A few months ago, President Barack Obama announced a foreclosure prevention plan called Making Home Affordable. The plan included provisions for those who wanted to refinance, but couldn’t because of their loan to value ratio. Refinancing would be encouraged for those who had a loan to value ratio of between 80% and 105%. The idea was to help those whose home values have dropped in response to housing market troubles.

Unfortunately, the program has been seeing limited success. It relies on voluntary help from mortgage lenders, and it excludes those with even higher loan to value ratios. Yesterday Obama made a move to expand the Making Home Affordable program. Now, those with a loan to value ratio of up to 125% are eligible. There are also continuing incentives to encourage mortgage lenders to deal with homeowners.

As far as the housing market is concerned, this new move is unlikely to have a huge impact immediately. It probably won’t even arrest falling home values, or do much in terms of stabilizing the overall housing market. But it does have the potential to help prime borrowers who are looking to refinance to a lower rate. Mortgage interest rates are still relatively low, and refinancing could save folks who made good homebuying decisions a great deal of money.

It even benefits people like me. I bought my home two years ago with 5% down and a 30 year fixed rate. Obviously, I haven’t had time to make up a lot of ground in terms of home equity. My home has lost some value in the last two years, and I have a loan to value ratio of about 94%. (The new rules don’t change my eligibility.) We can easily afford our mortgage payment, but I wouldn’t mind if I got an interest rate that is 1 percentage point lower. Plus, there are places in town offering no-fee refinancing. We could refinance to a 15-year loan and only pay $200 more per month, saving us a great deal over the long haul.

Image source: woodleywonderworks via Flickr

It’s time for a Personal Story From My Life. Lucky you.

Every month, I schedule payments online. Last month, I had need to schedule a credit card payment. Now, I must admit (sheepishly) that between Christmas and the new car and paying those dastardly state income taxes, we’ve got a balance we’re carrying on the Bank of America credit card. Not a massive balance on the card in question, and one that will soon be paid off (next month), but a balance nonetheless.

Last month, I scheduled the payment online, much as I do for my satellite TV bill and my Internet bill. For some reason, it didn’t go through. Did I forget to hit some button in a final step? Maybe. But I recorded the payment in my personal finance software, and thought no more of it. Until this month, when I checked my statement. I called Bank of America, confused, and explained the situation. They waived the fee (I’ve never, ever missed a payment on this card in six years) and I scheduled a payment for last month and this month.

Upon further inquiry a couple days ago (just making sure the payment went through this time), I discovered that this one indiscretion resulted in a default rate of 27.99%. My regular rate on this card is 9.9%. I was furious. My account is in good standing! I’ve never missed a payment! I’ve been a card member for six years! I occasionally buy things to keep the card active! So I called Bank of America to ask for my interest rate back.

After talking to three people, I got my interest rate back. They did have to do a “credit account review” before making the decision, though. I had to give them my income, my job information, and allow them to pull my credit report. Which annoyed me. It’s obvious that this in not a normal thing for me. There usually aren’t any payments to miss in the first place. But, in the end, we got there. I managed to remain calm, despite my annoyance, and my general fiscal responsibility carried the day.

Have you ever had to ask for a lower interest rate?

image credit: Brian Katt via Wikimedia Commons

One of the phrases that has been tossed around quite a bit recently is “quantitative easing“. This is a monetary policy course that attempts to increase liquidity in the market. The idea is to promote lending amongst banks by indirectly sending interest rates lower. With the Fed rate effectively at 0%, direct interest rate intervention is not practical. So the Federal Reserve has turned to quantitative easing, buying mortgage-backed securities and agency debt. And, yesterday, the Fed announced its plans to begin purchasing mortgage-backed securities.

If you have seven and a half minutes, this is a better description of quantitative easing than I could ever provide.

Mortgage rates drop

Yesterday’s announcement from the Federal Reserve has resulted in lower mortgage interest rates today. Because mortgage rates are long term debt, they are connected to long-term Treasury bonds, specifically the ten-year bonds. As Treasury yields change, so do mortgage rates. Right now, mortgage rates have dropped to historic lows.

As a result, if you have good credit and if you have a reasonable amount of equity in your home, now might be a good time to refinance. Indeed, you could save tens of thousands of dollars over the life of your home mortgage loan if you refinance to these rates. Even 30-year fixed rates are below 5% right now. You can get even better rates with a 15-year fixed mortgage.

I received this question via email, regarding the “30% rule” when making your mortgage or rent payment:

I know that you’re supposed to stay around 30% of your income for housing costs per month. Is that 30% of net or gross, and is that only for the housing, or do they recommend staying under 30% for housing and all utilities?

This is an interesting question without a straightforward answer. “They” say many things, but from what I can tell from talking with some other financial types and consulting my common sense, the basic rule is 30% of your pre-tax (or gross) earnings, and that doesn’t include utitilies.

That said, here is what I, personally, think:

Try to keep your housing payment to 28% of your net monthly income.

Many mortgage lenders, if you want the best mortgage interest rate, have what is known as the 28/36 qualifying ratio. This means that your mortgage payment should only be 28% of your monthly income and no more than 36% of your monthly income should go to total debt (mortgage + other obligations). I suspect that this is even more common in the current economic climate.

I think that you would be wise to keep your housing payment — mortgage or rent — to 28% of your net income, rather than relying on your pre-tax income. (Our mortgage payment is 25% of our net income.) It might get you qualified, but you want to be able to afford the home without being “house poor” . I would even go so far as to include PMI and property taxes in the category of “mortgage payment”. We’ve done this, and our total housing expenses (including utilities and maintenance) is less than 30% of our monthly income.

What do you think is a reasonable percentage of your monthly income to make for housing?

image source: sxc.hu

I know everyone is all about whether now is the time to buy, but I’ve already got a house. So, of course, my current concern is whether or not to refinance. Here my refinancing considerations:

1. A lower interest rate would mean less money paid over all.
2. If I kept a 30-year mortgage, my monthly payments would be much lower. I could invest the difference.
3. I could refinance to a 20-year mortgage or a 15-year mortgage, gaining equity faster and paying less interest overall.
4. On the down side, I might have to pay loan origination and other fees, depending on who I refinance with. (Prepayment penalties are not an issue; I won’t have any.)
5. Will I even qualify for a mortgage refinance? We did just buy a car, and we’ve only been in the house for a year and half.

Refinancing: Rule of thumb

The rule of thumb on refinancing is that you should refinance when the going mortgage rate is at least 1% below what you are currently paying. And with rates where they are at, we’re pretty close to that. Our rate is 6.02%, and last week’s rate was 5.04% for a 30-year fixed. 15-year rates are even lower. So it’s looking like it might be a good time refinance. Unfortunately, we haven’t been in our home very long (about 18 months) and we just bought a car. We may not get approval.

But I’m going through the checklist anyway. I want to see if refinancing would be a good idea, so I’m doing my research on refinancing, and on our situation. I’m really liking the 20-year mortgage thing. Using a mortgage refinancing calculator, I discovered that if we get a 15-year fixed mortgage, we would be paying about $200 more per month with a 4.86% interest rate, but save about $19,000 in interest. With a 20-year fixed mortgage, at 4.96% interest, we would actually be paying about the same amount as we are now. And we’d save more than $16,000 in interest. I’ve been leaning toward a 20-year lately, because I don’t know if I want to add another $200 obligation on top of that new-acquired car payment.

Fees and the erosion of refinancing savings

Of course, if there are fees to pay, the savings will be eroded. I think, though, if I call around (especially to the credit union we belong to), I could probably get away with avoiding loan origination fees, appraisal fees, credit check fees and documentation fees. Some of the local banks are really looking to attract business. And even with paying some of the fees, we’d still be saving thousands over the life of the mortgage.

Of course, we still have to get approved. But I think I’ll at least go talk to someone about it. After all, these rates are a once-in-a-lifetime chance.

What do you think? Is now the time to refinance?

Today, the Federal Reserve is widely expected to cut the Fed Funds rate. Because the economy seems to be heading toward recession, the overriding goal is to stimulate the economy. And this means — as far as the Fed is concerned — making it cheaper for everyone to borrow money.

Because our economy runs on consumption fueled by debt, a Fed rate cut is expected to help stimulate the economy be stimulating more borrowing. Here’s one example of how it’s supposed to work for you and the economy:

1. The Fed cuts its rate, which influences consumer loans (including credit cards). This happens because the prime rate, in most cases, is the Fed Funds rate plus 3. So, the prime rate drops from 4.5% to 4% — assuming 50 basis point cut to 1%.
2. Your credit card interest rate drops. Credit card rates are prime plus whatever (I have one that is prime +7 and one that is prime +11), so theoretically, those drop as well.
3. With a lower interest rate, your monthly credit card payments drop. If you keep paying the same amount, more money goes to the principal, giving you more room on your credit card. If you just go with the minimum, you pay less money overall and have that money in your pocket. Either way, the hope is that this newfound “disposable” income finds its way into the economy when you buy stuff.
4. The economy is stimulated as people have more spending power and use it.

Also, the lower interest rates are meant to lure people into buying things with debt, since the rates are lower. Auto loan interest rates will drop, and that could make buying a car more desirable. Which would help a segment of the economy that is suffering rather badly.
Will the Fed rate cut work this way?

The big question now is whether or not today’s likely Fed rate cut will work this way. With credit card companies worried about increasing defaults, they are starting to tighten their requirements. Credit lines are being reduced (that’s right; check your statement — your $5,000 limit may only be $4,700), so even with lower rates, it may not mean more available for spending on the credit card.

Read more

About 45 minutes ago, the US Federal Reserve announced that its federal funds rate — which is the rate that banks charge each other for loans — will remain at the same low 2% it has been at for the past three months.

For people with cash investments (savings accounts, CDs, money market and the like), this is a bit of a bummer. On the other hand, people with consumer debt have something to cheer about: With interest rates remaining low, more of your credit card and home equity line of credit payments will go toward reducing your principal.

If you are working on getting out of debt, now is a great time to participate in aggressive debt reduction. Instead of eating up your payments with interest charges, chances are that you can make a bigger impact on your debt right now.

Go ahead. Make that extra credit card payment. It will help you in the long run.

image credit: sxc.hu

Sometimes, for some of the larger expenses, debt is necessary. When you do borrow, remember to:

Shop around for the best interest rates on loans.

Whether it’s a mortgage, car loan or even an education loan, shop around for the best interest rates. You will save money over the life of the loan.

image credit: sxc.hu

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I’m not overly fond of store credit cards. Every time I am asked “Would you like to save 10 percent on your purchase today?” at the check out line, I politely say, “No, thank you.”

Two things that I have seen lately have only served to deepen my dislike of store credit cards. Over at No Credit Needed, there is a great anecdote told about why stores like to push their credit cards:

Having worked in retail when I was in high school, I was familiar with that type of company policy. Apparently, her particular manager asks each CSR to get 2 credit applications, per week. I asked her what she thought about credit cards - in general. She cocked her head, slightly, and said - almost at a whisper -

“They tell us if we can get someone to sign up, and be approved, that we have guaranteed that that customer will shop at our store, on average, three times more often than they would have if they didn’t have a card with our store’s name on it.”

The other interesting thing I received was a press release from Consumer Reports and their ShopSmart publication. The press release focuses on an article that rates different store credit cards. Here is a quote from the press release:

“The promise to save immediately when you open a store credit card account is tempting, but big interest payments can easily exceed rewards,” said Lisa Lee Freeman, editor-in-chief, ShopSmart. “Store credit cards make sense only if you pay off your bill each month and only when the program fits your individual spending habits.

That is a very good point. No matter how good the discount may seem, store credit cards charge higher interest. And it is also worth noting that store credit cards are not viewed as favorably as those from major banks. When figuring your credit score, store credit cards fall somewhere above payday loan, but well below major bank cards. You can probably make them work, if you are responsible, but wouldn’t you rather use a better card that gave you better rewards?

Think three times before getting store credit cards. And if you are still tempted, just say no anyway.

image credit: sxc.hu

As I mentioned before, the string of interest rate cuts by the Federal Reserve has severely hit the annual percentage yield (APY) on my cash investments, including my high yield savings account.

So it’s rather refreshing that at least one bank is upping its APY, even if by a rather small amount. E*Trade Bank is increasing its APY on the high yield savings account. Does this mean that other banks (including mine, maybe) will follow suit?