Real World Finance$

So, last night was the meeting with our mortgage guy. We have moved several times in the last 3-4 years due mainly to work and have used him on every purchase. While we may not get the rock bottom best rate there is, we do get to work with someone who tells us the truth, does what he says he’s going to do when he says he’s going to do it, and always runs numbers for multiple products to go over our options with us rather than pushing one kind of product.

He gave us the run down of what’s been going on from the insiders perspective. We’ve all heard about the sub-prime loans and the problems there. These are mortgages made to people with very little documentation (no income verification) and high loan-to-value ratios (little to no down payment). These problems have also spilled over into the Alt-A market of which my wife and I reside. We have a good credit rating (700+) and we have our income verified, but we don’t have much in the way of down payment or equity to leave in the house.

Because people are more afraid of our group of borrowers as a whole, we now have a larger premium to pay in the form of interest rate in order to do what we want. In the past, our interest rate premium was rather small compared to what you would see for a conventional loan with 20% or so down. Now, that added risk premium means that we may not be able to do much better than our current rates.

The other added problem is how much mortgage companies are letting people cash out on a refinance. While there used to be a number of products that allowed you to cash out 95-100% of your value, those are dwindling down to almost nothing. The closest thing at this point might be through FHA, but only if they were to raise their limit for the total home value they will insure (currently $213,750 in my area for single family).

Now, all of this is assuming we would go ahead and do the bathroom upstairs. If we choose not to do that, we could refinance through FHA now and have plenty to pay off the AC and still have a few grand to pay on our consumer debt. We have until May of next year to do at least that, so we are waiting to see what FHA does in the mean time with their cap on the loan value and to see what else the market has to bring.

All in all it was time well spent. We are both on the same page now and know what we are looking to accomplish. In the end though, it is paying off our consumer debt that is the biggest priority. So far, it’s looking like we are making progress in that arena, and I just got assigned another class to teach starting in November (I had to take a break because we had our vacation coming up in the middle of a class session), so that will bring in extra income to make extra debt payments.

More updates to come next week on our progress…

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.

The last few days I have spent scouring the Internet for some other good personal finance sources. Surprisingly enough, I’m finding a number of people just like me out there. It’s always good to not feel like you are the only one! So, I thought I would share some links with you to give you a couple more resources in our constant struggle to live smarter with our own money.

Get Rich Slowly - Everything from practical investment advice from experienced, real people to advice on how to save money and where to find good bargains on the Internet.

Money Blog Network - This is a network of all sorts of personal finance blogs. I don’t see any links on how to get included… I guess I’ll have to wait for an invitation someday!

So, I explained in an earlier post (here) the process by which I’m working on setting up our budget. The key factor in our budget is that we want no more than 60% of our monthly income to be for “Committed Expenses” or monthly bills, groceries, gas and the like.

Well, we are just a few days from the end of the month and we have spent 61% on those expenses. Oh, and there are a couple of other bills that will clear in these last few days as well. Not all is lost, budgeting is just the start. It’s a baseline that is a goal for us to reach. With a good couple of months of expenses tracked now I can look back and see what is likely pushing us over that threshold and see what we can do to reduce it. I’m going to wait until probably mid next week to do that so that I can make sure everything for the month has cleared and I have the best possible picture of what the end result was.

How’s your new budget coming along?

Do you like to imagine yourself a stock picking guru? Do you remember that one time you said you wished you could buy such and such stock and the price shot up shortly after?

Well, if so, then I have a site for you.

You may be familiar with the Motley Fool website. They are a very well known site for financial information and analysis. Sometime last year, they started a game called CAPS. Here you can pick your favorite stocks and tell all about why you are predicting them to Outperform or Underperform the S&P 500. The site then tracks your predictions and rates you against other players. You earn your color of CAP based upon your rating of both portfolio performance and accuracy of your picks. Then, based on all these ratings, the site can rate the stock for future performance. After all, if you seem to be good in your past picks, then odds are, you might be right in your next so others may want to follow in your glorious path.

Give it a try, have some fun!

For us, like for most people, our house is by far our biggest investment at our age. Yes, it is more than just a place you live, it is an investment that nearly always appreciates in value over the long term.

I know lots of people with 401(k) accounts who spend hours every week checking their value and the day to day status of their mutual funds and such. Yet, those very same people with a house worth 5-10 times as much, rarely do anything to keep up with the value of that investment. There are a couple of websites I would recommend you look into every once in a while.

National Association of Realtors - Yes, this is the self same group of professionals you likely used to buy your house. Because they are so well entrenched in the real estate industry, they have a wealth of information about the prices of homes in the US. Here you can find quarterly reports on the median home value in the US by region and even metropolitan areas (there are over 200 of them tracked).

Mortgage Bankers Association - This national group of mortgage industry workers, like the NAR, has wealth of information, but theirs is all about interest rates and mortgage types. They publish monthly data on the average mortgage rate and points by state. This is very helpful when you are starting to think about refinancing your home.

Zillow - Zillow is a real estate website that will give you and estimated value of your home (they call it a Zestimate). This is given as a range of vales and lets you see it in comparison to those around you. You will also be able to see recent sales in the area to do comparisons. Obviously, you will get a much narrower range in a neighborhood with homes of similar size and condition. My house has a range of nearly $100k, so beware.

Of course, actually working with local professionals who make this their day to day life is always best. Sometimes though, you want to do your own research and not bother someone else. So, take a few minutes and get up to date on your house.

I just realized the other day, I hadn’t really given you much of my personal background. After all, I am sorely in debt and what makes me think that you would be interested in financial ramblings from someone like me?

I must admit first, that my understanding and my actions do not always line up. I wish I could say that I took my own advice more often, but the past is in the past and I have vowed to finally start listening to myself from now on!

Anyway, about me. I have a BS degree in Engineering Management (a mix of business and industrial engineering) from the University of Missouri-Rolla. I’ve spent several years of my career working in the field of Purchasing and Production Management.

Over the last few years, I have continued on to get an MBA from Webster University. My career path has also changed over to the IT realm as I have been providing functional and data analysis for the Financial side of the business (being someone who can speak both Accountant and Computer Tech comes in handy). In addition, I am also an adjunct instructor teaching Economics and Quantitative Analysis courses with a local ITT Tech campus and Fontbonne University.

So, now you know about me, I hope you are enjoying this so far. Soon I will have updates on our progress of first getting our net worth out of the red. It looks like things are going well so far, but I should have some final numbers by the end of the month.

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.

It’s funny how things seem to show up just when you need them. I read this article sometime last week about the 60% Budgeting Solution. The theory here is to simply your budget. There are 5 categories of your budget to break out expenses into.

• 60% - Committed Expenses. These include your mortgage/rent, utilities, groceries, cable, telephone, car payments, insurance and taxes
• 10% - Retirement Savings. Everything from your 401(k) and any IRA’s you may keep. This is a rather agressive number for most (at least on the surface), but if you are putting in your 6% to your employer plan, you are most of the way there.
• 10% - Long-Term Savings & Debt. This 10% is used to pay off debts including credit cards and what’s left over should be put into savings or investment accounts for future major purchases.
• 10% - Fun. This is where too many of us ending spending the Long-Term Savings portion. Everything from monthly eating out, baseball games, theatre tickets, etc. Anything that is not essential, but you plan on spending every month.
• 10% - Short-Term Savings. This is for the irregular expenses. Annual personal property taxes, vacations, the fridge goes out. You plan on spending this all during the year, you just don’t know when or on what.

It’s that last 10% that we’ve always been told, “You should keep at least 2 months expenses in your savings account” that we never listened to.

This week has reminded me of this section and wished I has paid attention to it much sooner in my life than just last week. We have our every other year vacation to Orlando coming up next month and we have some money set aside for that, but then “stuff” happens. Tuesday night we turned off the AC and opened the windows. One of the upper sashes fell and glass shattered. Luckily that’s not much of an expense, but will come out of what I had planned to fix the wood fence on the house. Then, the wife lets me know about a call from the dentist that our insurance isn’t covering the $2k of bridge work she had done recently. Ouch!

Guess my budget planning I started a few days ago was a bit late. Well, about 6 months late actually. Regardless, I’m still going forward. I’ll be chaging some of the percents around for us. I’m sure the 10% for short term savings will mostly disappear and a few percent of the Retirement Savings to roll into debt in the short term. That will get us much further to having true savings in the coming years.

Pretty much everyone nowadays is familiar with their credit score. We have been bombarded the last decade by advertisements from mortgage lenders flashing numbers of scores to entice us in. These scores come from the 3 major credit bureaus(Equifax, Experian, and Transunion). All three of these are for profit corporations that take in information from our creditors and compile our financial payment and balance history.

We, of course, agree to this when we apply for mortgages, credit cards and even our phone and utilities services. These bureaus then take their compiled information and report back to potential new creditors (with our approval) of our “Credit Score”. This is supposed to tell the creditor our potential for defaulting.

So, why 3 bureaus? Well, as it turns out, not every creditor reports to every bureau, so they each have a slightly different set of information. Where they all seem to be the same is the method they use to calculate our credit score based on their information on us. They use a scoring method developed by FICO (Fair Isaac Corp). Fair Isaac is another profit seeking company that sells business intelligence.

In a recent report, both Forbes and Fair Isaac agree that the FICO score alone is not a perfect representation of default rates for mortgages. You can read the article HERE. Forbes tries to place some of the blame on FICO for not building into the score factors for mortgage documentation and equity.

Now, wait a minute. FICO is not responsible for how the mortgage is made, they are simply reporting on the past. If a mortgage company is looking at FICO scores and they know the person is trying to do nothing down and little documentation, the KNOW there is more risk of default on that loan. How am I sure? Check the rates they are given. The mortgage company just bumped your rate up several percent in order to allow you to do that. They then adjust how much they will approve you for a loan based upon your debt load. Their problem has come in because they have been a bit over zealous in raising the amount they will let you borrow based on your income and total debt.

If you are in the market for a house, take a piece of advice from me. Don’t let the bank or mortgage company tell you how much house you can afford. Do the math yourself and decide how much you are willing to pay each month including all your taxes, insurance and added utility bills. We have bought 3 houses in just over 3 years (mainly because of moving for work). Not one of those houses did we put a penny down (and 2 of them we barely paid any of the closing costs). For the second house, we even got a mortgage approval without the contingency of selling the first one (our closings were 2 days apart, so we were okay with the difference). But, the bank seemed to think we could afford the payments on both houses. There is no way in the world that would have been possible.

To make a long story short. Keep track of your own finances. Don’t let others tell you how much you can afford of anything. Do your own homework.