Tuesday, July 26th, 2011
If you’re a newcomer to sorting out your personal finances, then you may find yourself perplexed by the amount of jargon that appears on the advertisements and websites of banks and other financial institutions. You might do a web search or use a dictionary to find out what all of these financial terms really mean, but could still find you’re still muddled by the lack of decent explanation. If you still think you need some help, then take a look at this handy list of financial terms.
Collateral is used to describe an object of high value that is used to guarantee the repayment of a loan. If repayments are late, or the agreement is defaulted, the collateral is taken in place of the repayment. Amongst the most common types of collateral are people’s houses in regards to their mortgage payments, or their cars if ‘part-ownership’ deals have been made. Therefore, mortgages are amongst the most common loans with collateral. For some of the top rates on mortgages, take a look at NatWest.
Secured and Unsecured Loans
A secured loan is one that has collateral back it up in the event of default, they usually have lower interest rates due to the fact that if payment isn’t made the lender has the ability to take ownership of the collateral and sell this to make up the money that they are still owed.
Accordingly unsecured loans are Loans that don’t have collateral. Instead they charge much higher interest rates so that if the repayment is unable to be made, the lender will already have received back much of his original capital and therefore make the smallest loss. Alliance and Leicester is provides some of the best rates on loans available from the reputable high street banks. Also, take a look at ASDA Finances for low rates on both secured loans and unsecured loans.
Equity refers to the monetary value of a property or business after the amount that is still owed on the loan originally used to purchase it is taken off. Most commonly that loan is the mortgage on someone’s house, which means the equity is the part of the house that is owned directly and solely by the individual and not the bank, or mortgage lenders. The more money that a person pays towards their mortgage then the more equity that they are considered to have.
Equity, therefore, is linked to collateral in as much as it is the equity that an individual holds on their house that is considered as the collateral in mortgage agreements.
Defaulting is when an individual is unable to fulfill their obligations in regards to a financial agreement. Simply put, if you are unable to meet the payments of a mortgage, or of a loan, then this is considered defaulting. In regards to the current global credit crunch, the problems are simplistically assigned to large numbers of people defaulting on their mortgages in America. This was due to certain financial institutions taking the risk of agreeing mortgage terms with people who would not certainly be able to meet the terms of their mortgages.
These are just a few of the simplest terms that are found when addressing personal finance, particularly in regards to loans, credit cards, bank accounts, and mortgages. It is important to be closely familiar with them when dealing with anything financial, as slight misunderstandings can have incredibly grave consequences.
Monday, February 22nd, 2010
When we apply for a mortgage we should always have some idea as to how much we can afford to borrow, and our capacity to repay the mortgage. Knowing how much we can afford is vitally important because nobody would like to lose their house or investment property to foreclosure. When we ask ourselves the question of ‘how much can I borrow for a mortgage’ it will be highly dependant on two major factors:
1.) The interest rate charged on the mortgage
2.) The amortization, or length, of the mortgage.
When it comes to lenders or banks deciding upon the amount and rate of the mortgage loan, they will certainly look into the financial background of the borrower.
Lenders are typically looking to satisfy themselves of the Three C’s of credit – Including the capacity to repay the loan, along with the credit history and the character of the individual. These factors can be determined initially by looking at the credit score, and secondly by calculating several ratios before the determination of how much credit they can grant to the borrower.
The Real Cost of A Mortgage
When one decides to buy a house, there are several payments that must be paid on time in addition to the actual mortgage payment. These other payments should always be included when we ask ourselves the question ‘How much can I borrow for a mortgage’?
Such additional payments consist of home owners insurance, property tax and home owners association fees. When these are all added to the mortgage payment, they comprise a more realistic cost of home ownership. In addition, add this to your other anticipated monthly expenses and this is one of the ways to estimate how much you can really afford when you apply for a mortgage.
Private Mortgage Insurance – PMI
This might be another expense that could alter how much mortgage we can afford. Private mortgage insurance, also known as PMI; is an additional cost that must be added if you are not able to afford 20% of the homes price paid as a down payment. In such a case, you will need to purchase private mortgage insurance in order to protect the bank’s investment in your high ratio mortgage.
The front and ratio is the comparison between the monthly mortgage cost-which includes insurance, real estate taxes, private monthly insurance with your total monthly income. Generally mortgage costs are given to make up between 26% to 29% of your monthly income, in this case your monthly maximum repayment amount would be $840. This is another analysis you can use in answering the How much I can borrow for a mortgage question.
When your total income is compared with your total debt payments, this is called back end ratio. This, more comprehensive, ratio includes credit card debt and college loans, and any other debt you have. It can make a total of up to 33 to 40% of your income.
For example, if your bank sets 35% as the limit, and you have a monthly income of $3000. In this case your total debt paid in a month would be $1,050. If you pay $400 as a monthly student loan, you would then have a maximum of $650 left from your income which can be used to repay the mortgage loan.
If you have a good credit score, the banks may increase the limit of the above ratio calculations because your history of repayment cements the bank’s faith in your credibility. Once the ration is determined, all the aforementioned characteristics and calculations help both the borrower and lender in deciding how much credit is really affordable for the borrow.
As you can see, answering the question ‘How much can I borrow for a mortgage’ is not as easy as we might think. There are many variables that lenders take into consideration and we must fully understand those variables in order to determine how much mortgage we can really afford. It’s just not as easy as some online mortgage calculators would have you believe!
For more information on Mortgages, check out my Mortgage Survival Guide For the First Time Homebuyer!
Wednesday, July 16th, 2008
How Long Will Economic Recovery Take?
As troubling as these times look, we all assume that eventually things will change and the economy will once again be robust, financial markets will stabilize, and commodity prices will revert to the mean.
In the mean time, however, many financial pundits are taking their best guess as to how long the recovery process will take. We are constantly barraged in the media with a mixed bag of opinions, all of which are given without request mind you, and all trying to influence government policy makers to either reign in pricing or make borrowing money easier.
Will We See Stagflation?
The puzzling duo of slow growth and high inflation is extremely troubling for policy makers because combating one ailment only serves to exacerbate the other. A true economic Catch-22 if you will. It is widely thought that the central banks will leave the overnight rate unchanged until year end as a tightened credit policy may send the economy into a severe downward spiral.
The current state of affairs has even the most seasoned economists scratching their heads:
“That’s the dilemma that rapidly rising high oil prices create for central banks everywhere. It boxes them in,” said Douglas Porter, deputy chief economist with BMO Capital Markets.
“It has the nasty side-effects of crimping growth and driving up inflation. This is like a mini-version of what central banks faced in the 1970s when oil prices spiked.”
The era that Porter speaks of was marked by what has since been termed stagflation – a persistent period of economic stagnation and high inflation.
The Numbers Tell The Story
In uncertain times like these, it is even more prudent to look at the hard data to provide the “real” truth behind the economy. The following are sets of numbers that help us to understand the effect that skyrocketing energy prices are having on consumers:
- Consumer Prices were ups 1.1% last month – The largest monthly increase in over 25 years!
- Energy prices are up 6.6% since last month.
- Inflation adjusted average weekly wages dropped 0.9% last month. This was the largest drop in wages since 1984.
- Consumer inflation is up 5% over the last year – The highest since 1991.
- Airline prices were up 4.5% in June – The biggest one-month jump since early 2000.
- Vegetable prices were up 6.1% in June – The largest monthly increase in three years.
What Can Investors Do?
In any inflationary environment the common practice says to keep existing outflows down, skip new large expenses, and increase your emergency savings. I would like to personally add that we should continue to invest in equity markets as long as we have time on our side (7-10 years).
Increase emergency funds and review life and health insurance.
The 3-6 months’ worth of expenses that advisors suggest we keep stashed away in liquid assets such as fixed deposits or a high interest savings account could be increased.
Life and health insurance should be reviewed and could be topped up with low-cost term insurance if necessary. Shop around for no-obligation insurance quotes. InsureMe.com offers quotes on all types of insurance and are very competitive.
Prepay your mortgage.
As mortgage and interest rates may climb higher, prepaying your loans will give you a guaranteed return on your investment equal to the interest rate on the loan. Moreover, no single investment option is likely provide guaranteed returns greater than the rate of interest on your mortgage. In addition, the psychological satisfaction of reducing your overall debt can trump any financial return. This is especially true for the conservative investor.
If you are concerned about rates increasing, you might want to lock in the interest rate on your mortgage with a fixed rate loan. If you have a good credit score, banks will likely really want your business as lending regulations are tightening. This would be a good opportunity to have a service like LendingTree.com working for you to get the best rate.
Continue to invest in stocks.
The only opportunity that we have to combat inflation is to investing in equity. Carry on with your stock investment strategy and take advantage of buying opportunities in great dividend growth stocks. For the moderately conservative investor, seek out large cap stocks that are trading at least 30% off of their 52-week high and have stable earnings as they are likely to rebound first.
If you want to pick up stocks, invest in stages and go for value dividend growth buys. If your time horizon allows, a great buying opportunity may be upon us. Remember, history is on your side.
Diversify in precious metals.
While Gold and Silver are at high prices, some advisors still recommend that you invest 5-10 per cent of your portfolio in gold exchange-traded funds and gold mutual funds. Their reasoning for this suggestion is that, historically speaking, periods of high inflation result in a surge in gold prices.
What are your plans for this economy? Are you buying, selling, or staying the course?
Friday, March 28th, 2008
I have mentioned in previous articles and on my About Page that I like to use my credit card to manage my monthly cash flow.
Just like mortgages can be used to your advantage, credit cards are another debt tool that can have a positive impact on your personal finances. As with those other tools, credit cards just need to be managed effectively.
Credit Card Rewards
We all know that credit card companies offer various reward systems that are designed to encourage use. To the average person, these are effective in creasing spending and making the card companies money. How do I know that? It’s quite simple. If these reward systems didn’t increase usage and profits, the card companies wouldn’t have them. They are in business to make money…period.
These reward systems can be utilized to your advantage and actually save you more money than if you purchased your item with cash, if you’re smart!
Cash Back Rewards
Cash back rewards are a favorite because of their flexibility and ease of understanding. Other types of “points” rewards systems can be obfuscated with black out dates, minimum redemptions, and other “fine print”.
I would highly suggest finding a credit card with a cash back rewards feature. This will allow you to utilize the rewards as you see fit and prevent any headaches from restrictions of use from other point systems.
How To Use Credit Cards To Manage Cash Flow
One reader has suggested what I believe is a very effective strategy for utilizing credit cards to manage cash flow and increase profits. It is designed to work very effectively if you have the will power to manage your credit wisely and pay your credit card balance in full each month.
Here are the steps to set it up:
1.) Set up your main chequing account with a high interest provider.
(I prefer ING Direct because of ease of use and low fees: Sign Up for ING here.)
2.) Have your employer directly deposit your pay into that high interest account.
3.) Find a good credit card that suits your needs and offers cash rewards.
(You can use this no-cost Credit Card service to find the card that is right for you)
4.) Use your cash rewards credit card for all of your monthly purchases.
(You can even set up your utilities and mortgage to be paid with your card in some cases)
5.) Pay your credit card bill in full from your checking account when it comes due.
Why This Works
This concept works very well because it gives you a full 30 days of interest earning power from your bank account every month before your credit card bill is due. This “float” can add up to hundreds of dollars per year in earned interest and does not cost you one extra penny.
Of course, you must be diligent in paying the bill off as soon as it is due – no earlier and no later. You need to leave it until the last day so that you earn the most interest on the money in your account, but you don’t want to be late or you will be paying those pesky high interest credit card rates.
The bonus to all of this is that you are also building up a cash reward stash that is usually paid on an annual basis from the card company. So, on top of earning extra interest each month from the high interest account, you will also be earning cash back from your credit card purchases.
Many credit cards offer 1% cash back and some even offer 2%. Depending on your spending habits and how diligent you are with your credit card purchases, you can rack up several hundred dollars in cash rewards over the course of a year as well.
This strategy should only be applied if you have a strong command of your spending. However, it can also help you to stay on budget because many card companies offer an online service that allows you to download your credit card statement directly into financial software like MS Money or Quicken.
How do you use your credit cards? Do you have any tips or tricks you would like to share?