Sunday, August 31st, 2008
I have recently received a few e-mail comments from readers asking me to expand on my previous article Understanding Mortgages, this article will answer many of the questions that were posed to me in those e-mails.
Mortgage and Housing Markets
Today’s housing market in most of the United States is a virtual candy store for the homebuyer. The sheer selection of properties on the market in most cities allows today’s homebuyer a tremendous selection at prices we have not seen in many years. There is only one problem however - lenders are tightening the purse strings on mortgage financing!
With lenders becoming more and more risk-averse, obtaining a suitable mortgage these days can often be a daunting task. There are numerous types of mortgages to choose from, and because of some previous “shady” lending practices, you need to make sure that both your lender and your mortgage are on the up and up.
With that said, there are several different types and structures of mortgages with various options to consider before committing yourself to such a large obligation.
Once you have settled on a legitimate mortgage with acceptable terms and conditions, there is the issue of the interest rate. Which option you choose will depend on your circumstances, but visiting your lender armed with the knowledge of the basic differences in terms and conditions will give you the confidence to get the best deal.
Here’s a quick guide to some different types of mortgages:
Fixed Rates
With a fixed rate mortgage, you agree with the lender on a set period of time - usually between two and five years - during which the interest will not change. The benefit here is that you will not suffer an increase if rates go up. Similarly, you won’t benefit if rates go down, and the borrower will likely face stiff penalties in order to pay out the mortgage early. As intriguing as a low, fixed rate interest plan may seem, you must check how long you are required to remain with the lender before you can pay out the mortgage without penalty.
Variable Rates
The amount you pay for your mortgage alters in line with national interest rates. Normally, the interest reflects the changes in the base lending rate of the central bank; this is decided by the Federal Reserve whom control the monetary policy for the country. Every time the Fed raises the overnight rate, the lenders eventually follow suit because their cost of funds increases. And in order for the lender to make money there has to be a “spread” between its cost of funds (the rate the bank pays to borrow money) and what the back charges to lend that money to the consumer.
Capped Rates
The idea behind capped rates is to offer the best of both fixed and variable rates. A “cap” is set on the interest so that it will never rise above that level, but if national rates fall, your interest will go down accordingly. The benefit of these is that you know the maximum interest rate that you could end up paying. However, the capped rate is not generally very competitive.
Discounted Rates
Discounted rates will fluctuate in line with the lender’s variable rate, but are obviously cheaper to tempt customers in. After the discount term has ended, the rate will then revert to the normal variable rate.
Banks and companies offering mortgages are now required to supply customers with a key facts document that provides all relevant information relating to the loan, and clearly sets out the total cost of the loan, not just the interest.
What Else Can affect My Mortgage Rate?
Along with the various types of mortgages available, there are a few other things that can affect the rate of interest that you will be charged on your mortgage.
One of the major factors that will affect the rate of interest that a lender will charge for your mortgage is the risk that they perceive they are taking by lending money to you. The major tool that lenders use to judge risk is your credit score. A better credit score will result in a lower mortgage interest rate because you are determined to be a lower risk than someone who has a lower credit score.
Do Your due Diligence
Whichever mortgage you choose, make sure you thoroughly research every option and compare lenders. You are, after all, bound in to the agreement for a long-time, and it’s sensible to make sure you get it right first time as switching lenders can involve hefty penalties. Lenders may have significantly different terms and conditions for their mortgages.
Remember, that it doesn’t matter how low an introductory rate is if it will significantly increase in 6-months or 1-year. Be sure that you read the fine print and calculate the actual costs of the mortgage over the entire amortization period.
There are plenty of great homes out on the market right now and there are a ton of reputable lenders who will be happy to lend money for home purchases. The key is to be knowledgeable and well prepared when applying for a mortgage so that you ensure that you get the best mortgage for your situation.
Happy house hunting!
Posted in Debt | 1 Comment »
Monday, March 3rd, 2008
I’m about to let you in on the secret of how I used my student loans to build wealth. Now, coming from a frugal individual like myself, this secret may shock you.
Are you ready? Do you have your notepad and pen? OK.
I maxed them out.
Yes, that is correct. I completely maxed out every penny that I could in student loan funds. I took advantage of every student loan program that I could find and you should too!
Why You Should Max Out Your Student Loans
No Collateral Needed
The premise behind student loan programs is that the financing institution is banking that your education will allow you to repay the loan at some point in the not too distant future. These programs are put into practice to assist those of us who came from poorer backgrounds as a way to enhance our futures by financing an education. The education is then supposed to lead to a successful career that will allow us to be a contributor to society instead of a drain on society.
This means that your future is all you need for collateral. This is great for students, if it used correctly. When you view student loans in this light, they hold more wealth building power as financial tool of leverage than a mortgage does!
How To Leverage Student Loans To Build Wealth
First off, don’t take my heading the wrong way. I lived rough in college - but I had a purpose!
Most student loan programs, or the ones that you should take advantage of, have deferred payments until after graduation. Essentially, this means that you have access to FREE MONEY for at least 4 years!
*Note: Some programs require minimum - interest only payments.
Student loan money is meant to be used for tuition, books, and living expenses. The first trick to leveraging this student loan money is to ask scholarship or grant money after you receive your loan. I accomplished this by simply approaching the financial aid department at my University for additional funding. I would make an appointment and plead my case days before the semester would begin. It wasn’t often that I received less than an additional $500.00/semester.
So there I was with an extra $500 in free money along with my student loan that would pay for my tuition, books and allow me to live comfortably. This was the beginning of my strategy. Read on to the end of the article to find out how to leverage this money!
Get A Job
Put time and experience on your side.
It is essential that you have a job in college. I know that sounds obvious, but I’m heading in a different direction with it. I don’t suggest working full time or finding the job that pays the most money; I’m suggesting that you get a part-time job in your field of study.
Working at even a menial job within your field of study will at least give you some experience when you head out into the workforce with your hard earned degree. This will often allow you to skip the entry-level positions and actually earn a mid-level salary right after graduation.
The Strategy
Live like a peasant and invest like crazy.
Because repayment of student loans is deferred until after graduation, sometimes up to one year after, it provides the perfect opportunity to leverage free money to your advantage and harvest the growth of investments over a short time period.
As long as you invest the money and don’t use it to live “high on the hog” in your college years, this strategy works. Depending on the investments you choose and their performance, you could graduate with a positive net worth! So, don’t go and blow the money - be smart.
We have all heard the stories of the poor college student living on Ramen noodles and kool-aid. Well, that’s how I did it. Actually, mine was more of a macaroni and cheese and canned tuna - I need my protein!
Anyway, I took all of the money that was left over from my scholarships, student loans and part-time job and rolled it into certificates of deposit that matured in the year I was to graduate. I would have invested in the stock market, had I had the knowledge that I do now.
Hindsight is always 20/20!
This has been the basic strategy of leveraging student loans, if I have skipped over something or if you have any suggestions, please share them in the comments below.
Coming Up!
Find out how I used Credit Cards to my advantage and still do! If you can’t wait for that article, part of the secret is using the right credit card to suit your needs. There is a website that helps you sort through the thousands of cards to find one that suits your needs - you can try out that site for free here.
If you have children that are heading off to college in the next few years I have an even more powerful strategy for you to use. I’ll be posting that article within the next week - so stay tuned!
Posted in Investor Education | 9 Comments »
Friday, February 22nd, 2008
I have received a handful of e-mails lately asking to hear my story about overcoming more than $40,000 in student loan debt to having no consumer debt and a net worth of more than $250,000 in just three years.
The title of this post is rather misleading because I do appreciate the wealth building power of leverage as I mentioned in my article detailing mortgages. Of course, mortgages are financial debt instruments that the vast majority of people require in order to purchase a home.
Why I Use Credit Cards
I also utilize one credit card on a monthly basis. I use a credit card for a few reasons:
1.) It helps me to track my expenses. I simply download my card statements to a financial program such as MS Money and divide my expenses in to categories. If I use my credit card for all of my purchases, it makes analyzing my budget a snap.
2.) It saves me money. Yes, using my credit card saves me money. When I use my debit card, my credit union charges me a fee per use (or more accurately a monthly fee that includes a number of debit transactions). When I use my credit card, the credit card company charges the business where I used my card instead of charging me personally.
Yes, you could argue that it still costs me money indirectly as the business would factor that charge into the price of the product - but please bear with my example.
3.) I receive rewards from the credit card company for using my card. My particular card offers me 2 points for every dollar I spend which, if used for travel, equates to approximately 1.75% cash back - not too bad!
I do advocate the use of credit cards for these purposes if, and ONLY if, you use them for managing monthly cash flow and not for accumulating debt. This means that you must pay off the entire balance each month - no exceptions.
To help you sort through the thousands of Credit Card offers to find one that suits your needs, I suggest using a service designed to match you up with a card that will benefit you and not take advantage of you.
My Stance On Auto Loans
Several folks have inquired about vehicle loans, asking if I own a vehicle and if so what types.
Vehicle loans are the biggest mistakes that I could ever think to make. Not only do vehicles depreciate, but they also require fuel, repairs, insurance and maintenance. There are no two ways about it - owning a vehicle is expensive.
That being said, my wife and I own two 2003 Hondas which we paid for with cash. We purchased a 2003 Honda Civic in the fall of 2005 and a 2003 Honda CRV in the fall of 2007. Yes, I do adamantly believe in purchasing high quality used vehicles that are fuel efficient and known for reliability.
Why Honda? It is simple really. I owned a 1991 Honda Civic hatchback in college and it had over 300,000 KMS on it and ran like a top. I simply filled the gas tank and changed the oil - I was hooked.
This has been a quick outline of my current stance on debt.
I also have no problem advising anyone to take out student loans to invest in themselves and their future. However, you must be careful not to “live too high on the hog” on borrowed money while in college.
Stay Tuned For The Rest of My Story
In a future post, I will tell you how I graduated from college with fewer student loans than most of my classmates and how I managed to pay off the balance within a year after attending my final class!
Posted in Debt | 8 Comments »
Wednesday, January 2nd, 2008
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
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
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.
Default
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.
Posted in Investor Education | 1 Comment »
