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

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.

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Post from: EveryJoe

Making Home Affordable Gets Upgrade

Who qualifies for the new student loan debt program?

Those with lower incomes qualify for this student loan debt program, which allows you to make payments that are around 10% of your monthly gross income. In order to qualify, you have to have student loan debt of at least 1.5 times your your gross income. (This means I don’t qualify.) The loans included in the plan can be undergrad or grad. Professional job training certifications are also included.Your Stafford, Grad PLUS or consolidation loan of these programs are eligible. A parent PLUS Loan is not eligible. You can include old loans in this program.

For those who are having a hard time finding a job, or for those with a lot of debt relative to their income, this might be an elegant solution, one that works better than forbearance or deferment. One of the bonuses is that if you go into public service, what is left after 10 years is forgiven. If you choose the Income Based Repayment Plan, and you still owe after 25 years, that remainder is forgiven as well.

Here is an example chart of what you might pay, depending on your income and the size of your family (source: studentaid.ed.gov):

Drawbacks to the Income Based Repayment Plan

As you might guess, there are some downsides to this plan. While it can make meeting your obligations a little bit easier, there is a price to pay — in the form of increased interest paid over the life of your student loan debt. With a reduced payment, you are spreading your obligation out over a longer period of time. This means that you will probably pay more interest over the long haul. Most student loans are repaid over a period of 10 years, so that means extending out 25 years could mean a great deal of difference, even if you get the remainder forgiven.

You should also realize that you will have to submit annual documentation. This means that you have to maintain a low income in order to renew at your low income payments. If you fail to provide documentation, your payments will return to a standard repayment amount. Most lenders will probably send you reminders about renewing your documentation.

For those having difficulties due to the economy, this might be just the thing. However, it is a good idea to pay more when you are able to. Extra payments toward the principal should begin as soon as you can manage. In the end, the student loan industry is making money off of you, and the interest is money you could be using for yourself.

What do you think of the Income Based Repayment Plan for student loan debt?

Post from: EveryJoe

Help for Those with Student Loan Debt

1. A lower interest rate would mean less money paid over all.
2. If I kept a 30-year mortgage, my monthly payments would be much lower. I could invest the difference.
3. I could refinance to a 20-year mortgage or a 15-year mortgage, gaining equity faster and paying less interest overall.
4. On the down side, I might have to pay loan origination and other fees, depending on who I refinance with. (Prepayment penalties are not an issue; I won’t have any.)
5. Will I even qualify for a mortgage refinance? We did just buy a car, and we’ve only been in the house for a year and half.

Refinancing: Rule of thumb

The rule of thumb on refinancing is that you should refinance when the going mortgage rate is at least 1% below what you are currently paying. And with rates where they are at, we’re pretty close to that. Our rate is 6.02%, and last week’s rate was 5.04% for a 30-year fixed. 15-year rates are even lower. So it’s looking like it might be a good time refinance. Unfortunately, we haven’t been in our home very long (about 18 months) and we just bought a car. We may not get approval.

But I’m going through the checklist anyway. I want to see if refinancing would be a good idea, so I’m doing my research on refinancing, and on our situation. I’m really liking the 20-year mortgage thing. Using a mortgage refinancing calculator, I discovered that if we get a 15-year fixed mortgage, we would be paying about $200 more per month with a 4.86% interest rate, but save about $19,000 in interest. With a 20-year fixed mortgage, at 4.96% interest, we would actually be paying about the same amount as we are now. And we’d save more than $16,000 in interest. I’ve been leaning toward a 20-year lately, because I don’t know if I want to add another $200 obligation on top of that new-acquired car payment.

Fees and the erosion of refinancing savings

Of course, if there are fees to pay, the savings will be eroded. I think, though, if I call around (especially to the credit union we belong to), I could probably get away with avoiding loan origination fees, appraisal fees, credit check fees and documentation fees. Some of the local banks are really looking to attract business. And even with paying some of the fees, we’d still be saving thousands over the life of the mortgage.

Of course, we still have to get approved. But I think I’ll at least go talk to someone about it. After all, these rates are a once-in-a-lifetime chance.

What do you think? Is now the time to refinance?

Post from: EveryJoe

Is Now the Time to Refinance?

Answer: $9,718.49

To arrive at that figure, CNNMoney.com took the total of the bank bailout, $700 billion, and added that to the proposed stimulus spending in the House of Representatives bill, $819 billion. That totals $1.519 trillion.

We then divide that number by 156.3 million, which was the total number of U.S. filers in 2008.

So: $1.519 trillion divided by 156.3 million equals $9,718.49 per U.S. taxpayer.

Now, this figure only includes the latest two large economic stimulus bills (the one in Congress now and TARP passed last autumn). The real number spent on economic stimulus measures so far — most of it benefiting banks and some of it going to pay for executive bonuses and perks — is something right around $7.2 trillion. And that’s without the economic stimulus bill currently being considered. So, with a little quick and sloppy math, you can take that $9,718.49 and multiply it by seven and get pretty close with this estimate: If all of the economic stimulus spent so far had been giving to taxpayers, each would get right around $68,000.

How much could you do with $68,000? You could pay down debt, set money aside for savings, and do some consumer spending. (Of course, part of that stimulus is the money from the tax rebate received, so I suppose you can subtract the money you got last spring from the total.) The benefit increases in number slightly if you look at households instead of taxpayers: According to the Census Bureau, there are about 126 million households (as opposed to 156 million taxpayers).

What’s the excuse for not splitting the money amongst taxpayers?

Even though it is obviously too late to recall the trillions spent already, close to $10,000 would be quite helpful. But we won’t get it. CNN Money also answered the question regarding why taxpayers will be lucky to see only the possible tax cut included in the current economic stimulus bill:

But the government is looking to have that money get spent and to have it multiplied somehow. Our economy is based on people spending money. So people saving money doesn’t help.

And there you have it: Instead of helping us completely makeover the economy, our leaders are set on keeping the current model of growth through (unsustainable) debt-fueld consumer spending. Personally, I find it heartening that more Americans are becoming interested in saving. Also, it is worth noting that paying down your debt isn’t any more helpful to the economy, either. Although I contend that if more Americans were able to pay down debt, it would prevent some banking problems through fewer defaults. It’s sort of a trickle up effect.

Of course, just giving us all between $15,000 and $50,000 apiece to begin with would have been cheaper. We could have paid down credit cards, made a big enough mortgage payments to qualify for refinancing and loan modifications, and maybe even bought cars (you know, a couple thousand down and then 72-month financing). All of this would have freed up all sorts of resources for us to be spending again — just like the government wants.

Now, don’t get me wrong: I’m not a big fan of any bailout. But I do wonder if — since the money is going to be spent anyway — it would be less wasted coming back to us rather than going to fat cats.

What do you think? Should the bailout money be given to taxpayers?

Post from: EveryJoe

What If The Bailout Went to People Instead of Banks?