation where we’ve needed to tap into these “creative” sources of funding.  If you’ve used any of these three, let us know why you needed to and your experiences with them in the comments at the end.

Payday Loans

Payday is a week and a half away. You have made financial mistakes in the past, and haven’t fully recovered from them.

Something happens — some financial emergency. Let’s say your refrigerator dies. You don’t have the funds to pay it, but it’s an issue that you have to resolve. (You’ve got to eat!)

You could use something like a credit card, but instead you choose to get an advance on your next paycheck. You figure that you’re working a steady job, you’ll be able to pay it back quickly enough. You get a loan for $400.

Bad idea.

These “lenders” use loopholes in state laws to get around maximum interest regulations. Your payday loan could cost you 100% to 500% depending on how deep in the trap you get caught. You write a check for the amount you are borrowing plus a fee. Let’s say you borrowed the $400 for the refrigerator and they charged you a $20 fee. You write a check for $420 to be cashed 10 days from now.

Even if you paid off the loan after 10 days you’ve paid $20 for 10 day loan on $400. That’s an annual percentage rate of 196%!

But what if you can’t pay the loan back? No worries, they’ll let you loan yourself the loan money for another 10 days, for the same fee. Now we’re up to $40 in fees for a $400 loan over 20 days.

The cycle starts there… if you can’t pay off the loan you start paying more and more in fees just to keep the loan active. Definitely a bad deal for consumers.

Interest-Only Mortgages

How does this scenario sound to you?

Mr. Banker is going to lend me several hundred thousand dollars for a home. I’m going to buy a home that I can’t afford a regular mortgage on. So Mr. Banker in all his infinite wisdom offers to let me pay only the interest on the loan. I never pay down any money on the principle of the home.

Sounds to me like you’ll be making payments the rest of your life!

Think about these scenarios that might lead you towards an interest-only loan:

1. You can’t afford a regular mortgage today, but some day your income will go up and you’ll be able to refinance into a standard 15 or 30-year mortgage that includes principle payments that will eventually lead to you owning the home.
2. You will never be able to afford the house, instead you rely on any gains from price appreciation from the price your purchased the house at.

Both of these could potentially result in you never putting a dime toward actually owning the home!  Doesn’t sound like a good idea to me.

401(k) Loans

Your 401k plan at work gives you the opportunity to set aside pre-tax income for retirement. You get a tax break, your employer maybe offers you a match, and you build up a nest egg to live off some day in the future.

The fun doesn’t stop there. If you haven’t planned for the future well you can actually lend yourself some of that money. Got an emergency and no emergency fund on hand? Don’t worry — just raid your 401k!

This is a bad idea for multiple reasons:

• The money you lend yourself could be earning a higher return in your 401k’s investment options. Instead you end up missing out on potential gains (and losses) in the portfolio.
• You end up having to pay yourself interest.
• If you lose your job you have to pay the funds back within 60 to 90 days (usually).
• If you don’t pay back the loan the IRS considers it a taxable distribution and you’ll get nailed with a 10% fee plus federal income taxes. Ouch, ouch, and ouch.

Money Sucking Alternatives

So what’s the alternative to these money sucking options?  An emergency fund is a good place to turn for fast cash, much better for your finances than a payday loan or a 401k loan.  If a 401k loan isn’t for an emergency but rather some planned expense, it’s obviously better to save up in advance of the purchase. 

In terms of interest only loans, a better alternative could be to rent until you’ve saved up enough money to buy the house you want.  Or you could settle on a cheaper house for now and plan to by the more expensive house in the future.

Of course we know life doesn’t always go according to plan and not everyone has emergency funds or a savings account to tap into so if you’ve had an experience with one of these, let us know how it went in the comments below.

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FHA Loans vs Conventional Loans

The recent mortgage market crisis and tightening in the credit market has resulted in an increasing interest in FHA loans. Prior to the financial crisis, FHA loans, with their required down payments and limits on loan amounts, were somewhat unpopular. Now, though, with mortgages increasingly difficult to come by, FHA loan requirements seem a little more reasonable than what is being imposed by other mortgage lenders. In some cases, you might find that a FHA loan works well for you.

What is a FHA Loan?

The Federal Housing Administration offers to insure loans made by certain lenders. The FHA itself does not offer loans, but approved FHA lenders can lend you money and have the loan guaranteed by the government agency so that the lender receives money if you default on the loan.  With a typical conventional loan, if your down payment is less than 20% the bank requires you to buy private mortgage insurance.

FHA Loan Advantages

In the current real estate market, there are a number of advantages associated with FHA home loans. First of all, the down payment for buying a house is often lower; you are only required to make a 3.5% down payment. Right now, many lenders working with conventional loans prefer a down payment of at least 5%, and some are requiring 10% or more. FHA lenders might be more flexible, since the money they advance is guaranteed by the government.

Another advantage is that you can get approved even if your credit is not as good as some lenders would like. While your FHA mortgage rates may be a little higher than if you had good credit, you can still at least be approved for a mortgage that you may not get with a more conventional mortgage.

FHA loans are often ideal for first time home buyers with little credit history and small resources for a big down payment. Another benefit to first time home buyers is that there are no income limits, something that often exists with special first time home buyer programs. Nearly anyone can benefit from a FHA loan, and FHA approval can be a little less onerous than trying to get approved for a conventional loan.

FHA Loan Drawbacks

Like all financial products and services, FHA loans aren’t for everyone. In some cases, conventional loans might be more flexible. There are FHA limits on how much you can borrow for your purchase. Limits vary according to real estate market, but these limits mean that you may not be able to buy the home you want using a FHA loan.

Another issue to consider is that there are FHA loan requirements associated with insurance. Since the government is guaranteeing your home loan, you will need to pay for insurance. FHA loans require an upfront premium, as well as a monthly fee. Once you reach a loan to value ratio of 78% on 30 year loans, the monthly fee stops.

However, there are cases in which the insurance premiums paid for a FHA loan actually ends up being more expensive than private mortgage insurance (PMI), which does not usually charge an up front premium in addition to a monthly fee. Additionally, you can cancel PMI when the loan to value ratio reaches 80%, instead of waiting longer.

Bottom line: FHA loans can be great tools for those who are looking to buy a home in the current real estate and credit market. While almost anyone is eligible for a FHA loan, some of the requirements can scare off would-be home buyers, and there are limitations to what can be bought with a FHA loan.  If you’re thinking about buying a house it might be worth it to look into an FHA loan and compare it to the financing you could qualify for with a conventional loan.

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Angies List Big Deal

Angies List has added a new feature called the “Big Deal” that could save you some money on house projects.  The way it works is that contractors or service providers with good Angies List reviews can offer special prices to members of the list.

For example, in the last few weeks I’ve seen deals for carpet cleaning, interior painting, hardwood floor installation/refinishing, and air conditioner inspection/tune-up.

Air Conditioner Repair & Maintenance
The most recent was a local air conditioner company offering $30 off their air conditioning maintenance services; which was 33% off their regular rates.  If we hadn’t had ours serviced earlier this summer I would have taken advantage of the deal.  Their normal prices seem higher than the service we usually use but with the discount the rate was lower than we’ve ever paid for AC work.

Timing of Deals
One downside to the deals is that they usually only last for a limited time, a week or two, so you have to time it just right.  For example, since we just bought a new house we could use the discount on interior painting but weren’t quite ready for the work when the deal was featured a few weeks ago so we had to pass on it. 

One thing I haven’t asked is how much time you have to use the service after you pay for it. For example, could I buy this week while it’s a deal but then schedule them to come and do the work a month later? I imagine it might depend on the contractor or service provider, I’ll have to ask next time I see a deal that could save us money.

Saving Money vs Quality Work
Of course you don’t want to hire someone just because they’re offering a good deal; the saying “you get what you pay for” exists for a reason.  Over the years I’ve learned that automatically going with the lowest bid can come back to haunt you.  Even though you save some money up front, the contractor may not do as good a job or as complete a job as someone who charged more for the same service.

That’s why I was glad to see that not just any contractor or company can participate in the “Big Deal” and offer a discount on their services.  Angies List only allows service providers with top ratings from previous customers to feature deals on home improvement work.  So you won’t get some fly by night company trying to make a quick buck, the deals will be from quality companies offering legitimate discounts on their work.

Big Deal Email Alerts
You won’t be able to see the deals offered unless you’re a member, here are some Angies List promotion codes. Once you signup, you’ll get an email alert when new deals become available.  It’s a new feature that just launched in June, so far I’ve gotten an email with a deal every week or two. Click here to try it out and start getting the home improvement deals in your inbox.

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Are Home Warranty Companies Worth the Money?

When you buy a home, you will probably be asked if you want to use a home warranty company to cover repairs to certain issues that might crop up. If you are buying a new home, chances are that the builder offers a one year home warranty automatically. You have the option to purchase a home warranty after that, with warranties covering your repairs a year at a time. You can continue to pay the premium each year, and then only pay a small fee for the service call if you have claims.

For the most part, a home warranty is a service contract. When deciding whether or not a home warranty is right for you, it is vital to understand what is covered. Most home warranty programs will cover what are considered “moving parts”: appliances, heating systems, air conditioning, some plumbing and some electrical. However, most of the time the home warranty company will not cover issues related to poor maintenance of the home, or to bad construction. Carefully read the paperwork to understand exactly what to expect from your home warranty.

Home Warranty Advantages

There are some advantages to participating in a home warranty program. Warranties usually cost between $250 and $600 a year, with many deductibles ranging from $30 to $100. (Some home appliance warranty programs charge premium only, with no deductible.) If you end up with a serious plumbing problem, or if your heating system breaks down, having the home warranty can save you money. If you had a $300 warranty with a $50 deductible, and you needed a new $1500 heating or cooling system, your home warranty policy would save you a lot of money. To get an idea of what a home warranty might cost you – Click here

Home warranties can provide peace of mind when you are living in an older home. Homes that are at least 10 years old, and that have not had any replacements to their “moving parts”, might begin to see more problems. If you own (or plan to buy) and older home, and you are concerned about the cost of possible repairs, home warranty protection might be desirable.

Home Warranty Disadvantages

One of the biggest issues is that some home warranty companies are slow to conduct repairs, and they may deny claims. You may have to fight with the home warranty company to convince representatives that certain repairs and replacements fall under the plan you have. In a lot of ways, it can be similar to dealing with an insurance company.

Another drawback is that you may not need repairs. You could be spending hundreds of dollars a year on a home warranty plan, only to never have a significant repair. By the time you do have a serious problem, it may be that you have paid so much in premiums that it isn’t worth it. You will need to do a cost benefit analysis to determine whether or not the continuing home warranty protection is worth the cost. Chances are, though, that after the first year (if you have a new home warranty), you might want to hold off buying protection until the home is a little bit older.

Home Warranty Companies

There are many businesses offering this service so its best to compare home warranty companies. You will be hard pressed to find a home warranty service that does not have complaints against it. This is because home warranty policies naturally stir up strong feelings — especially if a claim is denied. Some of the home warranty companies that are well-known, national and somewhat reputable companies include:

• Sensible Home Warranty
• Colonial Home Warranty
• American Home Shield
• Old Republic Home Warranty
• 2-10 Home Buyers Warranty
• First American Home Warranty

It is also worth noting that there are regional and state home warranty companies that may have better ratings, such as Blue Ribbon Home Warranty in Colorado, or American Residential Warranty in a limited number of states – to check if they’re available in your state Click here

Home Warranty Reviews

You can find home warranty reviews and ratings online, as well as check with the Better Business Bureau. There will always be complaints, but you can look through reviews and read experiences to get an overall feel for which home warranty company is least likely to cause you problems — and help you figure out whether a home warranty is worth the money in your individual situation.

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Summer Vacation Edition

Summer vacations are definitely different than they used to be for our family. My wife and I used to travel to cool cities like San Francisco, New York, Boston, and DC and see the sites over the summer. Now that we have little kids we don’t have the money or courage to venture out on trips like that any more. Instead we stay much closer to home and pick family friendly destinations.

It’s been a pretty busy summer with our home buying adventures so we’re looking forward to a weekend away. Since I’m on vacation, I’ll go light on the writing and heavy on the links. Here are some good money tips from around the web this week:

Investing

• Invest in What You Know? @ Lazy Man & Money
• What to Invest When You Are Young @ Suns Financial Diary
• Investment Strategy For Beginner Investors @ Free From Broke
• Student IRA: Can a Student Open a Roth IRA? @ The Oblivious Investor
• IRA Beneficiaries – How To Safeguard Yourself and Family @ Wealth Pilgrim

Real Estate

• Should You Refinance Your Mortgage? @ Generation X Finance
• Good News For Landlords & Investors @ Million Dollar Journey
• 10 Money-Saving Home Repairs @ Sweating The Big Stuff
• The Real Estate Bubble: What Can We Learn From It? @ Personal Finance By The Book

Career

• Is A Liberal Arts Education Worth It? @ The Digerati Life
• Could You Be an Entrepreneur? @ Consumerism Commentary
• Is Any College Degree Better than No Degree? @ Free Money Finance

Retirement

• How To Manage Retirement Savings @ Good Financial Cents
• Should You Overestimate Your Retirement Needs? @ PT Money

Personal Finance

• 5 Things You Can Haggle For @ Kiplinger
• Making Time for the Details @ Brip Blap
• Tracking Your Costs @ The Wealth Artisan
• Finding Fulfillment in Life @ Rainy Day Saver
• Ten Big Mistakes #10: Poor Goal Setting @ The Simple Dollar
• What the Financial Reform Bill Means for You @ My Dollar Plan

Frugality

• Frugal Living Tips @ Millionaire Nurse
• How To Spend Less On Your Pets @ Moolanomy
• Money Saving Secrets of Super Savers @ Cool to be Frugal
• 6 Ways to Save Money on a Road Trip @ Canadian Finance Blog
• Garden Tips from Personal Finance Bloggers @ Couple Money
• A Frugal Daughter’s Guide to Back to School Shopping @ Frugal Dad
• How To Save During Back To School Shopping Season @ Studenomics
• How To Create A Lush and Beautiful Lawn Inexpensively @ PF Firewall

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Buy or Rent – Which is Better For You?

Renting vs buying is a major decision; whether you rent vs own a home can have an impact on your family’s life for years down the road.

With some of the best mortgage rates in years and deals to be had on homes in a down real estate market; if you’re renting you might be thinking about buying a home. Before you buy, make sure you look at the total costs of owning a home and how it fits into your overall financial picture.

The Big Picture

The decision to rent vs. buy is an important financial decision due to the sheer amount of money most of us spend on housing, but don’t think of it only in terms of the interest rate and the amount of the monthly payment. Whether to rent or buy is only one part of a complete financial picture – in some regions, housing prices might make buying and all its requisite tax benefits a better deal. In others, it might be better to rent and put the extra expenses related to property ownership in other investments or toward other purposes.

The bottom line – the decision to buy or rent doesn’t exist in a vacuum. It should always be tied to other factors – lifestyle, community, and where your personal investments stand. And many lenders are now sticking to the guideline that you shouldn’t spend more than 28 percent of your monthly income on a mortgage payment.

Cost of Renting vs Cost of Buying

That said, there are some interesting resources that have surfaced to help you start the decision-making process. A website called Trulia and research from the Center for Economic and Policy Research in Washington, D.C. have reported their opinion that homes are fairly valued in a city when they cost about 15 times a year’s rent. In simpler terms, if you’re spending $18,000 to rent a place and the house costs more than $270,000, then think twice about buying.

Rent vs Buy Calculator

The New York Times also has an interesting rent vs buy calculator that’s worth checking – it goes beyond what prices are doing in an area and adds other factors like how long you plan to stay in your home. The calculator can help you determine the total cost of buying a home and offers a year by year analysis of your costs.

Understanding the Neighborhood

If you’re seeing pricing capitulation in a neighborhood you really like, it’s going to be a tighter call between renting and buying. But if a neighborhood takes a turn for the worse or you see an opportunity to move somewhere else, a renter can make a move much quicker than an owner.

Home Owner Responsibilities

The condominium movement has created a class of homeowners who never have to trim a bush or mow a lawn, but they obviously have to pay for those services. Renters don’t have to care about painting a home or paying an assessment – they don’t have ownership, but they have freedom. And with a look at motivation and financial considerations, it’s possible to make a more informed decision.

Costs of Buying a Home

Assuming you can’t pay cash, it costs money to get a mortgage — closing costs can run into the thousands at the start of the game. A financial planner can help you detail the typical financial outlay at the start of home ownership and advise you on how not to get into spending trouble once you get the keys.

Risks of Buying a Home

Homeowners today understand risk as never before. Most have seen the value of their property stagnate or fall in the past three years. As with any investment, the question with homeownership is the same – can you handle the risk of an extraordinary drop in value? If not and other factors work, it might be better to rent.

Lifestyle Impact

Lifestyle means different things to different people, but renting can be a relatively low-headache lifestyle with the right property. It also allows for relative freedom to move and away from the financial responsibilities that come with ownership. People often say that if you expect to live in a community for a short time, renting might be the best choice; age is also a factor. In addition the high cost of home ownership may limit travel, lifestyle or other opportunities. Only you know what will be the best indicators based on your life situation.

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8 Fabulous Money Innovations

The world has changed quite a bit in the last 15 years. Think back to 1995, what do you remember about that year? The show Friends aired it’s second season, the Braves won the World Series,   Netscape debuted an alternative browser to Internet Explorer, and the tragic Oklahoma City Bombing took the lives of 168 people.

So you can probably remember some of those moments but do you recall how you managed your money? For most of you it was likely a mix of cash, paper checks (with handy check registers), and maybe some credit cards. If you’re a budgeter you might have kept your budget on paper or an early Windows computer program.

Fast forward to today and think of all the financial innovations we’ve seen over that time. A lot has changed! Just how much? Here’s a list of fabulous money inventions that didn’t exist in 1995:

Health Savings Accounts (HSAs)

The law approving HSAs went into effect January 1, 2004. Health Savings Accounts allow you to set aside pre-tax dollars for healthcare costs throughout the year. You own the account (not your employer) so you can take any leftover funds with you to your next job. Both you and your employer can set aside dollars in your HSA, and you avoid paying taxes on the money as long as it is used for medical expenses ranging from over the counter medication to doctor’s visits.

Roth 401(k)

A law signed in 2001 allowed for the creation of a different type of 401(k) program starting January 1, 2006. A Roth 401k is an employer-sponsored retirement plan that mixes the benefits of a traditional 401k and a Roth IRA. With a traditional 401k your contributions to the account are tax deductible, and you pay taxes as you withdraw money in retirement. There is a yearly cap on the amount of contributions ($16,500 in 2010).

A Roth IRA is an account not tied to your employer that allows you to set aside post-tax dollars for retirement. You pay tax now and never pay income taxes again; when you retire you simply withdraw the money as you see fit. There is also a lower limit of $5,000 per year (in 2010) that you can set aside for retirement.

Thus a Roth 401k is an employer-sponsored plan that allows you to set aside post-tax dollars for retirement. It is just like a Roth IRA except your employer sponsors the plan, chooses which investments to offer you, and can match your contributions. (Note, however, that employer matching contributions are put into a pre-tax traditional 401k.) 

Online Savings Accounts

Many of our financial innovations are a result of the widespread use of the Internet. Online savings accounts like those at ING Direct, HSBC, and Ever Bank allowed consumers to abandon traditional brick-and-mortar banks that paid little interest on deposits. The online accounts had low overhead for the banks, and when interest rates were higher you could find these banks paying  interest rates in the 4% to 5% range.

Even with historically low interest rates mandated by the Federal Reserve online savings accounts continue to trump most brick-and-mortar institutions. Better interest rates, better customer service, and online account access 24/7 have made these accounts quite popular.

Online Savings Accounts:

• ING Direct
• FNBO Direct
• HSBC Advance
• Ally Bank
• Ever Bank

Mobile Banking

So you’ve got an online savings account and a smartphone. You’d like to access your account information, transfer funds, or check your balance. No need to go to your old brick-and-mortar bank or look at your paper check register. These are modern times and mobile banking is a reality! Open up the browser on your phone, go to your bank’s website, and login.

Mobile Banking:

• Bank of America
• Citibank
• Chase
• Wells Fargo
• USAA

Peer to Peer Lending

In the past if you needed to borrow money you had to deal with a banker or loan shark. If you wanted to consolidate your debts into one payment while lowering your interest rate you didn’t have many options.

Today with services like Lending Club and Prosper you can go online, create a loan request, detail why you need the funds and how you have the funds/income to cover repayment, and wait. Individuals, not banks, will assess your loan’s risk and lend you money. There are thousands of success stories of individual’s consolidating credit cards at 30% to 15%, and paying the loan off on time.

Another service, Kiva, allows individuals to lend money to individuals in developing countries. Generally the loans are very small amounts of money, so this sector is called micro finance. You would be surprised what a $50 loan to buy some livestock can do for the livelihood of someone in a developing country.

Peer to Peer Lending

• Lending Club
• Prosper
• Kiva

Peer to Peer Payments

In the past you could send money directly to another person’s bank account via a check, handing them cash, or (for a hefty fee) through a wire transfer. All three have downsides– delay in payment, security, and cost.

Now you can go online and send money immediately to another individual for almost nothing. Websites like PopMoney, ZashPay, and Revolution Money Exchange will let you send money with your phone. The person receiving the money also have to an account with the service, but that seems to be the only catch. And it sure beats PayPal’s fees!

Peer to Peer Payments

• PopMoney
• ZashPay

Rewards Checking Accounts

This is one of my favorite recent innovations. As interest rates on online savings accounts dropped banks fought to gain customers back by offering eye popping rates with certain catches. My bank offers a 3.61% interest rate on funds up to $25,000 if you do the following each month: have 1 direct deposit or automatic bill pay, swipe your debit card 10 times, and receive your statements online.

The terms change from bank to bank. I’ve seen deposits up to $50,000 get the rewards interest rate with requirements of swiping your debit card 12 times per month.

At a time when online accounts are paying 1% to 1.5% on deposits this is an amazing deal simply because most people won’t have to change their spending habits to get the rewards.

Online Personal Finance Software

No more paper check registers. No more paper budgets. You can even abandon Excel spreadsheets if you so wish.

Online personal finance software like Mint and Yodlee will import your transaction history from your bank accounts and credit cards to create a summary of your spending habits. You can use that data (in handy and easy to understand graphical form) to create a budget.

To top it off the websites will continue to track your spending against your budget. As you get close to spending limits on certain categories the services can e-mail you to let you know to stop spending.

Online Personal Finance Software:

• Mint
• Yodlee
• Rudder
• Buxfer
• Geezo
• Money Strands
• Budget Pulse
• PocketSmith

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Home Buying Tips From Our Big Purchase

Home buyers are definitely in the drivers seat in the current real estate market.  We know this because we bought a house for a great deal last week!

Our realtor helped us find a good deal on a short sale that was about to go into foreclosure; so the whole home buying process had to be expedited to beat the foreclosure date.  In just over two weeks time we made an offer, got financing, had the deal almost fall through, and then finally closed on the house.

It’s been quite an emotional roller coaster ride; the decisions, disappointments, and excitement have been pretty exhausting but we’re happy with the outcome.  It’s too bad that the selling family found themselves in such a bad situation financially but it seems to have worked out for the best; the owners avoided foreclosure, the bank got (some) of their money back, and we got a great deal on a house.

We’re really greatful to the bank that did our financing for fast tracking our loan processing to meet the deadline, as well as locking us in to some of the best mortgage rates we’ve ever seen.

You’ve probably noticed that with the exception of the new bank account overdraft rules and two reward cards articles, the best Blue Cash rewards and our credit card rewards, all we wrote about last month were home buying topics.

Here’s an overview of the home buying tips we’ve picked up over the last few weeks:

Mortgage Rates

• How Your Credit Score Impacts Interest Rates
• How to Find the Best Mortgage Rates

Home Loans

• Home Loan Closing Costs
• Home Loan Documentation Checklist
• How Much House Can You Afford?

Home Improvement

• Home Inspection Services Can Help You Sell
• How I Find Local Contractors on Angies List

Home Buyer Tips

• 5 Good Reasons Buying a House Requires Planning
• Wire Transfer Lessons for Home Buyers

Coming up this month we’ll have more to share about what we learned in our process of buying a house.  We’re going to be doing a lot of work to the new house before we move in so I’m sure I’ll also have tips on home remodeling. 

Since our current home is still on the market, we’ll also cover the topic of selling a house, wish us luck!

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