Finance

Mortgage Rates Are Down

May 12, 2014 By Twila Van Leer

Anyone who has ever ventured into the world of home buying has learned something about the interest rates that are an integral part of the deal. They yo-yo up and down almost daily. In early May, they hit the lowest level they have been for awhile, at 4.21 percent for a 30-year fixed rate house loan. That was a decline from 4.29 percent the previous week. For a 15-year loan the rate 3.32 percent, a drop from the 3.38 percent of the previous week. The 15-year option is popular for those refinancing existing mortgages.

These rates were the lowest since last November.

The question for most lay folk not privy to the ups and downs of the housing market, the question is: What causes the swings? Why do they rise and fall so consistently and so fast?

Believe it or not, such things as global unrest and a weak U.S. economic recovery from the recent recession are major factors. What happens in Africa and Russia and China sends shock waves into the American economy and affects transactions at the most basic levels. The old saying that it’s a small world is especially true when it comes to the fluctuations in the American housing market.

Negative economic effects in other places on the globe contribute to the ongoing bid for Treasury debt, which drives yields down, with a subsequent dip in mortgage rates as well, financial gurus say. That’s good news for those in the market for a home. The practical effect is a lower house payment. For instance, on a $200,000 home with a 30-year fixed rate mortgage, the monthly payment would be $979 a month at rate of 4.21 percent. At the norm of 6 percent, the home buyer could expect to shell out about $1,200 per month. Though the fractional increases or decreases in the interest rate seem negligible, they make a big difference when you’re making a long-term loan.

There are, of course, other factors at play. Stricter lending standards have to some extent limited the impact of the lower interest rates, according to data compiled by the National Association of Realtors. A high credit score can even the effect. But for those with lower scores, credit is still very tight, the association reports. Many of those who would like to jump into the housing market can’t find financing, despite the attraction of a lower interest rate.

The best solution for those whose credit is marginal is to work on improving the credit score to make themselves more appealing to those who made loan decisions.

Make Your Kids Money-Wise

April 11, 2014 By Twila Van Leer

When you start thinking about the facts of life that your children need to know, remember that money is one of those facts. It’s the rare human being who doesn’t need to know, early or late, how to manage personal finances. And in this case, early is always better.

A foundation in finance can protect your children as they venture into the adult world. For instance, when they come up against the cold hard facts of things such as student loans. The Consumer Financial Protection Bureau estimated in 2013, for instance, that seven in ten college seniors graduating in2012 had an average debt load of $29,400 going into their productive years. More K-12k programs in financing are being offered, but still too many young adults launch themselves into the working world with no idea of what to do with the money they hope to make. Many of them will end up in the financial morass that will affect their well-being throughout their lives.

What to teach kids about money? First of all, you can’t teach what you don’t know. If you don’t feel prepared, learn what you can about budgeting, debt, saving, investing, <a href=”http://www.coolchecks.net/”>checking accounts</a>, etc. Then involve them in discussions and practice of these elements.

Remember that they will pay more attention to your example than anything that you may tell them about money. A bad example will offset any advice you offer. Make them part of family financial matters and don’t let them grow up thinking that their whims and desires cancel out reasonable spending policies. Honest dialogue and consistent example will take care of the first lessons in the fundamentals of money management.

Make your teaching concrete, with an underpinning of the basic principles, as well as the techniques. Encourage them to set money goals, to prioritize wants and to share. The principles, including the truth that you can’t reasonably purchase things you can’t afford without consequences, hopefully will stay with them for life.

Too many modern children grow up feeling entitled and blaming others when things go awry. A foundation of wise money management will help foster honesty and the sense of responsibility that are the basis of sound finances. Ideally applied, it’s the foundation on which a child can learn to handle debt and save something to meet future needs.

Having a little spending money is essential to learning how to manage resources. Ideally, it will be tied to responsibilities. That’s how it works in the adult world. Having a little to spend gives the child the opportunity for practical application of what you’ve been telling them. Resist the urge to micromanage. You won’t be on the spot when they are making those adult decisions. If they make mistakes, point out the inevitable consequences. (They can only spend their money once and when it is gone, there isn’t any more until the allotted time. And make that stick.)

People who have succeeded financially in this world point out that an early start is one of the best predictors of who will make it. Warren Buffett, for instance, started his first business at age 6. If it’s feasible, make opportunities for your children to dabble in finance. A lemonade stand or garage sale will facilitate that.

Talk to your kids about consumerism, impulse buying and the effect that advertising may have on one’s spending. Suggest a “cool-off” period before any considerable purchase to help distinguish between “wants” and “needs.” Being required to wait a month for something perceived to be a “need” may help recast it as a “wants.”

Money is a tool to help achieve the things you desire in life. Ignoring the laws of financial health can have serious consequences. That’s the message your children need.

Don’t Let Lifestyle Inflation Overwhelm Your Finances

April 10, 2014 By Kevin Mercadante

Protecting Your Money So It Can Grow In Value

So often, people watch their careers flourish and their incomes grow – but no matter how fast they do, somehow their overall financial situation seems to go nowhere. Sometimes, it even gets worse. How can that be? It’s called lifestyle inflation, a kind of financial cancer that can render your finances a complete wreck, even as your career takes off.

It’s important to realize that income and net worth are not the same thing. Income is how much you make, but net worth is what you’re left with after all your living expenses are paid. If those expenses are too high, you will never see your net worth rise – and your finances improve – no matter how high your income is. That’s what lifestyle inflation does to your finances. And it’s something we all need to be on the lookout for.

What is Lifestyle Inflation?

Lifestyle inflation has become so pervasive that it even rates a dedicated definition from Investopedia.com:

“Increasing your spending when your income goes up. Lifestyle inflation tends to continue each time someone gets a raise, making it perpetually difficult to get out of debt, save for retirement or meet other big-picture financial goals. Lifestyle inflation is what causes people to get stuck in the rat race of working just to pay the bills.”

That’s the general idea. On a mechanical level, lifestyle inflation looks like higher living expenses, more debt, and very little in savings and investments. You’re in the trap if that combination remotely describes your financial situation.

How Lifestyle Inflation Overwhelms Your Finances

Lifestyle inflation is virtually a default setting. Unless you’re intentional about managing your finances, your living expenses will continue to grow, eating up every extra dollar you earn and sometimes even more.

Have you ever played that game what would you do if you had $1 million? There are different versions of that question, but it comes down to what would you do if you suddenly came into a very large windfall of money? It’s fun to imagine, but if you listen to the answers that most people give you begin to get a solid idea as to how dangerous lifestyle inflation can be.

When confronted with the prospect of coming into a large amount of money, people almost instinctively read off a laundry list of how they would spend the money. Very few ever contemplate how they might save and invest it. In reality, this is what often happens to people who win the lottery or inherit a large amount of money. In short order, they end up broke.

That’s the essence of lifestyle inflation. We all have an almost limitless number of wants in life, and when the money becomes available those wants are magically converted into needs. The difference between wants and needs is more than just semantics. Wants are something that we would like to have – needs carry a certain urgency. The transition from wants to needs often happens as a result of a pay raise, a promotion, or the receipt of a windfall.

The Worst Part – You Don’t Even Know It’s Happening

Most times, you won’t even recognize that lifestyle inflation is taking place. That’s because the whole concept is rooted in emotion, rather than logic.

Let’s say that you get a $10,000 increase in pay. $3,000 will go for income tax and payroll deductions, so you’ll really have only $7,000. You reason that this is the perfect time to replace your old clunker with a brand-new car. You then go from no car payment, to $400 per month. But what the heck, with a big fat raise swinging the monthly payment should be no problem, right?

There’s a good feeling that comes with having extra money. So in addition to buying yourself a new car, you also increase your eating-out from once per week to twice, at an extra $50 per week. You also decided you need to new clothing, and about $1,000 should do it.

Let’s add that up. $400 per month a new car payment comes to $4,800 per year. The extra restaurant meal per week at $50 each comes to $2,600 per year. And then there’s the $1,000 for clothing. $4,800 plus $2,600 plus $1,000 comes to $8,400! Not only does that combination eat up your entire $7,000 net increase in pay, but you’ve also overspent.

Making more money feels good, and that’s the problem. When you feel good, your defenses are down and you enjoy the extra financial freedom. Since it quietly, gradually goes into consumption, none of the extra income ever makes it into the bank.

That’s how lifestyle inflation creeps into your life, and keeps you from ever getting ahead financially.

Preventing Lifestyle Inflation From Happening

It’s easy to see lifestyle inflation happening in the lives of other people. But it’s more complicated when we’re engaging in it ourselves. If that’s been your pattern in the past – and the evidence will be inflated credit card balances and an undersized bank account – you’ll have to take concrete steps to get it under control.

Try these steps to get out of the lifestyle inflation trap, and put you on the path to financial independence:

Track your spending – make sure you know exactly where your money goes
Reduce or eliminate any expenses that are not absolutely necessary
Set up payroll savings plans; you can direct money into a savings account, mutual funds, and of course retirement plans (yes, even IRAs if you don’t have an employer plan)
When ever you get a raise, increase your payroll savings by the amount of the net pay hike
When ever you get a cash windfall, use it either to payoff debt, or to put into savings and investments – don’t give yourself the opportunity to spend it on something you don’t really need

Unfortunately, lifestyle inflation can easily become a way of life – it is for millions of people. Breaking out of that habit will be like going on a diet, except that this one will be a financial one. That means that it will be painful at first, but once you get control of your finances, your life will get progressively easier. It’ll will be like creating a new automatic pilot for your life, one that will stack the long-term deck in your favor.

Take a Good Look Before Refinancing Your Mortgage

January 31, 2014 By Sherry Tingley

Thinking about refinancing your mortgage to pay off credit card debt? Don’t jump too fast. There are factors that make such a financial leap a very bad idea.

On the face of it, it seems a good idea to swap “bad” credit card debt for an extension of your mortgage, which is generally viewed as “good” debt. Among the arguments people use when making such a decision is the fact that mortgage interest is tax-deductible, while credit card interest — usually much higher, climbing up to 30 percent in some instances — is not. In fact, long experience shows that making such a change is seldom a wise step.

Trading Unsecured Debt For Secured Debt

The most compelling reason you should not exchange mortgage debt for credit card debt is that you are converting unsecured debt (the credit card balances) for secured debt. A credit card company doesn’t ask for security, only your word that you will pay the debt. If you fail to pay, you could conceivably be sued, although most credit card companies don’t go to that extreme unless your balances are very large. The company could put a lien on your home, but typically it could not force you to sell.

With a mortgage, your house becomes collateral for the loan. The lender has a security interest in your home.

Loan Costs

Refinancing is not free. You’ll likely have to pay for an appraisal and possibly a home inspection, as well as loan origination fees and closing costs. The cost will depend on your credit score, your mortgage lender and the amount of the mortgage. In 2008, the Bankrate Survey determined that closing costs to refinance a $200,000 home amounted to an average $3,118. Those costs may to a degree offset the costs of high interest rates on credit cards.

Longer Time To Repay

Refinancing extends the time you will be obligated to discharge a mortgage (and the credit card debt you have added to the mortgage.) In reality, you are only extending the life of the credit card debt to the mortgage. That may mean it stays with you for the usual 15- to 30-year term of the mortgage. It is possible you will end up paying more interest than if you chose to plug along and pay off the credit card debt as you are able.

Credit Score Damage

A refinance may damage your credit score. It will trigger a new inquiry on your credit report by shortening the average or y our accounts. The companies that do credit reports will note the higher mortgage and be nervous, particularly if the level or your income is marginal. The impact may be short-term, especially as large-balance credit card debt will no longer show up in the reports, but there will be some impact.

Difficulties Selling Your Home

Selling your home may become more problematic if there are additional mortgages. To sell, you must pay off the balance of the mortgage burdens, and most likely pay a real estate commission of up to 6 percent. Banks typically won’t let you refinance a home unless the anticipated mortgage amount is below 80 percent of the home’s value. And be aware that home values tend to respond to financial vagaries and can fall fast. Having to sell under pressure because of such situations as a new job location might force you into missing the optimum return for your property.

Little Changes Made In Decreasing New Debt

Too many people who use a mortgage refinance to resolve credit card issues don’t overhaul their budgets and change their spending habits to avoid racking up more debt. They pile debt upon debt at an increased risk of losing their home because the mortgage payment is now higher and there are fewer options available. A genuine commitment to avoiding credit card debt is essential to getting any benefit from a refinance.

Solutions

Better alternatives for dealing with high-interest debt include debt settlement, debt consolidation and even bankruptcy. Putting your home at risk should be a last resort.

Debt Management: Save or Pay Down Debt

Achieving A Financially Successful Life

April 19, 2013 By Sherry Tingley

One of the basic foundations for building and maintaining a successful financial life focuses on using regular income to provide you with a basic lifestyle and money in savings to meet emergencies. This may take years to accomplish, but proves to be the foundation of financial success.

Good Cash and Credit Management Practices

Managing cash and credit is a skill that can be beneficial for a lifetime. People sometimes fail to realize that credit card companies are in the business of making money off people who can’t do basic math or don’t project into the future how much their purchases will really cost. They bank on human nature to be lackadaisical with their payments.

Some Americans have adopted credit card usage as a “way of life.” Credit cards have been singled out as one of the most perilous consumer financial products and frequently leads to over indebtedness. Using credit cards to pay for unexpected difficulties is one of the biggest problems.

Managing Expenditures Adequately

Being able to keep your living expenses well below your income level is ideally the best strategy to take. Your entire financial success depends on being able to do this. This allows you to build up an adequate savings to handle unforeseen emergencies and helps you stay out of thinking that your best solution is to use a line of credit to pay your debts. It also allows you to build up savings for investment purposes. If you find that you aren’t in this position, then it is time to think about alternate ways to bring in income.

Income and Asset Protection

Insurance is one way to protect your assets. Car insurance minimizes losses from car accidents. Home insurance minimizes losses from accidents as well. Life insurance can protect your children in the event of your death. Using insurance to protect you from losses is wise, but be sure to do research into the details of each policy and carefully examine the risks you are taking.

Investing Wisely

No one wants to lose money so investing wisely is a skill worth learning. Because money can return a positive rate of return over time, it is best to start saving early in life. A $10,000 investment can grow to $57,430 in 30 years at 6% interest.

Preparing for Retirement and Estate Planning

You really need to start planning for retirement at the beginning of your earning career. Many folks put this off until it really is too late to do anything about. Starting at an early age, the time value of money can really work for your benefit.

Achieving financial success is a life time goal, but takes daily effort. The more effort you input, the more you will enjoy rewards.