One of my coworkers, a divorcee with adult children who, like me, works multiple jobs, was asking about taking out a home equity loan to pay off some credit card debt. My response: it’s more important to reduce spending to live within your means than it is to pay this off in this manner, because all that’s happening is debt is being shifted from one pile to the other.
“But I can’t make ends meet.”
And that’s what it came down to. I could sit down with my coworker and go over every single bit of her budget to try to find areas to cut–piano lessons, gym memberships, cell phones for her adult kids–and none of it would matter if she didn’t have the discipline to actually do it.
A budget, after all, is just a plan; if she can’t follow through, it doesn’t matter how the math looks. What counts is the discipline to keep spending in check, and if she doesn’t have that, no amount of loans or plans will help.
The Federal Reserve met today and it appears that interest rates will stay low for some time to come.
While this is not the best news for savers who are already struggling to find “high yield” or money market accounts paying even two percent–and regular brick and mortar banks tend to give even worse rates–if you’re looking to borrow money or refinance a mortgage, this could really help.
In combination with the extension of the Federal Housing Tax Credit, this might make more first time homeowners out there; it could also really be a big deal for folks who are trying to refinance a mortgage.
Take advantage of those great rates if you can. They certainly won’t last forever. We already did by refinancing the mortgage in 2009 to 4.25%, a rate I’m ecstatic about. It wasn’t a fun process, but it was worth it.
One of the best features of the economic stimulus packages that have been going around since the economy got flushed down the toilet has been the homebuyer tax credit of up to $8,000 for first time homebuyers, which is set to expire at the end of the month.
Fortunately, there is bipartisan support for extending this credit.
This is a huge break for those looking to buy a home, but it comes with the usual gotchas (besides the credit actually getting extended, which the lawmakers are working on right now): the buyer has to have a down payment saved up and decent credit to get a loan–which really, is the way it was always supposed to be–and find a lender willing to lend you the money.
That said, if you meet those requirements, you may have a few more months to make this into a fantastic time to buy a home.
One of the nice side benefits of the low interest rate environment is that mortgage rates are continuing to stay low. I told the story a few months back about refinancing the mortgage here to a 4.25% fixed rate over 30 years; apparently, according to this CNNMoney.com story, mortgage rates have dropped for six weeks in a row, and some are seeing rates below 5%.
If you have either enough money for a decent (at least 20%) down payment on a purchase or are refinancing with sufficient equity, have a pretty high credit score, and a secure job with a decent income, it may still be the time to refinance.
Personally, we cut hundreds of dollars a month off of our mortgage payment every month and dropped about a point and a half (more, actually) off of our rate, so I’ve been really happy with our refinance. If you can drop a point on your rate and you have more than seven or so years left on your mortgage, it may be well worth your while to refinance yours too! Think about it.
One of my coworkers told me this during a lunch break. Knowing her, I was not surprised, although I’m not sure if there’s much of a way to help her:
“My husband is convinced housing prices will drop to the point we can afford to buy a house. But we’re not saving anything.”
This looks like a missed opportunity waiting to happen. The days of the freewheeling mortgage brokers are gone; it’s so much harder to get a loan now than it was when the housing market was booming it’s as if everyone has done a complete 180. Granted, it really needed to be harder than it was, because the way we got into this mess is by lending people who had no chance of paying it back–and who may have been a lot less than honest about their financial situation when applying for the loan–a lot of money. Turns out they couldn’t pay it back, so now the lenders are gunshy and wanting everything verified to the nth degree.
However, that said, it’s not impossible to get a loan–all that has to happen is that you need a strong credit score and a reasonable down payment.
My friend is in grave danger of missing the boat here. As evidenced by my mortgage refinance not long ago, rates are very low historically (even if it’s become impossible to get the 4.25% we did), and home prices are still coming down. But without saving for a down payment, there’s no way my friend is going to be able to get a new house when she and her husband think prices have come down enough.
Despite all of the changes over the years, the reality is still this: the basics for buying a house are good credit and a down payment. Without these–especially now–there’s no way to do what she and her husband want to, and without saving, they definitely won’t be able to get the house they’re hoping for anytime soon.
Welcome to our on-time-for-once edition of the Link Payday. This day after United States Independence Day, we take a look at some of the best posts on personal finance blogs of the last few weeks:
This is a conversation that comes up fairly often: how much or what to give for a wedding gift? Lynnae over at Being Frugal asks the readers the question in You Tell Me: Favorite Frugal Wedding Gift. This is a tough one to tackle and opinions seem to vary wildly, so thanks for taking it on!
Blogging Away Debt tackles a close to home subject (everyone in this state is affected, either directly or through a friend or family, by the crunch here which is possibly leading to furloughs or layoffs) when she talks about Understanding Government Spending… Since she’s a government employee herself, she has a view that’s right in the midst of this controversy.
Ron at The Wisdom Journal might be talking to me when he says Having Too Many Goals is Like Having None. Yes, I have a lot of goals, but I’m hoping they’re not too many; I do, however, run out of energy and not get everything done the way I want them too. I’ll have to consider that a bit.
Spilling Buckets tells us 10 Things I Wish I Knew as a First Time Homebuyer. Considering that they just purchased their home, I think they’re far ahead of the game; after all, I wish I knew a lot of things as a first time fill-in-the-blank only months or years later!
And finally, David over at My Two Dollars tells us How to Fix a Mistake On Your Credit Report. I‘m hoping I can finally get one of the bureaus (after years of trying) to fix a mistake on mine (they think I lived somewhere in California–I’ve never lived off this island!).
And that’s your Link Payday for July 5, 2009!
I’m currently in the process of a third listening of the CD audiobook version of All Your Worth. While I initially was quite skeptical, I’ve become a bit intrigued by their idea of budgeting and the concept of counting the dollars rather than the pennies.
The short version (very short) of their idea of a budget is 50% of your take home pay going to “must haves” (like rent), 30% to “wants” (just for fun stuff, like eating out or parties), and 20% to savings. They seem to be against spending logs (of which I’m a big proponent) because the people who do them are no fun (hey!). But the concept that I thought the most of was how before the advent of the credit card for most consumers, they had a lot of difficulty actually getting into financial trouble. Why? Because no one would lend them “too much money”; money that they really are a poor risk to pay back.
Say, like that subprime mortgage mess.
I’ll give a more complete discussion of this later; what I can say now is that while I started off a skeptic, I’m warming up as I repeatedly listen to it.
Many people are confused about the term “tax deductible”. We often here that in reference to donations to charitable organizations or for the interest on the mortgage payments for a primary residence. Here’s how all of this comes into play:
For federal (and, at least in Hawai’i, state) income tax, there is a “standard deduction”–an amount that the folks who collect and calculate taxes on income say you can deduct no matter what. However, if you have tax deductions that are in excess of the standard deduction, it would reduce your taxable income to use those instead. The interest on primary residence mortgages and charitable donations fall into that category.
Despite common belief, you don’t get a one to one benefit on your deductions. Instead, what you are getting is a benefit equivalent to your marginal tax rate on deductions, and in the case of interest on mortgages, it’s a benefit on paid interest. Let’s look at an example:
Say you’re in the 25% federal tax bracket, as I am. Let’s say you have a $1200 a month mortgage payment, and $1000 of that is interest. At the end of the year, you can deduct that $1000 from your adjusted gross income; given that you’re in the 25% bracket, 25% of that $1000, meaning $250, is the amount you are actually reducing your tax bill by. Let’s say you’re in the 5% state bracket; that would be another $50 off your state tax bill. So while you are getting a hefty $300 in tax benefit, it’s not the whole $1000. Keep this in mind when considering whether or not you can afford your mortgage!
It works similarly for tax deductible charitable contributions as well. While the tax benefits are great, just remember that you’re not getting a one to one benefit, rather a benefit based on your marginal tax brackets.
Welcome to our Link Payday March 22, 2009 edition! It’s heating up a bit here in the islands but the weather is still unpredictable. Here’s a few of the best personal finance blogosphere posts of the last couple of weeks:
Tricia over at Blogging Away Debt highlights An Awesome Quote which is everything that needs to be said about the vast majority of people dealing with this economic crisis. How simple, how true, how difficult.
Lynnae over at Being Frugal uses her weekly Tuesday topic to bring up a long forgotten way to spend less on your wardrobe (or lots of other things for that matter when she writes Tightwad Tuesday: Something Borrowed. There are many times I will borrow or lend items to friends, but it’s really important to return and to express appreciation as well!
One of the personal finance blogs I think is underrated, Her Every Cent Counts, highlights an interesting issue when she writes about how 4 in 10 Americans Don’t Know When They’ll Retire. She reports on an ING Direct study here on this concerning issue.
Paid Twice blogs about The Art of Not Accepting No For an Answer when she looks at ways to assert yourself. Does it always work? No, but there are many times that by simply trying to figure out what alternatives you have, you can get an outcome that’s closer to what you want.
And finally, since I’m about done (finally!) refinancing the mortgage, I’m going through all the information available out there and in my head about these huge loans. Moolanomy tackles a difficult one to explain around this subject (including President Obama’s Making Home Affordable program) with What is Loan Modification?
And that’s your March 22, 2009 Link Payday!
One of my friends who I meet for meals from time to time likes to tell me a lot about her financial problems (she is apparently oblivious to this blog), including how she got into her current adjustable rate mortgage with no money down, how the apartment has no equity, and how she’s having difficulty with her credit cards or paying her other bills. What’s amazing to me is not that she’s not looking for help or advice (I can assist with that), but instead, the conversation always ends with:
“But don’t worry, Ryan, it’ll all work out somehow.”
Uh, how?
Gang, “it’ll all work out somehow,” is NOT a financial plan! Realistically, there are only a handful of things you can do to change your financial situation: spend less, earn more, or do both. But, as the old time management tenet goes (and it applies equally to your finances), failing to plan is planning to fail. Figure out your baseline. Set goals. Make a budget. Spend less. Take a part time job. Refinance your mortgage. But do something. Don’t just believe it’ll all work out somehow–make it work out somehow!
