5 Simple Ways To Take Advantage Of Low Interest Rates

By //  by 

Many people are disappointed because of the low interest rates available today. They look at the fact that their bank accounts are paying pennies per year in interest, and conclude that they cannot get ahead financially. However, there are things that you can do to take advantage of low interest rates.

Refinance Your Mortgage With Low Interest Rates

This is one of the most common ways to take advantage of low interest rates. This is because most mortgages involve hundreds of thousands of dollars and span across multiple decades. Even a small change in the interest rate of your loan can have drastic effects on your monthly payments.

The best time to refinance your mortgage is when you owe at least 20% less than the appraised value of your home. This way, you won’t have to worry about private mortgage insurance when you refinance.

Low Interest Rates

If you do decide to refinance, make sure you perform an analysis to see if the expected savings outweigh the points, fees, and other expenses associated with the refinance to make sure it is actually going to save you money.

A great way to pay off your mortgage early is to refinance at a lower rate, secure a lower monthly payment, but continue to pay the higher amount. This way you will be able to pay a few hundred dollars extra on your mortgage each month, without having to change your current budget. Just make sure that your additional payments are applied to the principle of your loan.

Negotiate Lower Rates

When you notice that interest rates are going lower, that should be a signal to you that it’s time to negotiate lower rates with your creditors. Give your credit card companies a call and ask them to lower your interest rate.

If you have an excellent payment history with that company and you have good credit, you should be able to get them to lower your interest rate. In fact, even if we aren’t in a low-interest-rate environment, you should be able to secure a lower rate if you have those credentials!

Consolidate High-Interest Debt

If your individual credit card companies and banks aren’t willing to give you a lower interest rate, a consolidation may be in order. Actually, depending on my situation, I may try to consolidate my debt first!

When dealing with high-interest credit cards, there are typically two ways in which you can consolidate your debt. First, you can apply for a consolidation loan. This is usually an unsecured, personal loan that you use to pay off all of your debt. The main benefit here is – hopefully – a lower interest rate, and only having to worry about making one payment each month.

The second way to consolidate your debt is to move all of your debt onto a single credit card. If you can find a card that has a balance transfer offer – such as 0% for the next year – then this can be a great move. Usually, you will have to pay a fee in order to process a balance transfer – just make sure that this fee is less than the money you plan to save by the reduced interest rate.

Refinance Your Car Loan

Many people only think of refinancing a mortgage when faced with low interest rates. However, with the price of a new car easily exceeding $30,000, you can save thousands of dollars by refinancing your car loan!

I would make the same recommendation to pay it off early. Refinance the loan in order to have a lower mandatory monthly payment, but continue to pay the same amount that you are paying today. If this amount is going directly toward the principle of the loan, you will finish paying it off much faster!

Make Prepayments To Secure A Lower Purchase Price

There are a number of financial agreements which we enter into, that will allow us to pay a reduced price if we pay the bill in full up front. The most common charge that I can think of which fits this description is car insurance. Most companies charge a fee for breaking your premium up into monthly payments; thus giving you a discount for paying the full charge up front.

Sometimes landlords will be willing to give you a discount on your rent if you pay up front. The discount may increase as you add more months to your initial payment. Paying your rent a year in advance can lead to real savings.

The same is true for many other arrangements where there is an option to pay over a long period of time versus paying the entire amount due in the beginning of the agreement.

You may be thinking to yourself, “I can make prepayments at any time! This has nothing to do with interest rates”. However, the reason why this is tied to low interest rates is because you have less incentive to put out $15 – $20,000 all at once, if rates are high.

If you can earn a high interest rate by putting your cash in a savings account or CD, then you will not be inclined to pay your rent a year in advance, unless the savings in rent are more than what you would earn in interest. Therefore, low interest rates make it financially feasible to make prepayments in order to secure a reduction in your purchase price!

photo by jscreationzs

A Few Questions About Low Interest Rates

  1. Do you take advantage of low interest rates to reduce your debt payments?
  2. Have you ever taken out a consolidation loan?
  3. Do you feel more justified in living above your means (borrowing money to pay for expenses) in a low interest rate environment?

 

Six Money Saving Tips for a First Time Home Buyer

By //  by 

Up until about 2006, buying a home was a relatively low risk proposition, even for first-time homebuyers. But now that mortgage underwriting guidelines are more difficult, and property values are bouncing up and down like a yo-yo, you need to be more informed before making a purchase.

Here are six money-saving tips that will make the process easier, and remove at least some of the risk involved in purchasing a home as a first-time home buyer.

6 Money Saving Tips For The First Time Home Buyer

First Time Home Buyer

1. Buy Beneath Your Means

This first tip is one where you will have to push back against your real estate agent. The conventional wisdom – which will be strongly advanced by members of the real estate community – is that you should buy the most expensive house you can afford. The idea is that you will be able to more easily afford it as the years pass and your financial situation improves. There may be merit to this, but it’s bad advice for a first time home buyer, especially in today’s market.

It will be better for you to buy at least a little below your financial means. This will leave more room in your budget to pay for everything else in your life. When you buy above your means, you’re flirting with being house poor. No matter how much you love the house, being house poor gets old fast.

2. Buy Below Market

To the best of your ability, try to buy house at a price that is below the going market price. You should aim to buy a house at least 5% to 10% below the prevailing market value. If the house is reasonably worth $200,000, you should try for a settlement price of between $180,000 and $190,000.

This will give you some extra equity upon closing on the house. More important, it will provide some insulation in the event property values should fall.

It’s easier to do this in some markets than others, but you should always try. You never know how anxious seller is to make a deal. Those are the kind of properties that you want to buy – the ones you can get at least a bit of a deal on.

3. Get A Home Inspection

Many times a first time home buyer will resist this idea, because it means coming up with an extra $300 or so before closing. But this can be the very best money you can spend in the entire transaction.

A home inspection can provide the following benefits:

  • It can alert you about needed repairs; if you know about these upfront, you can have the seller fix them before closing, saving you a major headache later.
  • You can use repairs and other deficiencies to negotiate a still lower price on the property. A home inspection often provides you with a list of bargaining chips.
  • It can reveal that the property is a complete disaster, allowing you to get out of the deal before closing.

Spend the extra money for the home inspection, you’ll be glad you did.

4. Use A Real Estate Agent

Property sellers sometimes like to work without real estate agents, so that they can avoid having to pay the real estate commission. As a buyer, there’s no real advantage to not having the services of real estate agent.

The agent acts as a third-party negotiator between you and the seller, and that tends to be more effective than face-to-face negotiations. This is especially true if there are significant issues that develop along the way to the closing table. The agent acts as both a go-between and a shock absorber, helping to work out mutually agreed upon terms.

In addition, since real estate agents work in the business all the time, they know how the process works. They can present a written offer, handle negotiations, schedule the closing and home inspection, and even help you select the mortgage lender and closing agent. If you are a first-time home buyer, you will have enough on your plate without having to worry about all of that.

5. Save Up More Than The Minimum Down Payment

It’s natural for first-time home buyers to want to buy with as little money as possible, but that’s not how the real estate business works these days. The minimum down payment with an FHA mortgage is 3 ½% of the purchase price. If you are using conventional financing, the new normal will be more like 10%, or even 20%.

[What is private mortgage insurance, and is it really necessary?]

You should have your down payment saved in advance, but that’s not all. You should have at least a few thousand dollars saved up in excess of your down payment requirement. There are at least three reasons for doing this:

  1. On conventional mortgages, lenders require that you have “reserves” in excess of the down payment, equal to anywhere from 3 to 6 months of the new house payment.
  2. The extra money will come in handy with incidental and unexpected expenses related to the purchase, such as moving, establishing utilities, making minor repairs, and last-minute purchases.
  3. It’s never a good idea to be broke immediately after purchasing a new home. Save some extra money to give yourself some breathing room after the closing.

6. Clean Up Your Credit Before Applying For A Mortgage

Some first-time home buyers don’t bother reviewing their credit before applying for a mortgage, but it’s to your advantage if you do. If you wait and let the mortgage lender run your credit, and there are credit problems, your loan could be declined. But if you obtain a copy of your credit report in advance, and fix any issues that show up, your credit report will be “clean” by the time the lender pulls it. That will improve your chances of getting a mortgage approval.

[See why a 15yr mortgage may not be the best choice for you!]

The underwriting guidelines for mortgage loans are still quite a bit tougher than they were a few years ago. You will need to enter the process in the best financial shape possible. Determining the quality of your credit is something you can and should do in advance.

Follow these steps, and not only will buying your first home be easier, but you’ll find the entire transaction – and subsequent ownership – to be a much more pleasant experience.

What kind of problems did you encounter as a first time home buyer?

What Is Private Mortgage Insurance, And Is It Really Worth It?

By //  by 

When I was a kid, one of the things that I remember about home ownership is that people would have to save up for a long period of time in order to be able to put down at least 20% of the purchase price of the home as a down payment. However, over the past 10-15 years, the practice of planning a home purchase based on when you could save up a 20% down payment has essentially become obsolete.

What Is Private Mortgage Insurance (PMI)?

Because of this failure to come up with the standard down payment, more and more people began paying private mortgage insurance premiums during the real estate boom of the mid 2000s. Private mortgage insurance (or PMI) is insurance that is in place to ensure that mortgage lenders do not lose money in the case where a mortgagor is not able to repay the loan, and the full costs cannot be recovered even after a foreclosure and sale of the property.

Because of this, private mortgage insurance is usually required when the borrower is putting up less than 20% of the purchase price or appraised value of the home. The cost of your insurance will vary depending on the size of the down payment and the loan and the location of the property (like one of these retirement havens), but they typically amount to about one-half of 1 percent of the loan – which would be about $2000 a year on a $400,000 house.

PMI definitely makes sense from the lender’s perspective, since they are taking on more risk by extending a loan that is at or close to the value of the property. In some cases you will actually pay an upfront premium in addition to the ones baked into your mortgage payments.

PMI is an extra fee that can add a substantial amount to your monthly mortgage payment (especially when you consider interest, homeowner’s insurance, and taxes), and you may be required to pay this amount until the equity you have in your home reaches the twenty percent threshold.

How To Stop Paying Private Mortgage Insurance:

If you currently owe less than 80% of the value of your home and are still paying PMI, contact your mortgage company immediately for instant savings (it issupposed to be canceled automatically once you owe less than 78%). They will require proof that your equity position is stable and is more than 20%.

That “proof” will come in the form of an independent appraisal. Unfortunately, you are usually not given a choice regarding the appraiser or the total amount of the fee; but at least you get to pay for it (sometimes at a cost of $500 or more)!

If you still owe more than 80% of the value of your home, but you have enough money in savings (“enough” is relative), it may make sense to pay down your mortgage in order to stop paying these fees.

My Thoughts About PMI

Waste Money

To me, it doesn’t make sense to pay insurance premiums for a plan that doesn’t even cover me . I wonder how many people actually add PMI to the equation when figuring out if it’s time to buy a home. What was that? Most people don’t make any calculations when trying to buy a home? Well, then I guess they won’t mind paying an extra couple of hundred dollars (with the home prices in my state) per month in order to grab a piece of the “American dream”. Maybe you can buy a home overseas instead! 😉

Seriously, how many other types of insurance can you think of where the one paying the premium doesn’t benefit at all from the protection offered by the coverage? And to me, if a loved one benefits, then I benefit, so you can’t add any types of life insurance to that list.

If you have crunched the numbers and you can tell me that it is better for you financially to rush into buying a home with little to no down payment and paying PMI, then maybe there may be some merit to this; but as far as I can see it (in most cases that I have observed), it is a huge waste of money, and it is another cost of being financially unprepared and undisciplined!

Photo credit: Freedigitalphotos.net

5 Reasons You May Be Better Off Renting Than Owning A Home

By //  by 

For many, many years the renting-vs.-owning question was a done deal when it came to housing. Everyone who could own a home did, and everyone who couldn’t aspired to do so as soon as possible. Is that still true today? Is renting a better option? And if so, what changes have caused it?

Renting Vs. Owning: 5 Reasons You May Be Better Off Renting

House Prices Aren’t Rising Any More

When house prices were rising steadily owning made far more sense than renting. You were building wealth in the form of increasing home equity while you were living in the property. But that dynamic has been missing for the past five years and even if it does return, it’s unlikely that it will be anything like the price increases we’ve seen in the past.

Renting vs Owning

Consider the following:

  1. Mortgage rates are at historic lows, house prices are lower than they have been in years, and yet prices show few signs of recovery
  2. The 76 million-strong Baby Boom generation have entered the retirement years—a typical time of trading down or selling off housing completely
  3. Generation Y is showing nothing like the fever to own a home that previous generations did
  4. Millions of households have been impaired by the financial meltdown, effectively removing them from the housing market for a very long time
  5. Though employment has been improving, jobs security is conspicuously absent

It seems that the combination of these factors are putting a lid on house prices and probably will for the foreseeable future. And if prices aren’t rising, there’s no imperative to own right now. Better to rent and see how it all plays out.

Freedom To Follow The Jobs

Let’s spend a little more time on item #5 from above. When you buy a home you’re usually signing a mortgage note that will bind you to the house for something like 30 years. Can you conceive of a job that you’ll have for 30 years?

Probably not.

Jobs and even careers are becoming notoriously unstable for reasons that appear to be beyond the financial meltdown. A 30 year mortgage requires some level of income stability for the term of the loan, and that may require not just changing jobs, but also uprooting to follow them to distant places.

If you have to make a geographic move to find work in your field, owning a home will complicate matters. You’ll have to sell or rent out your home in order to make the move. And if you can’t do either, you may have to pass up the job opportunity.

When you rent, it’s far easier to pick up and follow a job.

A House Is A Capital Trap

It’s not just a mortgage you have to contend with when you buy a home; you also have a down payment tied up in it. That wasn’t much of a problem when you could easily sell a home after just a few years—for more money than what you paid for it—or borrow out the equity any time you wanted. Today, your down payment is likely to be tied up for many years.

In addition, when you own a home you have to put money into repair and maintenance, adding thousands of dollars to the money you already have tied up in the house.

At a time when so many people are dealing with job and career issues, as well as debt problems, can you afford to tie up thousands of dollars in equity in a house? When you rent, all of your money can be held in liquid accounts ready for your use.

Maximum Financial Flexibility

Here’s something we don’t like to think about too much…if you were to experience a permanent income reduction, what would you do to lower your house payment to adjust to the smaller paycheck?

If you rent, you can move to a lower priced home or apartment, or even move in with family. If you own, you first have to sell your house. In today’s market, selling a house can take months or even a year or more. Worse, if you’re in a negative equity position, you may not be able to sell at all.

Renting provides the financial flexibility that’s more consistent with today’s economic and employment circumstances. Owning, because it’s long term in nature, is rigid and locks you into a lifestyle you may not be able to sustain—or get out of.

Some people may consider such thinking to be negative; I consider it being prepared.

The Mortgage Interest Income Tax Deduction Isn’t What It Used To Be

Real estate agents often hype the mortgage interest and real estate tax deductions as a compelling reason to own a home rather than to rent. Renting, after all, offers no income tax deduction. Two factors are now weighing against that assumption though.

First, interest rates are at very low levels—a 4% interest rate on a $150,000 mortgage, will produce only a $6,000 mortgage interest deduction. Second, the standard deduction is $11,900 for a married couple filing jointly in 2012; it’s possible that even owing a house will not get you any more than $11,900 in deductions. At best, you may only get additional deductions on part of your housing costs, but nothing like the 20%, 30%, or 40% deduction agents are quick to point out.

The mortgage interest and real estate tax deductions continue to be a real factor for higher income households buying higher priced homes. But for many middle class households, and most lower income ones, the deduction will make only a minor improvement in your cash flow.
Am I saying you shouldn’t buy a house? In many cases, yes, that’s what I’m saying. It’s not as “right” as it was a few years ago, not for a lot of people. Consider the value of owning against the possibility that the home could drop in value—would you buy knowing that might happen? Do you feel your job/career is stable enough that you’ll be able to make the payments and not need to move to another city for the foreseeable future? Is your financial situation strong enough that you could weather a prolonged period of unemployment and still keep up the house payments?

These questions were always a part of the homeownership equation—they’re just more relevant now than ever.

What do you think about owning versus renting today? Do you think the pendulum has swung in favor of renting?

photo credit: FreeDigitalPhotos.net

Why A Consolidation Loan May Be Worth Considering

By //  by 

I know that many of you may think I’ve gone crazy with the title of this article – especially since I am trying to pay off debt myself – but I can assure you that I have not.

With interests rates being as low as they are right now, this may be a perfect opportunity to take out a loan in order to refinance debt or start up a business.

Don’t get me wrong, I still despise being in debt bondage, and I would still advise all of my clients, family, and friends to avoid debt whenever possible; but I also understand that taking out a loan isn’t always the worst option.

Here are a couple of situations for which getting consolidation loans might be the answer.

High Interest Credit Card Debt

Some people get into credit card debt because they decided to live above their means. For others, it may have been due to a few acts of desperation. Some may have even tried to take advantage of credit card benefits, and for some reason, were not able to pay off their debt.

No matter what the reason, if you are stuck with high-interest credit cards, it’s time to take action. First, call your bank(s) and try to negotiate a lower rate. If that doesn’t work, see if you have a card with a zero balance and a balance transfer offer. If your savings are higher than the transfer fee, do it!

If none of these options work, it may be best to take out a loan – be sure to take advantage of a personal loans comparison first from sites like http://www.comparethemarket.com/loans/ – and consolidate your credit card debt.

Student Loans

There are a growing number of people who are financing their higher education with the help of student loans. Unfortunately, many of those former students are then put into a difficult financial situation because of their high monthly student loan repayments.

Depending on whether you took out subsidized versus unsubsidized Stafford Loans (or some other instrument), you may end up owing a lot more than you realize once you’re out of the grace period.

Sometimes, the only option in these cases is to secure another loan, which will help you to lower your interest rate and/or extend the amount of time that you are given to pay back the loan – lowering your payments in the process.

Of course, your goal should always be to pay back any debt as quickly as possible, so don’t use your lower payments and a license to go wild with your spending!

Consolidation Loans For Your Car Note

Most people only think about refinancing their mortgage when overall interest rates in the economy drop. However, you can still save yourself thousands of dollars if you can get a new loan for your vehicle.

Don’t forget to compare any fees that you might have to pay with the amount of money you stand to save by refinancing.

The same exact things can be said about refinancing your mortgage – besides, people write about that so often that it gets boring! 😉

photo by Omar Omar

Reader Questions

  1. Have you ever had to take out consolidation loans for one or more of the reasons listed above?
  2. Do you think it’s a bad idea to try to fix a debt problem with more debt?