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Should I Refinance My Mortgage?

Mortgage interest rates are at historically low rates.  Consequently, you may be wondering if it makes sense to refinance your mortgage.  Although there may be a variety of reasons for refinancing your mortgage, there are probably three primary reasons for you to refinance your mortgage.

  1. Lower your payments by borrowing money at a lower interest rate
  2. Convert your adjustable rate mortgage to a fixed rate
  3. Access some of the equity in your home (this isn’t as common or easy as it was a few years ago)

Since there are costs associated with refinancing a mortgage, the decision to refinance may not be a slam-dunk.  Essentially, you are paying money today, to save more money later.  As an example, assume that refinancing reduces your monthly payments by $50 per month.  If you have 25 years remaining on your mortgage, you will save $15,000 over the life to the loan.  If you assume you will pay $5,000 in closing costs to refinance, you save $10,000… over the next 25 years.

There are many different mortgage calculators available which will help you calculate your savings.  You can click here for one, or search the internet.  Keep in mind, internet calculators are only estimates, and the computations from your lender may be different.

Here are a few additional things to consider in your decision to refinance.

  • The time value of money – In my simple example above, you save $15,000 over the next 25 years, but you have to pay $5,000 up front.  Not only does it take you over 8 years to recoup your $5,000, you also lost the opportunity to invest that money and earn a rate of return (hopefully).  With interest rates on liquid assets near zero, the time value consideration may be nil.
  • Income taxes – The only refinance costs you can deduct are points paid to reduce the interest rate.  Unlike points you pay when you initially purchase your home, points paid on a refinanced mortgage must be amortized over the life of the loan (25 years in our example).  With a lower interest rate, your current mortgage interest deduction will also decrease, which could cause your current tax liability to increase slightly.  Although you’ll come out ahead by paying less interest over the life of the loan, your total benefit might be reduced by a smaller mortgage interest deduction.
  • Length of ownership – Since it’s likely to take you a couple of years of reduced payments to recoup the closing costs, you need to consider how long you plan to stay in your home.  If you expect to move in the next few years, the monthly savings may not be sufficient recoup your out-of-pocket costs for the refinance.
  • The loan process – The mortgage financing industry has changed dramatically.  It’s not easy for anyone to get a mortgage in today’s market.  I’ve had clients who experienced difficulties and delays in getting their refinancing approved, even though they could have easily written a check to pay off their existing mortgage.  The aggravation may be worth it, but expect the approval to be a hassle.
  • Market value – The fair market value of your home may be one of the biggest stumbling blocks to a refinance.  Market value is what prevented many people with subprime and adjustable rate mortgages from being able to refinance.  If you don’t have sufficient equity in your home, you won’t be able to refinance, even if you’re making your current payments, and the refinance will make it easier for you to continue making your payments.

Many advisors will tell you that the interest rate should at least 0.75-1.00% lower than your current rate for a refinance to be economically feasible, but depending upon your situation and long-term goals, a smaller rate differential might still be beneficial.

My advice is to run the calculation with an online calculator and see if it makes sense to you.  If the closing costs can be recouped within the next 5-7 years, and you don’t plan to sell before then, talk to a mortgage broker and get their advice.  A reputable broker will be able to give you a more accurate estimate of what it’s going to cost, the savings you can expect, and the process involved.

Refinancing your mortgage can save you money.  However, there are costs involved, and you want to make sure the benefits exceed the cost.

Can credit card debt management help you to save dollars?

People in this part of the world are used to using credit cards rather than cash for their day-to-day expenses. The proportion of credit use is far more than their retirement savings. Credit cards have given them immense portability and convenience to make frequent purchases. However, this has given rise to several financial diseases which is affecting the fragile US economy. One of the major setbacks is the accumulation of credit card debt. This makes it imperative for the people to know the ways of credit card debt management to avoid getting into a financially sticky situation.

The ways of credit card management

Here are few methods of reduce credit card debt as well as save dollars:

  1. Transfer your credit card balances – This means transferring all your multiple credit card balances into a zero interest credit card. This may be for a year or so as offered by the credit card company. This creates a great opportunity to clear out all your outstanding bills within the promotional period. In this process, you’ll be paying for the principal balance and not for the interest. However, there is a transfer fee for this procedure which hovers around 3-5% of the balance amount. By this method, you’ll save a lot of money even after paying the transfer fee.
  1. Create a budget: Start developing the habit of spending less. Vow to start living a frugal life. This is because the more you spend on useless things, the less you save. Therefore, to fight back such irresponsible behavior, plan a budget that will be comfortable for you to follow. Keep in mind that this budget should not become a burden for you; instead it should motivate you to spend smartly and save money for the rainy day. Use those savings towards debt repayment and you’ll see a remarkable decrease in the number of outstanding bills.
  1. Lower your interest rates: This is one of the most effective steps in the credit card debt management plan. Be vigilant and do your market research to learn about the recent market offers which various creditors are making. After a getting a thorough knowledge of the market offers, contact your current creditors. Request them to lower your card’s interest rate. The creditors will welcome this sort of gesture from you and will readily oblige. If you’ve been a good customer who has been punctual in making the payments, then the creditors will surely consider your request.

During the negotiation phase with your creditors, tell them that you are considering balance transfer as an alternative to lowering the interest rate. This will give them the necessary nudge to accept your terms.

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This article was written by Grace Ruskin.  Grace is a financial writer and is associated with DebtCC Community.

Paying for Christmas

The most wonderful time of the year is quickly followed by the most miserable time of the year. Not because of the winter doldrums, but because of the credit card bills appearing in your mailbox.  If you’re like many Americans who used credit cards to purchase gifts for the holidays, financial stress quickly replaces the joy and happiness of Christmas.

You may have the unfortunate realization that it’s going to take you months to pay off your Christmas gifts.  Don’t feel alone.  According to Consumer Reports, 13 million Americans (nearly 6% of the population) are still paying off last Christmas.   If you’re only making minimum monthly payments on your credit cards, chances are you’ll be paying it off for several more years.

Do you know that there is another way to pay for Christmas?  I will even go so far as to say that it’s a better way.

The best time to start paying for Christmas 2011 is right now.  I’m not talking about taking advantage of all those after-Christmas sales to stock up on gifts.  Instead, you can start saving money now to pay for your Christmas shopping next year. 

The first step is deciding how much you want to spend for Christmas.  If you’re married, you need to discuss this with your spouse and come to some reasonable agreement.  You may have different families, traditions and expectations, so expect to compromise.

Let’s assume that you decide you want to spend $2,000 for Christmas gifts next year.  Starting in January, take $200 and save it (that’s $50 per week). Open a separate savings account if you need to, or find a bank that offers Christmas Club savings accounts just for this purpose.  With meager interest rates and bank fees, you might just stuff the cash under your mattress.  The key is that you save it the money and don’t touch it until Christmas.  It’s not an emergency fund or quick spending money; it’s for Christmas.  If you put $200 aside each month, you’ll have $2,000 in cash by the end of October just waiting to be spent on great Christmas bargains.

But wait… what about the debt from this year?  Wouldn’t I be better off using the $200 each month to pay off my credit cards? 

That may sound like a good idea, but I say don’t do it.  Reducing your existing debt and paying off your credit cards is a different discussion.  Chances are this is the cycle you’ve been operating under for years.  You charge it.  You work all year to pay it off.  When Christmas rolls around again, you haven’t saved any money for Christmas, so you charge it again.  If you want to break the cycle, you’ve got to do something different.

I’m all for paying off credit cards and getting out of debt. However, you probably won’t achieve either of these without learning how to live within a budget and saving money to pay for future purchases.   Even if you’re still paying for this Christmas next year, think of how great you’ll feel next year when Christmas is fully paid before Christmas.  The stress and agony of opening bills in January will be history.

When it comes to paying for Christmas, you can pay now or pay later.  If you start paying for next Christmas now, I think you’ll experience a lot more peace, joy and holiday cheer next year.

The Gift-Giving Season

Christmas is the gift-giving season.  There is a lot of emphasis to buy gifts for other people.  Not only are you expected to buy a gift, but there is a lot of pressure to buy the right gift.

If a gift is an expression of your love, adoration and appreciation, does it matter what gift you give?  Yes… and no.

A gift will communicate your feelings if it has special meaning to the recipient.  The best gifts are those that are unique to the person receiving them.  It doesn’t necessarily have to be expensive or extravagant.  Sometimes a simple or hand-made gift can communicate your feelings much more than something that costs a lot of money.  Therefore, the right gift is the one that has signficant meaning rather than a high price tag.

This is an important principle to remember when purchasing gifts, especially for Christmas.  Our culture places a tremendous value upon the type of gifts you give.  Love, appreciation, and status are often measured by the gifts you purchase.  Consequently, there is a lot of pressure to overspend at Christmas, especially by parents.  You may want your children to have a memorable Christmas; or you want them to have a better life than you did; or worse, you’re trying to buy their affection by lavishing them with gifts.

There is nothing wrong with giving your children many things or showering them with gifts, but there is a problem if you’re buying gifts you can’t afford.  Far better for you to find less expensive but more meaningful gifts, than try to create an extravagant Christmas that takes months or years to pay off.  

Gifts rarely make lasting impressions and memories.  Sure there may be one or two gifts you’ll remember forever, but most of them are quickly forgotten or replaced.  Also, the more someone has, the less likely that any one thing has much meaning.  Upon reflection, I can only think of very few gifts I received at Christmas that really helped define a great Christmas.  My best memories are family traditions and spending time with people.  I may be a little unique in this regard, but I doubt it.

Christmas is a season of giving.  It’s good to give presents and material items, if given with the right heart and for the right reason.  The appropriate gift can communicate your love, adoration, appreciation and respect for another person.  At the same time, make sure that you can afford what you’re buying.  Feelings of regret and animosity can easily replace love and affection when you buy things you can’t afford.  Besides… it’s a foolish financial decision.

Giving gifts is an important part of Christmas, but there are more important things than material gifts.  The gift of love, time and traditions will probably make much more of an impact on your family and friends than the things you buy.  You may find that the best gifts don’t cost much.

Christmas is the gift-giving season.  Bless others with your generosity and gifts… both those that cost money and those that money can’t buy.

Journey of Financial Freedom

Yesterday was the 234th anniversary of the signing of the U.S. Declaration of Independence.  It’s an annual holiday intended to commemorate our independence and freedom and to honor those who sacrificed and paid a price to obtain and secure freedom for our nation.

Since this blog is primarily devoted to matters of finance, I thought it would be appropriate to write about financial freedom.  If I were to ask you if you would like to be financially free, you would probably give an affirmative-type answer.  It’s common sense.  But what does financial freedom mean?

Do a Google search and see what pops up.  You’ll see links to websites for reverse mortgages; debt management; people who teach financial seminars or sell financial resources; tips for investing; financial articles; and even one for the dummies guide to financial freedom.  If you search for “financial freedom” in Investopedia.com, which includes a dictionary of financial terms, you’ll come up empty. 

There are a plethora of financial freedom sites but no uniform definition because “financial freedom” is more of a concept than an objective standard.  It’s based upon your personal values and lifestyle, not your wealth or net worth.  Consequently, the definition and standard of financial freedom will be different for each person.

For me, the concept of financial freedom is encompassed in the idea that your decisions are not primarily motivated by money.   In my life, motivation is the critical factor.  Money will always be a consideration in making significant life decisions.  First off… I’m not that rich, so money does matter.  Secondarily, I also believe in being a good steward of my money.  In other words… just because I can afford something, doesn’t mean I should or will buy it.   

Here is a personal example regarding motivation.  We moved from Vermont to Texas nearly 18 months ago. From August 2008 to February 2009, we went from three sources of income to one.  Including the loss of employer-provided health benefits, our income dropped nearly 45%.  Moving costs (which we paid for) and the expenses associated with selling and buying a new home added to the financial drain.  Although Lady M and I considered the financial implications, we made the move because we felt it was the right thing for us to do, irrespective of what it would cost us.  Fortunately, we had the financial wherewithal to make the move, and we’re very thankful that after a difficult year, things have turned a corner.  However, if money controlled our decision-making, we would still be shoveling snow in Vermont rather than baking in the Texas sunshine.

Financial freedom is not the amount of money you make.  It is sad, but I have clients who make hundreds of thousands of dollars, yet are far from financial freedom, because they spend it as fast as they make it.  Sometimes, they even spend it faster.  You can be broke at any level of income.

One aspect of financial freedom is to be able to create margin between your income and expenses.  Let’s be honest, nobody likes to make less money, but sometimes it happens, voluntarily or involuntarily.  If you spend all that you make, you’re probably under a constant stress to maintain what you have and can easily become panicked if you think your income is about to drop.  This situation will also limit your decisions.  You may continue to work late or sacrifice precious family time because you don’t dare to take time off.  You can also become trapped in a career or business you dislike because you can’t afford to make a career change.  Spending less than you make is an important step in your journey to financial freedom.

Debt management is integrally tied to creating margin. Debt payments are very different from many other expenses and discretionary spending.  You can’t just decide not to make a payment next month, at least not without consequences.   Be cautious when taking on debt, especially in good times.  You have to consider the implications of what would happen if your income dropped, even temporarily.   A significant factor in the recent economic recession and mortgage crisis resulted from people who could only afford their mortgage payments in the best of times.  Even a slight decline in the economy, pushed people over the edge and triggered a chain reaction of mortgage defaults, falling real estate prices and a financial catastrophe.  This has been a painful lesson for millions of Americans.  As tragic as the current situation is, it will be even more horrific if we don’t learn from it.

Wealth is also not an indication of financial freedom.  Although wealth is an objective measure of value, it is fluid and can change quickly.  Falling real estate prices and declines in the stock markets have caused trillions of dollars of wealth to vanish over the past couple of years.  Bill Gates is the richest man in the world, yet a substantial portion of his wealth is tied up in Microsoft stock.  If something dramatic were to happen and Microsoft suddenly lost tremendous value or became worthless, his lifestyle could be seriously affected.  Can’t happen?  All you have to do is look at what’s happened to the price of BP shares in the last 75 days.  Even for the rich and famous, wealth can come and go rather quickly.   

Life is like a country road.  There are hills and valleys, curves and straightaways, clear visibility and blind spots.  Your ability to navigate and make a successful journey is dependent upon your ability to recognize and adapt to changing situations.  Your attitude and aptitude to adjust to the changes in life will not only determine the life you live, but also your ability to experience financial freedom. 

In my humble opinion, financial freedom is more of a journey than a destination.  There is never a point where you have fully arrived. There are just stopping points and markers along the way.  The destination is a successful, productive and happy life and family.  Financial freedom allows you to make decisions along your life’s journey that will help you to arrive at your destination. 

This is what works for me, but since it’s personal rather than universal, what does the journey of financial freedom mean to you?

Kids, Work and Money (The Value of Money – Part V)

No matter what your socio-economic situation, I believe your children need to learn the value of money. There is no universal formula for making your children financially literate, but I think three foundational principles are key.

  1. Working and earning money
  2. Using their own money for discretionary expenditures
  3. Saving money

Children and work can be controversial.  Images of child labor and sweatshops may flash through your mind, but not all work is an exploitation of children.  I don’t consider mowing lawns, babysitting, or other household chores to be unfair child labor.  By getting paid for work performed, kids learn that money must be earned.  Few people in the world receive money without having to work, and your children shouldn’t come to expect it.  Instead they should anticipate working hard for what they earn.

Your children should also use some of their own money to buy discretionary items.  If you pay for everything, it’s hard for them to understand the need to make choices or for them to appreciate the value of their possessions.  If they have to spend $100 of their own money on a pair of jeans, they might decide the $50 pair is good enough if they also get to buy a shirt or pair of shoes too.

Children must also learn to save money.  If you allow them to spend everything they earn, they may not grasp the principle of deferred gratification.  Unless you’re going to support them forever, your kids will need to save money to buy a car, pay for college, or buy a home.  It’s good to start the discipline of saving money early.

I started doing chores and other work for my parents by age 8.  I got paid $3 a week for by labor.  My father also required that I save at least half of the money.  My parents paid for all the necessities, but if I wanted a certain toys or something unusual, I had to use my own money.   I didn’t fully appreciate it at the time, but my parents taught me the value of money from an early age, but I started to get a clue when I paid $4,800 cash for my first car (that was 1984).

The principles I learned as a youngster have served me well to this day.  You may not agree with my three components, but if you want to raise mature, self-sustaining adults, you better teach them the value of money when they are young.

Next in The Value of Money – Part VI… Money: Good or Evil?