EveryJoe » mortgage-loan

When an ARM Might Be Right for You

Miranda Marquit — Thu, 06 Aug 2009 17:32:19 +0000

Ever since the mortgage crisis, we’ve heard a lot about how terrible adjustable-rate mortgages (ARMs) are. And, truly, they can spell a great deal of trouble for those who use them unwisely. But, are ARMs really the root of all mortgage-related evil? With the interest rates on ARMs back below the rates offered on fixed-rate mortgages, some are taking a tentative look at ARMs, and considering the savings they can enjoy with a much lower mortgage interest rate. But be careful! In one, five or seven years, the rate re-sets, and you could find yourself with an unaffordable mortgage payment.

Who might benefit from an ARM

There are those who can benefit from an ARM. These folks include:

Those who know they will move before the re-set in five or seven years.
Those who want to refinance to a lower rate from their fixed-rate mortgage — and who plan to move before the re-set.
Those who can afford the likely mortgage payment on the higher rate, but who want the interest rate savings.
Those with a large down payment, and with a plan to aggressively pay down the principle, so that they will qualify to refinance to a fixed rate before the mortgage re-sets.

As you can see, there are a lot of “ifs” to getting an ARM. While the interest savings can be rather significant over the initial period of the loan, it is important to consider the risks and your personal finance situation. You should not get an ARM if the only way you can afford the mortgage is if you have the lower monthly payment offered to you by the initial rate. Additionally, if you can barely afford the payments now, don’t rely on the prospect of a raise in the future to “save” you when the mortgage re-sets. And realize that even the best-laid plans to move or refinance can go awry (as thousands found it in the last two years).

Would you consider getting an ARM?

Image source: sxc.hu

Post from: EveryJoe

When an ARM Might Be Right for You

Making Home Affordable Gets Upgrade

Miranda Marquit — Thu, 02 Jul 2009 16:17:12 +0000

A few months ago, President Barack Obama announced a foreclosure prevention plan called Making Home Affordable. The plan included provisions for those who wanted to refinance, but couldn’t because of their loan to value ratio. Refinancing would be encouraged for those who had a loan to value ratio of between 80% and 105%. The idea was to help those whose home values have dropped in response to housing market troubles.

Unfortunately, the program has been seeing limited success. It relies on voluntary help from mortgage lenders, and it excludes those with even higher loan to value ratios. Yesterday Obama made a move to expand the Making Home Affordable program. Now, those with a loan to value ratio of up to 125% are eligible. There are also continuing incentives to encourage mortgage lenders to deal with homeowners.

As far as the housing market is concerned, this new move is unlikely to have a huge impact immediately. It probably won’t even arrest falling home values, or do much in terms of stabilizing the overall housing market. But it does have the potential to help prime borrowers who are looking to refinance to a lower rate. Mortgage interest rates are still relatively low, and refinancing could save folks who made good homebuying decisions a great deal of money.

It even benefits people like me. I bought my home two years ago with 5% down and a 30 year fixed rate. Obviously, I haven’t had time to make up a lot of ground in terms of home equity. My home has lost some value in the last two years, and I have a loan to value ratio of about 94%. (The new rules don’t change my eligibility.) We can easily afford our mortgage payment, but I wouldn’t mind if I got an interest rate that is 1 percentage point lower. Plus, there are places in town offering no-fee refinancing. We could refinance to a 15-year loan and only pay $200 more per month, saving us a great deal over the long haul.

Image source: woodleywonderworks via Flickr

Post from: EveryJoe

Making Home Affordable Gets Upgrade

Credit: Harder to Come By

Miranda Marquit — Sat, 06 Jun 2009 13:02:54 +0000

Even with optimistic prognostications for economic recovery pouring in (thanks largely to yesterday’s payrolls report), don’t expect credit to be much easier to come by. The credit market has been heavily damaged, and financial institutions are not likely to forget that fact anytime soon. Indeed, credit has been tightening, and it is not likely to loosen for quite some time.

For those looking for a 0% balance transfer credit card, the news is pretty bad. You are unlikely to find a good deal on a credit card, and the debt management methods that usually follow such a course are likely to become less effective. Indeed, the tightening of credit card availability is likely to be further exacerbated by the recently passed Credit CARD Act of 2009. While the intentions are good, and many of the reforms are sorely needed, credit card issuers are likely to begin tightening their requirements, raising their fees and slashing rewards programs.

Getting a loan with the tighter credit requirements

You will still be able to get a loan, even with the tighter credit requirements. However, you may have to work a little harder for it. Whether you are trying to buy a car or purchase a home, here are some things to keep in mind:

Down payment: The bigger your down payment, the better your rates — and your chances of getting approved in the first place. The larger your down payment, the smaller the amount being financed. And that is in your favor.
Higher credit score: The credit score you need just to get approved for a loan has gone up. It is more difficult to get a bad credit loan, especially for a house. If you want approval, you need to work to improve your credit score. A higher score will also mean a lower interest rate.
Income documentation: While it may not be terribly necessary for an auto purchase right now, income documentation is being emphasized more for a home mortgage loan. If you want to buy a house, the days of using unverified income are over. (At least for now. There’s a good chance that in 15 years or so things will be good enough that this whole messy cycle will repeat itself.)

This means that you need to prepare better if you are planning to make a large purchase on credit. Do what you can to improve your credit score, and save up money for a down payment. Those who are prepared are likely to still find credit at good rates. But the unprepared will either be rejected outright or will have to pay a premium to get approval.

Post from: EveryJoe

Credit: Harder to Come By

Rich In The Military

Miranda Marquit — Wed, 01 Apr 2009 10:44:16 +0000

This is a guest post from Matthew R. Bader, 1st Lt USAF. Be sure to share your thoughts and perhaps express your gratitude for his service to our country in the comments.

I think that I am rich. How can this be you ask? I am in the military, I am only 26 years old, I haven’t started my own business, I don’t work on Wall St, and I am definitely not featured on the cover of Forbes. I consider myself rich because I do not ascribe to the conventional definition of what being rich is. I have become rich while serving only a short time in the military through the combination of one very simple action and a unique mentality surrounding money and wealth. What is this very simple action? Well if I had to put it as simply as possible I would define being rich as “keeping more than you spend.” Wow. Very anticlimactic I know. But if you think about it, when you keep more than you spend you are, in essence, rich. It then becomes a matter of how rich you are and how long it will take to reach your financial goals.

The statement “time is money” represents one of the greatest truths. We really only have one currency and that currency is our time on this earth. If you took all the money you had and cut off all sources of income, how long could you maintain your current lifestyle? Is it 1 year, 2 years, 30 years? When you view money as a personal stockpile of time it changes how you think about it. Your values are reflected in how you spend your time. There are many people who are consumed by making more and more money, only to spend what they make on ‘things’. I like nice things as much as the next guy, but I think the real joy in accumulating wealth is building up that personal stockpile of time to do the things you truly want to do. Like spending more time with family, seeing different parts of the world, giving back something to this earth that stands the test of time, and improving as a person. Can you begin to see the difference between my definition and the conventional definition of being rich?

What does this have to do with the military? Although this outlook is not exclusive to military members, it serves as a crucial foundation that allows them to most effectively exploit the benefits of being in the armed forces while minimizing some of the negative aspects. Being in the military has its unique challenges, but given the recent economic condition of our country I think it is appropriate to first point out one of the greatest benefits. When you are in the military you are basically recession proof. While you watch the unemployment numbers climb on major media outlets your check from Uncle Sam continues to roll in. This is an extraordinary privilege of serving in the military. Couple this benefit with the fact that your salary is projected out through each progression within your career and you have something that your friends in corporate America do not have. You have an unusually secure and steady income that is projected out significantly farther into the future than most other sectors of our economy.

Service men and women can exploit this benefit by creating a realistic budget that allows them to adhere to my definition of being rich: keeping more than you spend. Go to Mint.com and consolidate all your financial accounts and holdings to start gaining valuable insight into your money behavior trends. When you have a budget and understand where your money actually goes every month you will be amazed at how easy it is to start keeping more than you spend. Once you keep more than you spend the military compensation makes it very easy to speed up the saving snowball effect to have you keeping more and more. The members of the Armed Forces generally get raises every year. Each year I have been in the military Congress has passed a roughly 3% increase in pay. Couple those raises with your advancement in rank raises and you are getting very consistent increases in income. If you lock in your standard of living to a level that is similar to when you first began creating positive cash flow, it is easy to see how you can continue taking in more and more as the years go by. Once you get past the barrier of keeping more than you spend the only way to go is up.

The benefits surrounding home ownership that are accessible to those in the Armed Forces are another area to take advantage of. Military members aren’t paid a straight salary like many of their civilian counterparts. They are given allowances for housing and subsistence. The key word to focus on is allowance. These allowances are not taxed as income by the government, yet they are recognized by mortgage lenders as income. This allows military members to show very little income to the IRS while still showing enough income to obtain a mortgage to purchase a home. Providing greater access to home ownership while simultaneously minimizing the tax burden is an amazing benefit, but the government went a step further when they passed the Serviceman’s Readjustment Act in 1944. This act was the beginning of a benefit extended to veterans known as the VA loan. The VA loan is a mortgage loan that allows military members to finance up to 100% of the sales price of the home for a fee around 3% which is added to the principle of the loan.

Many people in the military avoid buying a home. With the average military member moving every 2-5 years, they are often bombarded by advice telling them that it is not smart to buy property if you aren’t going to live there for more than 5 years. I couldn’t disagree more. The first thing I did when I got stationed in New Jersey was go out and sign a lease to a nice one bedroom apartment for $1220 per month. After feeling the pain of throwing money away on steep rent for a few months, I threw together a quick excel sheet modeling how much I would spend on rent over the next 3 years assuming the rent did not go up (which rent always does). I was appalled to see that I would be out at least $43,000 over the next three years on rent alone. My thoughts were that I would have to lose more than $43,000 on purchasing a condo to have made a bad decision on buying a home. That was all the reasoning I needed to make the jump.

Many people also fear being so highly leveraged with the VA loan, especially since we have seen the results of being over leveraged in the current economic crisis. My outlook is that you only truly lose (or gain for that matter) when you sell. If the value of your home has decreased don’t sell it until it rises again. We have already emphasized the enhanced job security you enjoy by serving our nation, so why not use it to your advantage with property ownership as well. You have a steady income that allows you to continue paying your mortgage even if the market value has declined. If you are forced to relocate don’t fret, you now have your first investment property. Rent the property and enjoy some additional income. I am not saying to go out and mindlessly purchase a home with zero money down speculating that it’s value will go up. We have seen how that scenario has played out. Do your research and become knowledgeable about buying a home. These are generalized and overly simplified suggestions but the point is that property ownership has incredibly unique tax advantages and wealth building opportunities. Serving in the military opens the door to property ownership. Be smart and take advantage.

Serving in the Armed Forces has its benefits, but it has its disadvantages as well. How can one get the most out of an otherwise unpleasant experience? Now more than ever our servicemen and woman are tested by an incredibly taxing operational tempo overseas. While nothing can compensate for time away from loved ones and friends, it is important to ensure that you are continuing to strive towards meeting your financial goals by building wealth while overseas. When you ask people what their biggest expenses are over a lifetime they typically list their home, cars, and food. However, depending on your income, one of your biggest expenses is likely the tax that you pay to live in this country. The great thing about being deployed is that all your federal income earned in the combat zone is tax free. Legal tax avoidance is always great, but a lesser known and equally impressive program is the Military Savings Deposit Program. Military members deployed in combat zones, qualified hazardous duty locations, or certain contingency operations may deposit all or part of their unallotted pay into a DOD savings account up to $10,000 during a single deployment. Interest accrues on the account at an annual rate of 10% and compounds quarterly. If anyone else knows of anywhere else you can legally get a 10% guaranteed return please let me know! Both of these benefits serve as ways to take a difficult situation that many would perceive as a negative and turn it into a positive for creating wealth.

Obviously there are many other benefits and challenging aspects to serving in our nation’s Armed Forces. There are also numerous programs and other strategies designed to help you navigate through your career to achieve your financial goals. Most notably, the virtually unbeatable retirement benefits for 20 years of service. The point of this post is to encourage you to break away from conventional thinking. Don’t view the military as a chapter in your life where accumulating wealth alludes you. Do not make your service to others mutually exclusive to building your own financial freedom. If you take each unique challenge and situation during your career and view it as an opportunity then your only option is success. Change your mind and keep more than you spend, how rich you become in the military is entirely up to you.

The views expressed in this post in no way are endorsed by or reflect that of the Armed Forces. Matt Bader is currently serving in the Air Force and maintains BadskiBlog which can be found at BadskiBlog.blogspot.com.

image source: Matt Bader

Post from: EveryJoe

Rich In The Military

Are Housing Market Troubles Too Much for a Fed Rate Cut?

Miranda Marquit — Mon, 17 Sep 2007 14:49:30 +0000

Many in the mortgage industry, and even some in the stock market, are putting a lot of faith in tomorrow’s expected Fed rate cut. The hope is that, as happened in 1998, the stock market and the U.S. economy with it, will bounce back from the edge of despair. However, the Wall Street Journal points out that this may not be the case:

“The bounce-back in the financial markets is probably going to be smaller than it was in 1998,” when the Dow Jones industrials surged 20% from its close on Oct. 1 through the end of the year, says Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. “We should expect further problems in the financial markets from the housing troubles.”

A Fed rate cut may not be enough to overcome housing market troubles that have led the mortgage industry down. And, while the cut will make getting a mortgage loan more palatable for some, tighter standards may mean that fewer will qualify for the lower interest rates.

And it doesn’t look like the stock market is doing as well as one would hope with such news, either. The Dow is down this morning. But, on the bright side, that means bargain hunters may still be in luck.

Post from: EveryJoe

Are Housing Market Troubles Too Much for a Fed Rate Cut?