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Take Your Credit Seriously

January 29th, 2010 No comments

When the credit markets were functioning, I can’t tell you how many new offers for credit in the mail (0% transfers!!) I received. The odd thing is I am still getting them when you would think banks would have stopped it. One day last week, I got two offers from the same company on the same day. How’s that for coordination?

I don’t necessary want the offers to stop, I like to look at the pitches they come up with. Yes, junk mail is interesting to me. For a time, AMEX was offering me credit and in each mailing, they included a refrigerator magnet. I have about 10 of those. One time in the past, I got an offer that offended me. It wasn’t “0% transfers with no annual fee”, but “5.9% transfers with a $39 annual fee”. Maybe they didn’t like my credit score?

When it comes to credit, I haven’t voluntarily opened a credit card in about 15 years. The same credit card that I have been using for 15 years has the same credit limit when I opened it: $5000. I say voluntarily because when I took out a home mortgage, the broker also signed me up for a credit card (I must have missed that part of the conversation). Watch out for these slips.

The credit offers that are hard to pass up are those store credit cards that you open up when making a purchase. They make it easy and enticing by giving you a 10% break on your first purchase. I was in Lord & Taylor during the holiday season with a checkout bill of over $500. Then, the offer came. Save $50 on your order right now by opening up a credit account with L&T. I politely said, No Thank You.

If you take the offer it’s not saved money, there is a cost here. The cost comes to your credit score since the more credit you take out it can lower your score. If you accumulate too many accounts (even with no balance) this is another nick against your score.  Also, as we have read in the news in the past year, one creditor can change their terms at will based upon the actions you take with other creditors. Be selective in who you chose to open credit with, treat it as though you are building a relationship with the institution.

Also, there can be “payment risk”, because when you open a new account you need to learn the terms of a new account: when to pay it, what the interest rate is, when fees are accessed, as well as going to the trouble of setting up bill payment. I am lazy when it comes to paying bills, I like simplification. The one credit card I use was issued at the same Credit Union where I have savings and checking. It’s a no brainer to pay the bill as I discussed in this post about payments

 

 

 

Categories: Personal Finance Tags:

Integrating Paypal into Your Finances

January 25th, 2010 No comments

Go back in time to 1999. Internet startups were flush, and banking online was a new idea with few implementations. Enter X.com, one of the first virtual only banks. It was cool. Instead of using paper statements and interacting using a phone, you could see your account and manage it using an internet browser.

Security took a back seat, as the company admitted there were flaws. It was possible to link to anyones checking account since all that was required was the routing/account information found on any check. While X.com was floundering, they merged with another service, Paypal.com. Paypal had more mature software and was growing fast. 

The service had two new features, among others: bank account verification which was more secure than X.com, and a secure payment service. One of the innovations of the payment service was that it allowed you to buy products online using a credit card, without giving your credit card information to the vendor. Eventually, X.com was changed into paypal.com and the original plans to become a full service bank were dropped. Ebay later bought Paypal.com.

After years of having a Paypal account, I have settled into using it for a few things. 

  • Using it as a savings account to plan for holiday/gift online purchases.
  • Using it to pay for products I buy on Ebay auctions.
  • Using it to send money to relatives or friends.

A few tips about using Paypal:

  • The money you leave in Paypal is invested in money market funds, so it pays a relatively good interest rate compared to a bank savings account. So, you can get quick access to buy goods online without giving up interest.
  • For personal accounts, you will have to pay a fee to accept money from other people if they used a credit card. Cash transfers between personal accounts are not charged fees.
  • Transferring money from a bank account to Paypal takes a few days. Keep this in mind if you plan to make purchases. 

 

 

Categories: Personal Finance Tags:

Save Money Refinancing a Home Mortgage, Part II

January 16th, 2010 No comments

This is the continuation of the first post. For the calculations in this post, the following loan will be used. If you want to use your own loan information, collect the following information: 

  • Annual Interest Rate.
  • Monthly Payment.
  • Number of Months Remaining: Subtract months you have paid from total months (e.g., for a 30 year loan after 5 years, this works out to 30*12 – 5* 12 = 360-60 = 300).
  • Current Loan Balance – find this on your current statement. 

Sample Loan: 30 year mortgage that has 25 years left to go:

  • Loan Amount: $200,000 
  • Term/Annual Interest Rate: 30 years/6%.
  • Monthly Payment: $1200 (rounded up).
  • Number of Months Remaining: 300 (25 years).
  • Current Loan Balance: $186,000.

The following Yahoo! calculators will be used:

Example #1: Refinance to 30 Year, 5%. 

Input the existing mortgage information into the RC. (Use the values above and input them into the calculator inputs of the same name). For the new mortgage, specify an interest rate of 5%, 360 months. Use the default closing cost estimate of $2500, and origination costs of ZERO. 

The calculator not only gives you the 30 year re-fi, it also provides the new payment for a mortgage modification loan (this is referred to as an ‘Enhanced Refinance’). The 30 year loan saves you almost no money in interest costs, while the mortgage modification saves a lot more: 

  • 30 year loan saves: $64 dollars (new payment: $998 – the lowest payment).
  • Mortgage modification saves: $33,316 (new payment: $1087).

Example #2: Refinance to 20 Year, 4.875%. 

Input the existing mortgage information into the RC. For the new mortgage, specify an interest rate of 4.875%, 240 months. Use the default closing cost estimate of $2500, and origination costs of ZERO. 

The Enhanced Refinance result is not relevant in this calculation.

  • 15 year loan saves: $67,990 (new payment:  1,215 – slightly higher) .

Example #3: Refinance to 15 Year, 4.75%. 

Input the existing mortgage information into the RC. For the new mortgage, specify an interest rate of 4.875%, 240 months. Use the default closing cost estimate of $2500, and origination costs of ZERO. 

The Enhanced Refinance result is not relevant in this calculation.

  • 15 year loan saves: $99,102 (new payment:  1,447 – much higher) .

Summary 

  • The best value is the 20 year re-finance. It saves money and the payment is only slightly higher.
  • The 30 year mortgage modification saves both in total cost and the monthly payment.
  • The most savings is found in the 15 year refinance, at a much higher payment.
  • The 30 year refinance lowers the payment the most, but there is no savings here (actually a loss) if you also add in closing costs. 

Save Money Refinancing a Home Mortgage, Part I

January 15th, 2010 No comments

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As I write this, mortgage rates have come down significantly due to the actions of the Federal Reserve and the U.S. Treasury.  They have come down very fast.  This has created a frenzy in the market. Whenever dislocations in a market like this happen, watch out. There will be many more applicants than mortgage brokers to handle the volume which means that the brokers have incentive to hold out for the borrowers who will pay the most.

As Jack Guttentag writes, pricing is all over the board. Before you call the broker, you should have a good idea that a refinance will actually save you money. Mortgage brokers are salespeople and they are selling you a mortgage, they will often times try to convince you to buy even if it isn’t in your self interest.

In this post I will talk about some things you will want to consider. In a followup post I will go into detail using a sample mortgage and an online calculator.

First, What Your Broker Doesn’t Want You to Know

The mortgage broker doesn’t want to tell you that you should go back to your existing mortgage holder and ask for a mortgage modification. This is as close to a free lunch as you can get in the mortgage market because in addition to a rate reduction, they will keep the existing terms of your mortgage including the term. This means that all the equity you have been building in your payment (the percentage that goes to principal) will be maintained instead of starting over with a new mortgage.

The banks know this is a good deal, so you will likely get a new interest rate above fair market rates. This is OK, you will likely still be better off particularly if you have more years of your mortage paid off already.

Some years ago, I refinanced a mortgage this way. The only thing that changed was the rate (it went down 1%), there were no closing costs at all and the principal was the same (they didn’t roll closing costs into the mortgage). Due to the existing credit crisis, banks may not give these deals anymore so don’t be surprised if there are some closing costs.

Look at Total Cost, Not the Payment

I get annoyed at mortgage brokers who try lots of different schemes to get your mortgage payment down without considering if the mortgage will actually save you money over the entire term of the mortgage. There are a couple of ways they try to do this: offering a mortage at a longer term and rolling closing costs into the mortgage.  If you have paid off 5 years of a 30 year mortgage, a refinance will restart your mortgage back to year 1. Even if your mortgage rate stays the same, the mortgage payment will go down because the term was increased. Closing costs added to the mortgage will not affect the payment significantly since it is amortized over the term, but it increases the total cost of the mortgage.

The broker will try to distract you by giving you an estimate of how long if will take to payoff the costs of the new loan using the ‘savings’ from the lower payment in the new loan. Don’t fall for it. Run the mortgage in a calculator to determine the savings.

Consider Interest Rate and Term

The goal of your refinance should be to reduce the total cost of the mortgage. A loan that costs less will let you keep more money in your pocket. Even if your interest rate drops 1%, you still may not get a new loan that will save you money, if you restart your term. If you are in this situation, consider dropping the term on the new loan. For example, if you are 7 years into a 30 year loan, consider refinancing down to a 20 or 15 year mortgage. This will let you keep all the ‘payment equity’ you have built in your existing 30 year loan. If your interest rate drops and you decrease the term on the new loan, it will be very hard not to save money.

Sorry to give you the bad news, but saving money on your mortgage will likely mean a larger monthly payment. This is easily seen when comparing a new 15 year loan versus a new 30 year loan. The monthly payment needs to be larger on the 15 year loan primarily because you are paying the principal down sooner. The quicker you pay off principal, the less interest that is charged.

In Part II, I demonstrate what was discussed here using online calculators.

Shortcut: Using a Mortgage Factor

January 13th, 2010 No comments

Quick, you want to know what your mortgage payment will be on a $200,000 house at 6% on a 30 year mortgage. This is quite easy using a shortcut that I call a mortgage factor.

Here’s how it works:Take the mortgage amount, drop the thousands (in this case 200). Multiply this amount by the interest rate (in this case 6). And there you go: (6 * 200 = $1200/month).  Believe it or not this will calculate it correctly within a couple of dollars! It also works in reverse, if you only want to spend $1200/month what will be the maximum amount you can borrow? Simply divide 1200/6, and you get 200 (multiply this by 1,000).

This also works for rates of 5% and 7%, but it is less accurate. (Multiplying by 7 will give you a payment that actually is closer to 7.5%; while multiplying by 5 will give you an interest rate that it closer to 4.5%). It can still be useful to give you a ballpark figure.