Real World Finance$

Our current line of credit that is the bulk of our unsecured debt is at a 10.99% interest rate.  Not the best, but it’s also a line of credit with a fixed rate and fixed payment schedule which helps to avoid the “minimum payment” trap.  My wife, the homemaker, just got a solicitation in the mail from the same bank advertising the same program at as low as 7.99% (when we got ours, the ad was for as low as 9.99%). 

So, me being the industrious person I am, I called them up and asked for a lower rate.  After all, the Fed has lowered their rates by 3 points over the last 6 months or so.  Here’s my recollection of the phone conversation:

• Me - I wanted to inquire about getting the interest rate lowered on my account.
• Bank - I’m sorry, but that account has a fixed rate, only variable rates adjust down.
• Me  - I realize that, and I’m asking for a review of the account to get a lower fixed rate.
• Bank - I’m sorry but we’re not able to do that.
• Me - You realize the Fed has lowered rates 3% in the last several months right?
• Bank - Yes, but they lowered the Prime rate and only variable rates tied to prime adjust down.
• Me - Actually, the Fed doesn’t deal with prime, that’s set by the bank.  The Fed lowers the Fed funds rate.
• Bank - No, the Fed sets the prime rate and only variable rates tied to prime are able to adjust down.
• Me - You see, the Fed has lowered both the Fed Funds rate which is what banks charge each other for overnight loans as well as the discount rate which is the rate the Fed charges banks like you to borrow money directly from them.  So,  you are borrowing your money cheaper and I was wondering if I could get mine reviewed for a cheaper rate as well.
• Bank - I’m sorry, we’re not able to do that.
• Me - My account is up to date and in good standing, correct?
• Bank - Yes.
• Me - So, the only way for me to get my rate changed is to either open a new account under my wife for the amount you offered her, or to move my up to date, always on time payments to another bank.
• Bank - Yes.
• Me - Okay, thank you.

So, it appears that even the bank customer service people aren’t taught about how banking actually works, and they are supposed to help the customers.  I think the lady was a little taken aback when I explained in detail what exactly the different Federal Reserve rates were.  She sort of shut down and gave as little response as possible after that point.  I wasn’t trying to be rude, just trying to make an argument that I should be able to get a reduction. 

Yes, there is an occasional bank that ties their prime rate to LIBOR (London Interbank Offered Rate), but most strictly advertise prime and want you to assume there some big board someplace that says Prime Rate that is set by the market.  It just ain’t so.  There may be some “accepted” norms for what constitutes prime in general, each bank still has the final say in what their prime is.  Oh, and for the record, my view of prime rate was given to me by a graduate finance instructor of mine who was a retired bank president.

What does it say about the state of our economy that even the people who are supposed to help us with our banking don’t understand the basics of how banks operate?  At least, I hope the lady really just didn’t know.  If the bank had taught her what she told me, then the bank really is out to get you with misleading information.  Either way, the bank needs to revisit their training program.  A script and phone manners just isn’t enough.

Are you familiar with the Rule of 72?  It’s always something that has fascinated me.  Here’s the jist, if you take 72 and divide it by your rate of return you get the approximate time to double your investment.  Conversely, if you divide 72 by the number of years you want to double, you get an approximate rate of return.

This is not a 100% accurate, number, but it is a great “back of the envelope” estimate.  I’ve always kind of wondered why this works.  Math is a cool thing and there really must be a reason for it… right?

I did some investigation and found this website that shows the mathematical formula for the interest rate calculation and how to solve for N when you are doubling your present value.  In the end, they suggest you graph the formula and the Rule of 72 formula and see how close they are.  So, I did just that.

While you can see the answers are quite close, the absolute percent error increases as the interest rate increases.  This is really only attributed to the fact that your base time is decreasing and so a small error looks larger in comparison.  Though the absolute error does increase when you get outside of the typical range for interest rates.  When you are in the most likely range of 6% to about 10% the estimate is very close to being accurate (within .1 years). 

The graph is also a little telling.  You can see the general shape of the line and realize that the curve is a very typical inverse relationship curve.   From that, I would assume there are probably a number of formulas that could come close to approximating this phenomenon, but with one simple division, this one seems good enough to do the job.

As I’ve said before, I’m a bit of a numbers geek.  With going through the house refinancing, new car purchase and debt repayment plan I’ve found myself making amortization schedules several times so I can see what type of balance I’ll have left when based on payments and rates.

Because of that, I thought it would be a good idea to make one to help out my readers as well.  So, I built a nice little form in Excel that does all the calculations for you and puts together the complete schedule as well.

You can find it over on my Files for Download page.  I realized too that my Loan Consolidation Worksheet was not included when I migrated over to the new website, so I’ve put it there as well.

 Make good use of them and let me know if you find any problems!

So, I ran across this article on CNN Money today: Buying a New Ride Will Never be the Same. In there, they give some advice for websites to visit before buying a new car.

First on the list is Edmunds. We’ve been there to do the old side by side comparison of specs. It’s how we came up with our short list of vehicles to start with. They are very helpful so you can see exactly where 2 or more vehicles differ so you can understand what is really more important to you. They also have some feedback on the pros and cons of a vehicle from drivers. It’s nice information to have before you take the test drive.

Next on the list is Kelly Blue Book. This is a must look when buying a used vehicle. To get an idea of the value of a vehicle before negotiating with the dealer is key. You can also view projected trade-in values compared to the retail (or dealer) price. This can give you a good idea of what the dealer likely paid to someone for the vehicle to see what kind of room you have for negotiations. Again, been here, done that.

The last sight they listed I had never heard of, CarDeals.org. This is a cool place where for $7 you can by a report they publish every other week of dealer incentives from the manufacturer. Basically, auto makers like Toyota, Nissan, etc. offer dealers incentives to sell cars in a month. Some dealers my then list some special offers in their local ads offering money off or special financing. They can use the incentives to “buy down” the price of the car and say sell you a car for $15,000 at 4.9% financing to give you the same price as if you actually bought it at $17,000 for 0% financing. Another local dealer might just offer you the special financing and be willing to knock a couple grand off the price so you know you are getting the $15k and 4.9%. Whatever way it happens, you end up with the same payments. However, know what the manufacturer is offering them will again let you know what extra money they have to negotiate with. For $7, I think I’ll be picking up the latest report when it comes out next week!

As I posted a couple days ago in Should I Renegotiate My Mortgage, I was going to see about consolidating our first mortgage with CitiMortgage and our CitiFinancial credit card that financed the central air install a few months ago. So, I called CitiMortgage (C) yesterday to see if they would be willing to handle this. While they can’t simply roll in the amount to our balance and update the payments, he did offer me a refinance deal.

Because of our standing as good clients (yep, we actually pay our mortgage on time every month, or, this month twice!), the offered us first a streamline refinance with no closing costs or fees. Basically, they just reduce our rate from 7.125% down to 6.25%. A pretty sweet deal I must say. However, we need to roll the central air money into the mortgage before the end of May in order to avoid finance charges (it was 1 year no payments no interest). For that, we will have to do a full refinance with closing costs and all that good stuff.

The total refinance would bring our 2 mortgage up to about 95% loan to value. That’s a big no-no in today’s market no matter your credit. But, since CitiMortgage is the first lien holder, they are mainly concerned about not having more than 80% of the value on their mortgage, which this refinance will still do for them. They plugged in my estimated home value and new income and we were approved in about 4 hours. It’s just a matter of paperwork and they will finish everything up, including paying off the CitiFinancial card for us. This refinance comes with the 6.25% they offered before and no points.

There will be a $445 application fee to move forward, which kind of stinks. They also estimate about $4k in closing costs and pre-paids which they will roll into the balance. That’s good, because we can’t afford to pay those at the moment. It’s strange though because they will make me fund a new escrow account and then we will get our current escrow account refunded to us later. What a scam.

All in all though, I think it will be a good deal for us. We will be rolling in 16k of debt plus the 4k in closing and pre-paids. With the drop in the interest rate on the mortgage, our monthly payment will be increasing by $27! That’s nothing. I had budgeted for it to go up over $100 when we did all this, so that’s really good news. It will take a big headache off of us going into the new year having it done. The skipped payment that comes with a refinance will also give us the cash to pay sales tax when we buy a new car next year.

I ran across this interesting article on NPR over lunch (Person-To-Person Lending Flourishes on Web). It is a short review of a couple of Person-To-Person lending sites on the web. Now, this is something I could get my teeth into. The 2 websites, Prosper and Lending Club, offer users the option to request or loan money from individual people. You can find someone looking to pay off a $5,000 hospital bill for instance. They are willing to pay 15% rather than a higher interest credit card. You can give just a portion of their funds and diversify your lending across many people. After enough is pledged to the loan seeker, they receive their money and start making payments. Lending Club at least, displays rates as low as 7.62%, but I’m not sure what it takes to qualify for that. I’m guessing a high credit score and low dollar amount.

A third website that was mentioned was Lending Circle. It was originally built to facilitate lending of money between family and friends. It was so popular that Virgin owner Richard Branson bought it and turned it into Virgin Money. It’s a little different concept, but interesting none the less.

I could see this as a way to diversify some of your savings to invest in some higher risk avenues when you are younger. For me, if I qualify for a rate less than my current line of credit (10.99%) then that might just be a good money hack to use my extra payments every month to pay off one of these sites while increasing the amount of principle I’m paying on the line of credit.

Anyone out there ever used either of these sites? How’d it work?

As we’ve been putting together our family budget and making plans to actually set aside some emergency money, I’ve been looking at some of our banking options.

Since we rarely ever carry cash, we find it difficult to keep up with our son’s allowance. I had the bright idea over the weekend that maybe we could open up a savings account at the bank and have automatic payments in there. Then we can still spend for him, but we would give him a blank check register (like the old pass books, that part was the wife’s idea) and have him keep track of what he has left. Then, once a month we could bring it back into balance.

So, I checked out the US Bank website and found their Goal Savings account. It requires nothing to open and has no fees as long as you make at least a $25 monthly automatic deposit. Great, just enough for the allowance and I won’t have to worry about it. Then I looked at the details, the current interest rate is 0.1%. That’s right, one tenth of one percent. That’s just absolutely atrocious. Bank of America here locally is 0.2% and my wife’s credit union, Vantage, is at 0.35% and goes up to 1.85% at over $50,000.

Seeing those rates were enough to make my blood boil. So, I started checking out the online banking. I looked at HSBC Direct, Emigrant Direct, ING Direct, and E*Trade. All of them have rates for online at 4.50% to about 4.70% at the moment though they have been higher in the past. Making deposits and withdrawals to other banks all appear to be relatively simple to do as well, so funding the account isn’t a problem. I also didn’t notice any hassles about minimum balances either. So, which one to choose?

I found myself most drawn to E*Trade. What I like about them is the integrated checking account that is also free if you have at least a $200 direct deposit each month. It too has a 0.5% interest and bumps up to 4.0% after $5,000 (but if you can get 4.50% in a savings account there, I don’t know why you would keep $5,000 in your checking). I’ve never been real fond of US Bank, but they were sufficient. I rarely find myself in a branch, so face to face banking isn’t high on my list. One of the best features I like also about E*Trade is the missing ATM fees. They do not charge any fees for using another banks’ ATM, and they also reimburse you the fee charged by the other bank (currently unlimited reimbursements, though it appears it used to be limited to 5 per month).

Does anyone else out there have experience with using an online bank, E*Trade in particular? What are your thoughts and/or experiences?

So, when I get home from work tonight we have a meeting with our mortgage guy. We bought our home in the spring of 2006 and the interest rates were a little high. We also did a financing deal to have central air installed in the house (we had used window units prior to that) and we will want to roll that into the mortgage within the 1 year same as cash period. Interest rates right now are about 1% lower than they were when we purchased the home, so that is good. We have until May of 08 to do the refinance.

While we haven’t had an official appraisal done yet, we expect our home is worth about $25k more than we paid for it due to our own repairs as well as the AC. The bill for the AC was about $16k, so there is still some left. We will be talking tonight about some of our options and what we could do. Here’s what we are thinking initially:

• We could refinance and just roll in the AC. It would probably cost us a couple thousand in closing costs, but our monthly payments would basically be unaffected with the change in interest rates. That would keep our equity some equity in the house.
• We could also refinance and do a 100% or 80%/20% loan and use the extra cash out to pay down some consumer debt. While this would help lower the consumer debt portion, it really doesn’t do anything to our net worth, just moves the debt. Obviously, by financing the debt over a stated 30 years, we also have lower monthly payment and get an extra few bucks added to our tax deduction every year.

The next couple of options are a little more radical. Our house is 85 years old and is one of the nicer houses in the neighborhood. The one thing it is lacking is a modern bathroom. We have gotten a couple of estimates to remodel the upstairs bath and they have come in the $15-18k range. This is really the only other major project to do on the house, the others I could mostly take care of myself or could be done with an extra $1-2k here and there.

So, our options to get this done is about the same as the ones above, but would include taking out money to do the bathroom and having an appraisal done for the ARV (After Repair Value). That would still leave us in about the same boat as either of the above, with the exception of increasing our monthly mortgage payment by $100 or more. The one exchange is that we would then have a house we know we are comfortable in for many years.

Anyway, we’ll be talking with our mortgage guy tonight and see where rates really are and what we might be able to get approval for given the different scenarios.

I know what you are thinking, “If you are trying to get out of debt, why would you want to take out more to do a bathroom?” Well, if I can borrow $15k against my house now to avoid the desire to buy a house that cost $50k more in a couple of years, it might be well worth it. Either way, we’ll look at it all and talk it out before moving forward. Wish us luck.

It happened today as had been expected. The Federal Reserve cut the Federal Funds Rate by 50 basis points. Why they can’t say 1/2% or .50% I can’t for the life of me figure out.

I’m sure you’ve heard all about the Federal Reserve and their rate cuts. Former Fed Chief Alan Greenspan made the Fed famous in the last couple of decades as the stock market and investors hung on his every word. So, what exactly are these rates that seem so glamorous to raise and lower all the time? Well, let’s take a look:

Discount Rate: This is the interest rate that banks receive from the Federal Reserve when borrowing money. Your bank, just like you, has to borrow money in order to lend it to you. This can be either short term to meet Fed overnight requirements (we’ll talk about that later) or it can be more long term. The actual rate may fluctuate depending on the solidity of the bank and the term, but the Discount Rate serves as the target.

Federal Funds Rate: This is managed by the Federal Open Market Committee of the Fed. This rate is the rate banks can get for loaning money to the Fed overnight which will, in turn, loan the money back out to other banks.

(Overnight) Reserve Requirements: This is a percentage of funds that all banks must have in reserve with the Federal Reserve every night. As you can see from the link, the current maximum is for banks with outstanding liabilities (loans) for more than $45.8 million, of 10%. This means if a large bank, like Countrywide for instance, has $100 billion dollars of money that they owe to others (say borrowing money so they can make mortgages), then they must have $10 billion in the bank every night.

There are some other methods the Fed can use to influence the economy as well, but I’ll stop here and leave that for another day.

So, what’s all the fuss about some interest rate that banks get charged you say? Well, the bank, like any other business, has a product they are selling. Their product is money. They sell that to you for an interest rate. However, the money doesn’t come free to the bank, they have to get it from somewhere at some price. That’s where the Federal Funds Rate and the Discount Rate come in to play. In a business sense, that is the banks Cost Of Goods Sold. So, if the bank is now able to borrow money for .50 percent less than they could yesterday, they could potentially lower your interest rate on your savings account and your mortgage by the same amount.

If your savings is now earning less, and your mortgage now cost less, you are more likely to borrow than to save. If you are borrowing money, you are using it to buy something which helps create jobs which continues to spur on the economy. If things move the other direction, you are more likely to save, which means you aren’t spending as much money and there isn’t need to build that extra house or car for you to buy.

This rate change should begin to trickle down for sure very shortly. Many people were anticipating the change and were likely ready to make their own changes. So, hopefully, you variable APR Credit Cards will be going down in rate and you could potentially save some money on a mortgage before long.

We have been looking to refinance our mortgage and roll in some debt. This might be just what we were waiting to have happen. Of course, the most important thing if we do this, is to NOT spend on the credit cards like before. Really though, we have been fairly good at that and have not accumulated much more the last couple of years, but have made little headway in paying it down. Refinancing our mortgage might just give us the kick start we need.