The New Under the Radar Newsletter Format
(to sign up for the newsletter, go here)
We are changing up the format for the newsletter from 2 times a month to every week. We are also changing how we deliver the content. In the past, we would provide you with a few very detailed articles. Now, we are sending out more content in a shorter format. You can pick and chose and decided what is the most important for you to read.
Here is this weeks’ edition:
Prudent Points of the Week
The New Under the Radar – More content + Shorter articles + Weekly = Informed
RETIREMENT ALERT: We are starting to see a great deal of lay-offs occur. If you are facing this situation or know someone who is facing unemployment, please read this article.
God and Money
Is God on the Front, Back, or Missing From Your Dollar Bill?
Investing and Managing Money
Do you need an investment check-up? Just Ask Bob
Consumer Hot Topic
The Best Way to Purchase a Car – Prudent Tip 1
Debt
Credit Monitoring – Why Some Companies are More Expensive than Others
Just thinking out loud….
What is Prudent Money?
Have a Question for Bob?
Weekly Stock Market Outlook
Podcasts
All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.
Wednesday, October 31, 2007
Tuesday, October 30, 2007
The Best 6-Month Strategy For Investing In Stocks – Is It The Real Deal?
Wall Street follows many different time periods in hopes of figuring out predictable trends. There are several of them that occur in December and January that are supposed to predict the returns for the coming years. One of the better known Wall Street trends starts on Thursday.
A trend was detected by the researchers at the Stock Market Almanac that the best time to be invested in the stock market is between November and April and the worst time to be invested is between May and October.
In fact, there is a saying that goes “Sell in May and go away.”
The writers at the Stock Market Almanac conducted an illustration to prove this theory to be correct.
The illustration compares an investor investing in Dow Jones stocks during the best six months of the year versus an investor investing in the same stocks during the worst six months of the year. The illustration showed both strategies starting in 1950 with $10,000 and repeating the strategy until 2004.
What is the difference between the two strategies?
Investor “A” who was invested during the worst 6 months for the 54-year illustration turns $10,000 into $9,498.
Investor “B” who was invested during the best 6 months for the 54-year illustration turns $10,000 into $489,933.
That is an amazing difference! Is that something that always holds true? Well it works until it doesn’t work anymore. It typically works best while it remains a secret. However, let’s take a look at this strategy when the markets are facing huge amounts of risk.
For example, look at the last bear market between 2000 and 2002.
November 2000 through April 2001 -12%
November 2001 through April 2002 -4.9%
Another rough time in the markets would be 1969. The best 6-month time frame netted a loss of -14%.
So what is the moral of the story?
1) If everyone is talking about an indicator that can predict future returns on your investments, the secret is out and chances are the less effective the indicator will be going forward.
2) There is a lot more to the numbers as illustrated above. Risk changes everything. To bet on that 6-month strategy holding true might prove to be a mistake. The risk level is higher than it has been in over 5 years. Determine how you are invested based on prudent principles of investing rather than pop culture trends.
All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.
A trend was detected by the researchers at the Stock Market Almanac that the best time to be invested in the stock market is between November and April and the worst time to be invested is between May and October.
In fact, there is a saying that goes “Sell in May and go away.”
The writers at the Stock Market Almanac conducted an illustration to prove this theory to be correct.
The illustration compares an investor investing in Dow Jones stocks during the best six months of the year versus an investor investing in the same stocks during the worst six months of the year. The illustration showed both strategies starting in 1950 with $10,000 and repeating the strategy until 2004.
What is the difference between the two strategies?
Investor “A” who was invested during the worst 6 months for the 54-year illustration turns $10,000 into $9,498.
Investor “B” who was invested during the best 6 months for the 54-year illustration turns $10,000 into $489,933.
That is an amazing difference! Is that something that always holds true? Well it works until it doesn’t work anymore. It typically works best while it remains a secret. However, let’s take a look at this strategy when the markets are facing huge amounts of risk.
For example, look at the last bear market between 2000 and 2002.
November 2000 through April 2001 -12%
November 2001 through April 2002 -4.9%
Another rough time in the markets would be 1969. The best 6-month time frame netted a loss of -14%.
So what is the moral of the story?
1) If everyone is talking about an indicator that can predict future returns on your investments, the secret is out and chances are the less effective the indicator will be going forward.
2) There is a lot more to the numbers as illustrated above. Risk changes everything. To bet on that 6-month strategy holding true might prove to be a mistake. The risk level is higher than it has been in over 5 years. Determine how you are invested based on prudent principles of investing rather than pop culture trends.
All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.
Friday, October 26, 2007
Irresponsible Marketing with Payday Loans
I define “irresponsible marketing” as marketing that leads you to believe something that is just not true.
A good example is a promotional article marketing payday loans. This article was promoting that you should just use a payday loan if you need quick cash rather than borrowing from a credit card. It went through reasons such as a one-time flat fee, avoiding paying long-term interest rates, and fast loan approval.
Then of course at the bottom of the promotional article is a link to a website that will quickly qualify you for one of these payday loans.
What the promotional article doesn’t tell you is that this 14-day loan has an annual percentage rate of 782.14%. The site also promotes renewing the loan. It says you could renew a loan up to 4 times, which they do automatically unless you call them and instruct them to stop.
So let’s say a person borrowed $200 from one of these outfits, renewed it 4 times, and then paid it back in full. You would have borrowed the money for 56 days and that $200 would have turned into $440. You would pay $240 worth of interest for borrowing $200 in just 56 days. In addition, they charge fees every time you renew.
Understand that there is a difference between marketing and good prudent advice and information. Don’t believe everything that you read at face value. Learn the art of being skeptical. It can save you a great deal of headache down the road. Plus it is just good stewardship to do so.
All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.
A good example is a promotional article marketing payday loans. This article was promoting that you should just use a payday loan if you need quick cash rather than borrowing from a credit card. It went through reasons such as a one-time flat fee, avoiding paying long-term interest rates, and fast loan approval.
Then of course at the bottom of the promotional article is a link to a website that will quickly qualify you for one of these payday loans.
What the promotional article doesn’t tell you is that this 14-day loan has an annual percentage rate of 782.14%. The site also promotes renewing the loan. It says you could renew a loan up to 4 times, which they do automatically unless you call them and instruct them to stop.
So let’s say a person borrowed $200 from one of these outfits, renewed it 4 times, and then paid it back in full. You would have borrowed the money for 56 days and that $200 would have turned into $440. You would pay $240 worth of interest for borrowing $200 in just 56 days. In addition, they charge fees every time you renew.
Understand that there is a difference between marketing and good prudent advice and information. Don’t believe everything that you read at face value. Learn the art of being skeptical. It can save you a great deal of headache down the road. Plus it is just good stewardship to do so.
All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.
Thursday, October 25, 2007
Is a Roth IRA Better Than a 401(k) Plan?
Most people will tell you that you should always put money in a 401(k) first. It is considered conventional textbook wisdom.
Let’s first think about the phrase “most people” or “the experts” or “they.” People who are successful in investing possess a common trait. They think differently than everyone else. They question how things are supposed to be done. They think outside the box.
So, we are going to think out of the box on this one.
I would suggest that the 401(k) plan has only two benefits. The first is the free matching money. You always want to make sure that you take full advantage of the matching money. If they are going to match dollar for dollar up to the first 4%, then you want to at least put in the first 4%. The second benefit is the ability to put large sums of money back for retirement on a pre-tax basis.
If you are able to put large sums of money back, then the 401(k) plan is probably the best route to take. If not, consider utilizing a Roth for the rest of your contribution.
A Roth gives the greatest tax advantage available by allowing you to never pay taxes again on any money that is deposited. What is the disadvantage? You don’t get a tax deduction on the deposit. Choosing between a small deduction on the initial deposit versus a tax free income down the road is a no-brainer.
This is the beauty of the Roth. Everything that is deposited, as well as the investment growth that you experience until retirement, is all tax-free upon withdrawal.
The other advantage is that you will be able to put back $ 4,000 with an additional $ 1,000 if you are over age 50 for 2007. For 2008, that increases to $ 5,000. What is the drawback? If you are single, your adjusted gross income has to be lower than $ 95,000 to get to invest the entire amount allowable. Over $ 110,000 in adjustable gross income, and you cannot participate. If you are married, that rises to $ 150,000. Over $ 160,000 and you lose the ability to participate.
All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.
Let’s first think about the phrase “most people” or “the experts” or “they.” People who are successful in investing possess a common trait. They think differently than everyone else. They question how things are supposed to be done. They think outside the box.
So, we are going to think out of the box on this one.
I would suggest that the 401(k) plan has only two benefits. The first is the free matching money. You always want to make sure that you take full advantage of the matching money. If they are going to match dollar for dollar up to the first 4%, then you want to at least put in the first 4%. The second benefit is the ability to put large sums of money back for retirement on a pre-tax basis.
If you are able to put large sums of money back, then the 401(k) plan is probably the best route to take. If not, consider utilizing a Roth for the rest of your contribution.
A Roth gives the greatest tax advantage available by allowing you to never pay taxes again on any money that is deposited. What is the disadvantage? You don’t get a tax deduction on the deposit. Choosing between a small deduction on the initial deposit versus a tax free income down the road is a no-brainer.
This is the beauty of the Roth. Everything that is deposited, as well as the investment growth that you experience until retirement, is all tax-free upon withdrawal.
The other advantage is that you will be able to put back $ 4,000 with an additional $ 1,000 if you are over age 50 for 2007. For 2008, that increases to $ 5,000. What is the drawback? If you are single, your adjusted gross income has to be lower than $ 95,000 to get to invest the entire amount allowable. Over $ 110,000 in adjustable gross income, and you cannot participate. If you are married, that rises to $ 150,000. Over $ 160,000 and you lose the ability to participate.
All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.
Wednesday, October 24, 2007
Mutual Fund Cash Levels Are Good Predictor Of Stock Market
When mutual fund managers are very positive on the market, historically they have kept lower levels of cash on hand in their portfolios. Watching these levels has been a very good predictor of where the stock market might be heading. Consider these statistics that date back to 1961.
In 1971, these cash levels went as low as 4% and a -9% decline followed.
In 1972, these cash levels went as low as 3.9% and a -42% decline followed.
Throughout the 60’s, mutual funds held on average 5% to 6% of their portfolios in cash. When the cash levels dropped below 4%, it was a high risk signal and market declines of some sort followed.
Then the cash levels went back up to the average of 8% to 10% again for a very long time until April ‘98. At that point they went back under 5% for the first time in 21 years. Following that dip down to 4.8% of cash, the market dropped -19%.
Then between 1998 and 2000, the cash levels stayed in the mid to upper 4% ranges. March 2000, we saw the first dip down to 4% cash level in almost 30 years. Of course, that occurred at the top of the great bull market run that led to a -47% decline in the stock market.
In September 2005, we set another record low in cash levels of 3.8%. That led to a mild decline of -5.2%.
In March ‘07, we set a new record of 3.7%. Following that record low the stock market dropped close to 10%.
So where do we stand today? It was reported that we are now at a record low of 3.6%.
Now let’s talk about indicators for a moment. Indicators by themselves can offer some predictive value. A group of indicators signaling everything at once is a big red flag that something is really wrong in the stock markets. Unfortunately, this latest reading on mutual fund cash levels is one of many that is signaling risk at the same time.
All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.
In 1971, these cash levels went as low as 4% and a -9% decline followed.
In 1972, these cash levels went as low as 3.9% and a -42% decline followed.
Throughout the 60’s, mutual funds held on average 5% to 6% of their portfolios in cash. When the cash levels dropped below 4%, it was a high risk signal and market declines of some sort followed.
Then the cash levels went back up to the average of 8% to 10% again for a very long time until April ‘98. At that point they went back under 5% for the first time in 21 years. Following that dip down to 4.8% of cash, the market dropped -19%.
Then between 1998 and 2000, the cash levels stayed in the mid to upper 4% ranges. March 2000, we saw the first dip down to 4% cash level in almost 30 years. Of course, that occurred at the top of the great bull market run that led to a -47% decline in the stock market.
In September 2005, we set another record low in cash levels of 3.8%. That led to a mild decline of -5.2%.
In March ‘07, we set a new record of 3.7%. Following that record low the stock market dropped close to 10%.
So where do we stand today? It was reported that we are now at a record low of 3.6%.
Now let’s talk about indicators for a moment. Indicators by themselves can offer some predictive value. A group of indicators signaling everything at once is a big red flag that something is really wrong in the stock markets. Unfortunately, this latest reading on mutual fund cash levels is one of many that is signaling risk at the same time.
All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.
Tuesday, October 23, 2007
How Much Risk Are You Taking?
I think that the almost 400 point drop in the Dow Jones Industrial Average on Friday is a strong reminder that everything isn’t OK in the world of stocks. So how safe are your investments? Everyone has a Plan A when it comes to investing. Invest money and leave it alone. What is your Plan B when Plan A fails?
Most investors don’t have a sell strategy in place. When risk starts to increase, typically nothing is done. So, if the risk level is getting high in stocks, what move do you make?
You look at diversification. Diversification is a strategy where you divide your investments into different types of investment categories that don’t have a tendency to all move in the same direction. This strategy helps you minimize risk in your portfolio.
A diversification strategy would mean having your money divided between stocks, bonds, real estate, gold, alternative investments, and cash. Now you go about diversifying your investments depending on the type of plan that you are in. For example, a 401(k) plan is somewhat limited. You typically only have stocks and bonds and maybe a money market.
However, you have many more options in a general investment account held outside of a company with a financial advisor/broker or directly with a brokerage company. This is where you can diversify your portfolio with alternative investments. These types of investments are something to consider when the stock market risk gets high. However, if you are interested in alternative investments I would encourage you to have someone help you with that type of investing.
For the 401(k) plan, it comes down to how much you have in stocks and how much you have in bonds. For a very detailed look at how to invest in your 401(k) plan, read this article.
You also have to be careful with diversification. Diversification is not based on the number of investments you have in your portfolio. If you have 9 different stock funds, you have very little diversification with everything being in stock. Stocks tend to all travel in the same direction a high percentage of the time.
All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.
Most investors don’t have a sell strategy in place. When risk starts to increase, typically nothing is done. So, if the risk level is getting high in stocks, what move do you make?
You look at diversification. Diversification is a strategy where you divide your investments into different types of investment categories that don’t have a tendency to all move in the same direction. This strategy helps you minimize risk in your portfolio.
A diversification strategy would mean having your money divided between stocks, bonds, real estate, gold, alternative investments, and cash. Now you go about diversifying your investments depending on the type of plan that you are in. For example, a 401(k) plan is somewhat limited. You typically only have stocks and bonds and maybe a money market.
However, you have many more options in a general investment account held outside of a company with a financial advisor/broker or directly with a brokerage company. This is where you can diversify your portfolio with alternative investments. These types of investments are something to consider when the stock market risk gets high. However, if you are interested in alternative investments I would encourage you to have someone help you with that type of investing.
For the 401(k) plan, it comes down to how much you have in stocks and how much you have in bonds. For a very detailed look at how to invest in your 401(k) plan, read this article.
You also have to be careful with diversification. Diversification is not based on the number of investments you have in your portfolio. If you have 9 different stock funds, you have very little diversification with everything being in stock. Stocks tend to all travel in the same direction a high percentage of the time.
All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.
Friday, October 19, 2007
Dangerous Sales Pitches
"Pay your mortgage off in ½ the time without spending an extra cent monthly! "
"Invest your money, gain stock market like returns and never lose a dime!"
Good Strategies? NO, DANGEROUS SALES PITCHES!
I received a mailer yesterday inviting me to a seminar where they were going to give me a free meal and tell me how to pay off my mortgage in ½ the time without spending one extra cent monthly. The letter starts off by saying “Paying off your mortgage is a mistake.”
There is a dangerous strategy that encourages consumers to take their mortgage, refinance it to an interest-only note, and then invest that money you would have been paying on the principle of the house into an equity-indexed annuity. The only thing about that strategy that is successful is paying out big fees and commissions. In fact, on many financial talk shows in the DFW area, these product and strategy pitches are being made and made very aggressively.
So what is wrong with the approach? It comes down to two things. First, these aggressive strategies are based on a perfect set of assumptions coming true. The likelihood of those assumptions occurring would require the stars align. Second, any strategy that is pitched that involves an equity-indexed annuity is simply dangerous.
Equity-indexed annuities are designed and aggressively marketed by life insurance companies. They are marketed as investments that never lose money. However, when the stock market goes up, they go up as well. They are supposedly the perfect investment. The agents who sell them make huge commissions. They are not regulated by a governmental investment regulatory agency. In fact, over the years the government has started cracking down on these products and many lawsuits have turned up claiming misrepresentation and fraud.
What is so dangerous about these strategies?
The idea on paper is easy to understand and makes total sense. In reality, it doesn’t quite work as advertised. It is human nature to want to believe the sensational claims. The dangerous part of the whole sales process is that it is easy for you to get suckered into it. Always live by one principle. A sales pitch with a sensational claim should be met with a heavy dose of skepticism. If it is too good to be true, it is too good to be true. That alone will work to keep you out of trouble.
Remember there are no slam dunk solutions. If this were so, everyone would be doing it.
All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.
"Invest your money, gain stock market like returns and never lose a dime!"
Good Strategies? NO, DANGEROUS SALES PITCHES!
I received a mailer yesterday inviting me to a seminar where they were going to give me a free meal and tell me how to pay off my mortgage in ½ the time without spending one extra cent monthly. The letter starts off by saying “Paying off your mortgage is a mistake.”
There is a dangerous strategy that encourages consumers to take their mortgage, refinance it to an interest-only note, and then invest that money you would have been paying on the principle of the house into an equity-indexed annuity. The only thing about that strategy that is successful is paying out big fees and commissions. In fact, on many financial talk shows in the DFW area, these product and strategy pitches are being made and made very aggressively.
So what is wrong with the approach? It comes down to two things. First, these aggressive strategies are based on a perfect set of assumptions coming true. The likelihood of those assumptions occurring would require the stars align. Second, any strategy that is pitched that involves an equity-indexed annuity is simply dangerous.
Equity-indexed annuities are designed and aggressively marketed by life insurance companies. They are marketed as investments that never lose money. However, when the stock market goes up, they go up as well. They are supposedly the perfect investment. The agents who sell them make huge commissions. They are not regulated by a governmental investment regulatory agency. In fact, over the years the government has started cracking down on these products and many lawsuits have turned up claiming misrepresentation and fraud.
What is so dangerous about these strategies?
The idea on paper is easy to understand and makes total sense. In reality, it doesn’t quite work as advertised. It is human nature to want to believe the sensational claims. The dangerous part of the whole sales process is that it is easy for you to get suckered into it. Always live by one principle. A sales pitch with a sensational claim should be met with a heavy dose of skepticism. If it is too good to be true, it is too good to be true. That alone will work to keep you out of trouble.
Remember there are no slam dunk solutions. If this were so, everyone would be doing it.
All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.
Thursday, October 18, 2007
What To Do If You Get Laid Off
So what do you if you think that you are going to get the dreaded pink slip at work? Well it is not a major surprise anymore. Typically companies fire the advanced warning that lay-offs will occur. If this happens to you or you suspect it is going to happen, it is important to take immediate action. Simply, you have to go to work.
1) Determine your staying power – Know the bare minimum that you will need to get by each month.
2) Determine what income will be coming in and for how long.
3) Obviously you want the best possible highest paying job. However, determine at what cost you are willing to pay. You can only hold out so long. At some point, you might have to take a lower paying job. Determine that timeframe up-front.
4) Determine what you will do with your retirement plan – It is important to roll this over to an IRA.
5) Resist taking some time off - When a lay-off occurs you have to go to work immediately finding a new job. Develop a game plan and make a list of everyone you know that might be able to help you.
6) Most importantly, stay in constant prayer and resist the temptation to worry. Getting laid off can be a scary proposition. Always remember that God is and will always be in control. He has a will for you. It is your job to trust His will and do your part by working as hard as possible to get another job.
All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.
1) Determine your staying power – Know the bare minimum that you will need to get by each month.
2) Determine what income will be coming in and for how long.
3) Obviously you want the best possible highest paying job. However, determine at what cost you are willing to pay. You can only hold out so long. At some point, you might have to take a lower paying job. Determine that timeframe up-front.
4) Determine what you will do with your retirement plan – It is important to roll this over to an IRA.
5) Resist taking some time off - When a lay-off occurs you have to go to work immediately finding a new job. Develop a game plan and make a list of everyone you know that might be able to help you.
6) Most importantly, stay in constant prayer and resist the temptation to worry. Getting laid off can be a scary proposition. Always remember that God is and will always be in control. He has a will for you. It is your job to trust His will and do your part by working as hard as possible to get another job.
All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.
Wednesday, October 17, 2007
Fund Manager Issues a Warning to Those Invested in the Stock Market
The prediction business on Wall Street is a tough one. The markets are and will always be too unpredictable. In his weekly newsletter, John Hussman of the Hussman Funds issued a stern warning concerning today’s stock market. Although it is somewhat technical, it is definitely worth a read. I wanted to provide this link for you.
John Hussman’s Warning
All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.
John Hussman’s Warning
All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.
Tuesday, October 16, 2007
New Bill Forgives College Loans for Public Service Employment
The new College Cost Reduction and Access Act just recently signed into law offers some interesting opportunities for college students. Some of the provisions of the law:
- Increase Pell Grant Scholarships over time,
- Provide up-front tuition assistance for students willing to teach in high poverty areas or high-need subject areas
- A landmark investment of $510 million to be made into minority serving institutions
- Reduce the interest costs by 50% over the next four years on subsidized student loans
The most interesting provision of the new legislation is federal debt forgiveness for anyone going into a public sector job. The government will forgive the balance of debt not paid after 10 years as long as the student works in the public sector. The public sector is defined as military service members, first responders, law enforcement officers, firefighters, nurses, public offenders, prosecutors, early childhood educators, librarians, and others.
The program will figure out your monthly payment based on either your salary if you are single or your combined salary if married. The public service employee will make 120 payments and the rest would be forgiven by the government.
So what is the drawback? Well the good news is that the government would forgive the remaining school debt. The bad news is that the employee will now owe taxes on that forgiven money. For example, let’s say that the remaining balance on a note comes out to $100,000. The tax bill due that year could be as high as an additional $35,000. Where someone who is making $45,000 to $50,000 a year is going to come up with $35,000, I have no idea.
Only Congress can take a good idea and turn it into a bad one.
For more information you can go to www.finaid.org.
Monday, October 15, 2007
The Irresponsible Mortage Industry
A recent advertisement read:
“Are you Paying to Much for Your Mortgage?”
Then they show how you can pay $ 1,698 for a $ 510,000 mortgage.
Most consumers don’t understand how mortgages work. In today’s cash crunched economy, consumers are looking for ways to reduce their expenses. There are also those who are buying into the real estate boom and attempting to buy more house than they can afford.
Well, there is a industry that claims to solve all of those problems. It is the Loan Shark Mortgage Industry. Since people don’t understand the ins and outs of mortgages, they go to the “professional” to get advice on mortgages. In reality, they walk into the shark's den and get sold a horrible product that will only make things worse in the future.
These companies are marketing these irresponsible mortgages and taking advantage of people who are in hopes of buying a house when they can’t afford it or people who are in cash flow trouble.
There are some good people in the mortgage business. Alice White Hinckley is someone that I confidently recommend for anyone who is need of a mortgage. The problem is that people like Alice are far and few between.
Keep this mind when thinking about a mortgage.
You don’t pay too much for a mortgage unless your interest rate is higher than the current market for interest rates is paying. Don’t fall for the “pick a payment” scheme.
“Are you Paying to Much for Your Mortgage?”
Then they show how you can pay $ 1,698 for a $ 510,000 mortgage.
Most consumers don’t understand how mortgages work. In today’s cash crunched economy, consumers are looking for ways to reduce their expenses. There are also those who are buying into the real estate boom and attempting to buy more house than they can afford.
Well, there is a industry that claims to solve all of those problems. It is the Loan Shark Mortgage Industry. Since people don’t understand the ins and outs of mortgages, they go to the “professional” to get advice on mortgages. In reality, they walk into the shark's den and get sold a horrible product that will only make things worse in the future.
These companies are marketing these irresponsible mortgages and taking advantage of people who are in hopes of buying a house when they can’t afford it or people who are in cash flow trouble.
There are some good people in the mortgage business. Alice White Hinckley is someone that I confidently recommend for anyone who is need of a mortgage. The problem is that people like Alice are far and few between.
Keep this mind when thinking about a mortgage.
You don’t pay too much for a mortgage unless your interest rate is higher than the current market for interest rates is paying. Don’t fall for the “pick a payment” scheme.
Friday, October 12, 2007
What Comes First - Debt, Emergency Funds, or Retirement?
What is the most important priority for your money? Should you save for retirement, eliminate debt, or save for emergencies? Should you attempt to do all three? This is a question that I get frequently through the Ask Bob question and answer section on Prudent Money.
In looking at a person’s financial situation, my initial concern is always the strength of their financial foundation. There are two pillars that hold up that foundation and neither of them have anything to do with invested money. First, is there any debt? And if so, is the debt on a schedule to be paid off quickly. Second, does the person have adequate emergency savings readily available, as well as a plan for that emergency account?
If you run into a problem with debt or you have an emergency, it will not matter if you have money locked up for retirement. You have to be able to take care of the here and now.
So here is the strategy that I would recommend across the board:
1) Put a schedule together to determine how you are going to get out of debt. Make that your number one priority before investing in retirement or anything else. The only exception to that rule would be if there is a 401k match available. You don’t want to not accept free money from your company. This is where you really need to determine what is the most important. Getting out of debt is paramount.
2) Start thinking of a way to handle emergencies. What is going to be your game plan if an emergency were to occur? Now if you follow this formula of liquidating debt at all costs, what are you going to do about emergencies? Now this is where it gets tricky. If you are paying off a credit card where you can borrow the money back if needed, then you aggressively pay off the credit card. If you are paying off a credit card and there is no way of borrowing any of that money back in the event of an emergency, then you need to also make building an emergency fund a priority alongside of getting out of debt.
3) Once your emergency fund is built and you are out of debt, it is time to start thinking about retirement.
Obviously, these rules of thumb will not apply to everyone. However, for most, this ends up being a prudent game plan. If you cannot take care of the present, the future doesn’t matter.
In looking at a person’s financial situation, my initial concern is always the strength of their financial foundation. There are two pillars that hold up that foundation and neither of them have anything to do with invested money. First, is there any debt? And if so, is the debt on a schedule to be paid off quickly. Second, does the person have adequate emergency savings readily available, as well as a plan for that emergency account?
If you run into a problem with debt or you have an emergency, it will not matter if you have money locked up for retirement. You have to be able to take care of the here and now.
So here is the strategy that I would recommend across the board:
1) Put a schedule together to determine how you are going to get out of debt. Make that your number one priority before investing in retirement or anything else. The only exception to that rule would be if there is a 401k match available. You don’t want to not accept free money from your company. This is where you really need to determine what is the most important. Getting out of debt is paramount.
2) Start thinking of a way to handle emergencies. What is going to be your game plan if an emergency were to occur? Now if you follow this formula of liquidating debt at all costs, what are you going to do about emergencies? Now this is where it gets tricky. If you are paying off a credit card where you can borrow the money back if needed, then you aggressively pay off the credit card. If you are paying off a credit card and there is no way of borrowing any of that money back in the event of an emergency, then you need to also make building an emergency fund a priority alongside of getting out of debt.
3) Once your emergency fund is built and you are out of debt, it is time to start thinking about retirement.
Obviously, these rules of thumb will not apply to everyone. However, for most, this ends up being a prudent game plan. If you cannot take care of the present, the future doesn’t matter.
Thursday, October 11, 2007
Is it a Good Idea to Co-sign or Loan Money?
If you look back through the history books, there have been many countries that have become so indebted and on the brink of financial ruin, that a lender of last resort was needed to come in and bail out that country. Throughout history, we have played that role and I would suggest currently other countries are playing that role to a certain degree for us.
That can also happen on an individual level as well. A person can become so indebted or have such poor credit that they require a personal loan or someone to co-sign for them.
So what should you consider when it comes to co-signing or loaning money to someone?
Co-signing is the worst of all situations when it comes to debt because you are taking on the responsibility of the debt that you have no control over. If you are going to co-sign for someone, remember that it is the same as taking out the debt yourself. How are you going to know for sure that it is being paid back? If it doesn’t get paid back, then your credit is harmed and you will be on the hook for the debt.
I always like to look at the book of Proverbs. The book of wisdom to me is a compilation of wise bits of information that, if implemented, keep us out of harm’s way. Concerning co-signing, King Solomon writes in verse 26 of the 22nd chapter:
(26) Don’t agree to guarantee another person’s debt or put up security for someone else.
It is an important piece of wisdom because the majority of co-signing agreements don’t work out.
With all good intentions, people will lend money to help another out. Now it might be that you feel God leading you to help someone out and lend them money. If you are going to lend money to another, go into the agreement with one thing in mind. If they don’t pay it back, you are fine with considering it a gift.
In most situations, the person borrowing the money ends up in a bigger mess, doesn’t pay the money back, and then a relationship is destroyed. It is just not worth it.
Most importantly where you are co-signing or loaning money to or for another, just know the risk. Anyone that comes to you for either arrangement does so with all good intentions. When either a co-signing deal is consummated or money is given on a personal loan, both parties feel real good about everything working out.
You have to consider the risk. People get themselves in over their head and cannot get money the conventional way. For most people severely in debt, the solution is to create more debt. Thus, as a co-signer or a lender to someone, you become the lender of last resort and assume huge amounts of risk.
Once again, only go forward with either arrangement if you are fine with picking up the tab.
Having said all of that, I was having a conversation with Jeff before we went on air. What about the people who are good for it? What about the people who are good for their word?
There are those good people out there and I also believe that there will be people that God leads you to help. As we always talk about on Prudent Money, the best rule of thumb when it comes to making decisions is simply this:
First, know the risk of the decision.
Second, pray that God will give you peace about saying either yes or no.
That can also happen on an individual level as well. A person can become so indebted or have such poor credit that they require a personal loan or someone to co-sign for them.
So what should you consider when it comes to co-signing or loaning money to someone?
Co-signing is the worst of all situations when it comes to debt because you are taking on the responsibility of the debt that you have no control over. If you are going to co-sign for someone, remember that it is the same as taking out the debt yourself. How are you going to know for sure that it is being paid back? If it doesn’t get paid back, then your credit is harmed and you will be on the hook for the debt.
I always like to look at the book of Proverbs. The book of wisdom to me is a compilation of wise bits of information that, if implemented, keep us out of harm’s way. Concerning co-signing, King Solomon writes in verse 26 of the 22nd chapter:
(26) Don’t agree to guarantee another person’s debt or put up security for someone else.
It is an important piece of wisdom because the majority of co-signing agreements don’t work out.
With all good intentions, people will lend money to help another out. Now it might be that you feel God leading you to help someone out and lend them money. If you are going to lend money to another, go into the agreement with one thing in mind. If they don’t pay it back, you are fine with considering it a gift.
In most situations, the person borrowing the money ends up in a bigger mess, doesn’t pay the money back, and then a relationship is destroyed. It is just not worth it.
Most importantly where you are co-signing or loaning money to or for another, just know the risk. Anyone that comes to you for either arrangement does so with all good intentions. When either a co-signing deal is consummated or money is given on a personal loan, both parties feel real good about everything working out.
You have to consider the risk. People get themselves in over their head and cannot get money the conventional way. For most people severely in debt, the solution is to create more debt. Thus, as a co-signer or a lender to someone, you become the lender of last resort and assume huge amounts of risk.
Once again, only go forward with either arrangement if you are fine with picking up the tab.
Having said all of that, I was having a conversation with Jeff before we went on air. What about the people who are good for it? What about the people who are good for their word?
There are those good people out there and I also believe that there will be people that God leads you to help. As we always talk about on Prudent Money, the best rule of thumb when it comes to making decisions is simply this:
First, know the risk of the decision.
Second, pray that God will give you peace about saying either yes or no.
Wednesday, October 10, 2007
The Five Things You Need To Know About Emergency Funds
To any financial question, there are two different answers. There is the textbook answer and the then there is the answer that works best for you. The textbook is the standard answer or the ideal answer. Remember that everyone’s financial situation is uniquely different. Thus, you can use the textbook answer as the starting point. Then move from there.
The textbook answer for funding emergencies is six months of salary. However, you might not need a full six months of cash sitting in a reserve. For some of you, that might be too much. For some of you, that might not be enough. Here are five things that you need to know when it comes to handling emergencies.
1) Unemployment - Determine the minimum amount that you need to get by on. That is the amount of money that you need monthly to cover the bare minimums. That would not include saving money, eating out, entertainment, etc. It would just be for the absolute necessities. Think through how long you would want to give yourself to find a job. Multiply the two numbers and then subtract any money that you think you would get from unemployment insurance.
2) Disability – Disability insurance comes in short-term and long-term. Most employers have disability insurance as part of an employment package. Take a few moments and familiarize yourself with the benefits. Know how long it pays out, determine the amount it pays each month, and finally know exactly when it starts. From a short-term standpoint, we want to know the gap if any between the day the disability occurs and when benefits start to pay. You will want to know that you can bridge that gap through an emergency fund.
3) A Bare Minimum - Have a minimum of $2,000 to $5,000 for those every-once-in-a-while big expenditures that pop up. It could be anything from your car breaking down, something needing to be replaced at your house, or paying a health insurance deductible.
4) Emergency Fund or Debt - Always liquidate the debt first. If you are paying down on a credit card, you can always borrow that money back in the event that you need it. The best case scenario is that you pay the debt down and don’t need the cash.
5) Emergency Fund or Retirement – Contrary to popular thought, I would select emergency fund. You can get that taken care of in a reasonable amount of time. Retirement will not matter if you have an emergency. Emergency funding should take precedence.
The textbook answer for funding emergencies is six months of salary. However, you might not need a full six months of cash sitting in a reserve. For some of you, that might be too much. For some of you, that might not be enough. Here are five things that you need to know when it comes to handling emergencies.
1) Unemployment - Determine the minimum amount that you need to get by on. That is the amount of money that you need monthly to cover the bare minimums. That would not include saving money, eating out, entertainment, etc. It would just be for the absolute necessities. Think through how long you would want to give yourself to find a job. Multiply the two numbers and then subtract any money that you think you would get from unemployment insurance.
2) Disability – Disability insurance comes in short-term and long-term. Most employers have disability insurance as part of an employment package. Take a few moments and familiarize yourself with the benefits. Know how long it pays out, determine the amount it pays each month, and finally know exactly when it starts. From a short-term standpoint, we want to know the gap if any between the day the disability occurs and when benefits start to pay. You will want to know that you can bridge that gap through an emergency fund.
3) A Bare Minimum - Have a minimum of $2,000 to $5,000 for those every-once-in-a-while big expenditures that pop up. It could be anything from your car breaking down, something needing to be replaced at your house, or paying a health insurance deductible.
4) Emergency Fund or Debt - Always liquidate the debt first. If you are paying down on a credit card, you can always borrow that money back in the event that you need it. The best case scenario is that you pay the debt down and don’t need the cash.
5) Emergency Fund or Retirement – Contrary to popular thought, I would select emergency fund. You can get that taken care of in a reasonable amount of time. Retirement will not matter if you have an emergency. Emergency funding should take precedence.
Tuesday, October 09, 2007
The Mortgage Industry Is Still At It
Countrywide is the poster child for irresponsible lending. Their aggressive marketing tactics and lending money at any costs have created huge problems in the credit markets.
A listener sent out a marketing letter that he just received. They are marketing a 40 year fixed rate mortgage and inviting you to also take out cash from your home. So they want to set you up on a mortgage that lowers your payment as well as allows you take money out of your home equity. In other words, they are inviting you to fully mortgage your home to the hilt by taking out all of the equity possible and assuming a low payment that will ensure that it will take forever to pay down the loan.
Then there is a marketing piece from Wells Fargo. Wells Fargo advertises the advantages of using their services as follows:
· Take as much cash out of your home as possible
· Skip your first payment
· Lock in your rate at this low
· Then they show a low payment
The disturbing part of this advertisement is that they advertise a payment that is before fees. It is not based on the APR. Most people don’t understand the difference between the stated rate and the APR. In addition, this is an advertisement that would cover a jumbo loan. There is no way that a consumer could get the advertised rate for a jumbo loan.
At what point does Congress step in and protect us from ourselves and the sleight of hand marketing tactics of the mortgage industry? Granted, consumers are ultimately responsible for the decisions that they make. However, I think that it is the responsibility of Congress to pass regulation that prohibits this type of advertising.
A listener sent out a marketing letter that he just received. They are marketing a 40 year fixed rate mortgage and inviting you to also take out cash from your home. So they want to set you up on a mortgage that lowers your payment as well as allows you take money out of your home equity. In other words, they are inviting you to fully mortgage your home to the hilt by taking out all of the equity possible and assuming a low payment that will ensure that it will take forever to pay down the loan.
Then there is a marketing piece from Wells Fargo. Wells Fargo advertises the advantages of using their services as follows:
· Take as much cash out of your home as possible
· Skip your first payment
· Lock in your rate at this low
· Then they show a low payment
The disturbing part of this advertisement is that they advertise a payment that is before fees. It is not based on the APR. Most people don’t understand the difference between the stated rate and the APR. In addition, this is an advertisement that would cover a jumbo loan. There is no way that a consumer could get the advertised rate for a jumbo loan.
At what point does Congress step in and protect us from ourselves and the sleight of hand marketing tactics of the mortgage industry? Granted, consumers are ultimately responsible for the decisions that they make. However, I think that it is the responsibility of Congress to pass regulation that prohibits this type of advertising.
Monday, October 08, 2007
Shades of 1929
Some people get a little irritated when I make references to the great crash of 1929 because:
a) It is different this time
b) Something like that could never happen again
c) We are in a super bull market
d) Our economy is much different than in 1929
You can pick your own answer. I keep going back to 1929 because of all of the similarities. This morning Goldman Sachs announced that some wealthy individuals were going to pump in about 3 billion dollars into their failing funds in an effort to save them. It is a "great buying opportunity."
If you go back and read the history books, the exact same thing happened in 1929. The markets were getting into big trouble and a "pool" of investors would go in and buy tons of stock to prop up the stock market. Investors in the 20's would get a feeling of relief knowing that this group of wealthy individuals were pooling together to save the markets. It was the big name people back then and it is the big name investors this time around as well. Besides, what is a few billion among friends?
Now my favorite part of the press release about this influx of capital was the highlights from the Goldman letter sent to the clients (read: individuals losing a lot of money) into their funds. (read:ponzi schemes). Here is the excerpt:
....according to an Aug. 10 letter to clients from Clifford Asness, the firm's founder and managing principal. Asness blamed the losses on the "strategy getting too crowded,'' rather than the models not working.
In other words, it wasn't our fault that we invested all of your money into sub-prime debt. I would argue the model was terribly flawed from the start.
This is the problem with Wall Street, politicians, the Federal Reserve Board, _____ (fill in the blank) - No one will take responsibility for the irresponsibility that has taken place.
a) It is different this time
b) Something like that could never happen again
c) We are in a super bull market
d) Our economy is much different than in 1929
You can pick your own answer. I keep going back to 1929 because of all of the similarities. This morning Goldman Sachs announced that some wealthy individuals were going to pump in about 3 billion dollars into their failing funds in an effort to save them. It is a "great buying opportunity."
If you go back and read the history books, the exact same thing happened in 1929. The markets were getting into big trouble and a "pool" of investors would go in and buy tons of stock to prop up the stock market. Investors in the 20's would get a feeling of relief knowing that this group of wealthy individuals were pooling together to save the markets. It was the big name people back then and it is the big name investors this time around as well. Besides, what is a few billion among friends?
Now my favorite part of the press release about this influx of capital was the highlights from the Goldman letter sent to the clients (read: individuals losing a lot of money) into their funds. (read:ponzi schemes). Here is the excerpt:
....according to an Aug. 10 letter to clients from Clifford Asness, the firm's founder and managing principal. Asness blamed the losses on the "strategy getting too crowded,'' rather than the models not working.
In other words, it wasn't our fault that we invested all of your money into sub-prime debt. I would argue the model was terribly flawed from the start.
This is the problem with Wall Street, politicians, the Federal Reserve Board, _____ (fill in the blank) - No one will take responsibility for the irresponsibility that has taken place.
Friday, October 05, 2007
Easy Steps To Take In Life Insurance Planning
One of the most overlooked types of planning I find today when working with people is planning for financial hardship due to death of a loved one. For one thing, it is a topic that most people don’t enjoy talking about it. However, it might the most important. There are few things more tragic then the combination of death and financial hardship. It is a tough combination to overcome.
Fortunately, planning for this financial hardship on a basic level is pretty easy to do by following these next few steps. The first step is to determine the amount that you might need. Just answer the following questions:
Do you want to pay off a house or any other debt?
Do you want to replace an income? If so, for how long?
Do you want to take care of college education for the kids?
Are there any special needs that require additional funding?
Are you responsible for elderly parents?
Once you have the total amount, subtract out the value of any current investments or savings that might also be used in the event of a death. For instance, you would want to subtract out any money saved back for college education funding or any money saved in just a general education account.
Now that you have a net number, you know how much life insurance that you will need. There are all types of life insurance programs available. I would go with term. It is the cheapest insurance available and you should be able to cover your entire need for a good value.
The rule of thumb is to lock in the amount of the insurance for as long as possible. For instance, 30 year term would be preferable. You know that for 30 years, the cost is fixed.
Finally, go and get quotes from at least five companies. This will allow you to shop for the best rate. However, there is one word of caution about looking for the best rate – make sure you consider the quality of the life insurance company.
Fortunately, planning for this financial hardship on a basic level is pretty easy to do by following these next few steps. The first step is to determine the amount that you might need. Just answer the following questions:
Do you want to pay off a house or any other debt?
Do you want to replace an income? If so, for how long?
Do you want to take care of college education for the kids?
Are there any special needs that require additional funding?
Are you responsible for elderly parents?
Once you have the total amount, subtract out the value of any current investments or savings that might also be used in the event of a death. For instance, you would want to subtract out any money saved back for college education funding or any money saved in just a general education account.
Now that you have a net number, you know how much life insurance that you will need. There are all types of life insurance programs available. I would go with term. It is the cheapest insurance available and you should be able to cover your entire need for a good value.
The rule of thumb is to lock in the amount of the insurance for as long as possible. For instance, 30 year term would be preferable. You know that for 30 years, the cost is fixed.
Finally, go and get quotes from at least five companies. This will allow you to shop for the best rate. However, there is one word of caution about looking for the best rate – make sure you consider the quality of the life insurance company.
Thursday, October 04, 2007
What Can You Do To Protect Yourself Against Financial Hardship?
Financial hardship can present itself in so many different ways. There are some definite steps that you can take. Let’s talk through these –
1) Make sure that you have an adequate emergency fund – I would even suggest that this is more important than saving for the future. It is vitally important to make sure that you have enough cash on hand in the event that life throws you a curve ball.
2) Make sure that your cash is working for you and make sure that your cash is in a safe place – savings accounts at banks are just not paying the going rate in savings. At some banks the rate could be as low as 0.50%. Check around and make sure that you are getting the going rate on your savings. In addition, make sure that you don’t exceed the FDIC insurance for any bank. The government insures deposits up to $ 100,000 per depositor. Anything over that is at risk.
3) If in the state of Texas, either issue a credit freeze on your credit files and or take out Identity Theft monitoring. I cannot stress enough how important it is to protect your identity.
4) Understand your health insurance and what you might have to pay out of pocket in the event of an illness.
5) Make sure that you have some type of disability insurance policy in force either through your work or through an independent policy.
6) The obvious thing to do is to make sure that you work as hard as possible at getting out of debt. If you have a lot of debt, put together a debt inventory so that you would know exactly the state of your situation.
7) Know where you are spending your money. If someone called me and needed a consultation session regarding a financial emergency, this would be the first thing that I ask for to determine the shape of the situation.
8) If it looks like you are running into a financial problem, be proactive and make sure that you know all of your options. There is a tendency to bury your head in the sand. Make sure that you start checking into every available option.
1) Make sure that you have an adequate emergency fund – I would even suggest that this is more important than saving for the future. It is vitally important to make sure that you have enough cash on hand in the event that life throws you a curve ball.
2) Make sure that your cash is working for you and make sure that your cash is in a safe place – savings accounts at banks are just not paying the going rate in savings. At some banks the rate could be as low as 0.50%. Check around and make sure that you are getting the going rate on your savings. In addition, make sure that you don’t exceed the FDIC insurance for any bank. The government insures deposits up to $ 100,000 per depositor. Anything over that is at risk.
3) If in the state of Texas, either issue a credit freeze on your credit files and or take out Identity Theft monitoring. I cannot stress enough how important it is to protect your identity.
4) Understand your health insurance and what you might have to pay out of pocket in the event of an illness.
5) Make sure that you have some type of disability insurance policy in force either through your work or through an independent policy.
6) The obvious thing to do is to make sure that you work as hard as possible at getting out of debt. If you have a lot of debt, put together a debt inventory so that you would know exactly the state of your situation.
7) Know where you are spending your money. If someone called me and needed a consultation session regarding a financial emergency, this would be the first thing that I ask for to determine the shape of the situation.
8) If it looks like you are running into a financial problem, be proactive and make sure that you know all of your options. There is a tendency to bury your head in the sand. Make sure that you start checking into every available option.
Wednesday, October 03, 2007
The Mortgage Environment
On my show yesterday, I interviewed Alice White Hinckley. I have known Alice for over 25 years. She frequently comes on my show to talk about mortgages. She describes the environment right now as very tough. We were really focusing on consumers that are in a position that need to refinance. So, I wanted to go through a few points that she made.
First, if you are having trouble with your mortgage, be proactive. The worst step you can take is to either ignore it or bury your head in the sand. It is best to call the bank and talk over your options. Keep in mind, the bank doesn’t want your mortgage back anymore than you want to face foreclosure.
Second, if you are in a situation where your rate on your mortgage is about to change within the next 6 months, go ahead and start looking at your options now. This is not a situation where a lot of options exist right now. If you are going to face a surprise, you need to be prepared for it. If you need to work on your credit score, you would then have 6 months to do something about it.
Mortgages have drastically changed. Everything is very black and white now. If you don’t meet certain criteria, then you don’t get a loan. As close as a few months back, mortgage companies would consider all types of information when writing a home loan. Now that information is limited to a few important pieces.
If you have any questions about your loan, I would greatly encourage you to e-mail Alice White at alwhite@firsthorizon.com.
First, if you are having trouble with your mortgage, be proactive. The worst step you can take is to either ignore it or bury your head in the sand. It is best to call the bank and talk over your options. Keep in mind, the bank doesn’t want your mortgage back anymore than you want to face foreclosure.
Second, if you are in a situation where your rate on your mortgage is about to change within the next 6 months, go ahead and start looking at your options now. This is not a situation where a lot of options exist right now. If you are going to face a surprise, you need to be prepared for it. If you need to work on your credit score, you would then have 6 months to do something about it.
Mortgages have drastically changed. Everything is very black and white now. If you don’t meet certain criteria, then you don’t get a loan. As close as a few months back, mortgage companies would consider all types of information when writing a home loan. Now that information is limited to a few important pieces.
If you have any questions about your loan, I would greatly encourage you to e-mail Alice White at alwhite@firsthorizon.com.
Tuesday, October 02, 2007
Are No Fee Mortgages A Good Deal?
Is the no cost mortgage loan a good deal? Well the banks are getting very aggressive with their marketing and making it look like they are giving you the deal of the lifetime. Is it really a good deal?
I was watching TV the other night and came across an advertisement that really caught my attention. It was an advertisement for Bank of America’s no cost mortgage. They were going to pick up all of the closing costs. I thought at first that it was just a 30 minute infomercial. To my shock, I discovered that it was a continuous through-the-night infomercial that seemed to never finish. Wow, that is aggressive marketing and maybe unprecedented by the banking community.
The CEO of Bank of America, Ken Lewis, was quoted in Newsweek as saying – “We want a bigger share of your wallet…..” Well, I guess they really mean it.
Go ahead and give them a bigger share of your wallet. However, you might not be getting the better deal.
I went through the process of checking rates online with Bank of America. The first question was focused on the size of the payment. Then I saw all of the adjustable rate mortgages. It is good that Bank of America is still marketing these risky loans and talking about low payments.
After seeing the numbers and comparing them to a mortgage company where you have to pay fees, it was pretty easy to see where the “no cost” came from. The interest rate was higher on the Bank of America loan. Long-term you are much better off paying the lower interest rate and the closing costs up-front.
Bank of America will tell you this works better if you are only going to be in the house for a short term. Of course, that is the wrong way to buy a house. Home-buying should be viewed as a long-term commitment.
Well, I guess I can sum it up about Bank of America with another quote from their CEO Ken Lewis - “We are close to a time when we will look back and say we did some stupid things.”
No one does anything for free – so here is what you look for:
1) Get an estimate from a no fee mortgage and place it up against a company who charges fee
2) Read the fine print and see where the costs are buried
I was watching TV the other night and came across an advertisement that really caught my attention. It was an advertisement for Bank of America’s no cost mortgage. They were going to pick up all of the closing costs. I thought at first that it was just a 30 minute infomercial. To my shock, I discovered that it was a continuous through-the-night infomercial that seemed to never finish. Wow, that is aggressive marketing and maybe unprecedented by the banking community.
The CEO of Bank of America, Ken Lewis, was quoted in Newsweek as saying – “We want a bigger share of your wallet…..” Well, I guess they really mean it.
Go ahead and give them a bigger share of your wallet. However, you might not be getting the better deal.
I went through the process of checking rates online with Bank of America. The first question was focused on the size of the payment. Then I saw all of the adjustable rate mortgages. It is good that Bank of America is still marketing these risky loans and talking about low payments.
After seeing the numbers and comparing them to a mortgage company where you have to pay fees, it was pretty easy to see where the “no cost” came from. The interest rate was higher on the Bank of America loan. Long-term you are much better off paying the lower interest rate and the closing costs up-front.
Bank of America will tell you this works better if you are only going to be in the house for a short term. Of course, that is the wrong way to buy a house. Home-buying should be viewed as a long-term commitment.
Well, I guess I can sum it up about Bank of America with another quote from their CEO Ken Lewis - “We are close to a time when we will look back and say we did some stupid things.”
No one does anything for free – so here is what you look for:
1) Get an estimate from a no fee mortgage and place it up against a company who charges fee
2) Read the fine print and see where the costs are buried
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