Archive for February, 2009

Mortgage Rescue or Ruin?

Economics, Politics | Posted by C.C.Mitchell
Feb 21 2009

On of the hottest issues in Politics today is, what should be done about the ever declining housing market if anything. The White House currently has a plan, but the skeptics ponder its effectiveness. Some believe it will do more harm than good; while The White House contends that it is our best bet. I see it as a bet; a gamble for our futures.

Its a PITI

PITI in mortgage lingo means (Principal, Interest, Taxes, and Insurance), these are the components of a mortgage. Hmm, PITI! Ironic isn’t it?

Property Taxes and Insurance alone often account for close to 35% of a mortgage payment; usually paid out in the form of an escrow account. Escrow accounts are a way of making sure that your state and local governments get their taxes owed out of you, and  your lenders’ investment (your home), is protected. Your home is their collateral they need to make sure its protected, so if something bad happens and your home is destroyed they get their money out of it. Isn’t it nice that they let you pay a premium that they benefit from?

Mortgage ApplicationIn the Obama Administrations’ plan to make bad mortgages affordable PITI is a key factor. It constitutes the percentage that must be met to achieve the Homeowners Affordability and Stability Plan or HASP. The percentage put forth by The Treasury Department is 31% of the borrowers gross income, thats pre-tax income.

To make a mortgage affordable and stable one of more of three factors: The interest rate, the principal balance, and the duration of the loan, must be altered.

Here is one problem with the plan: HASP does not account for Home Equity Loans, and Equity lines of credit that lender have to consider when issuing loans. This is a knot that must be untied before much good can be done.

In regard to the altering of mortgage loans in an attempt to make them HASP worthy. Foxbusiness.com put forth an example which examines the guts of the HASP plan far better than I could as I am not a big numbers guy. Their example reads as follows:

“For a sample household with payments adding up to 43% of his monthly income, the lender would first be responsible for bringing down interest rates so that the borrower’s monthly mortgage payment is no more than 38% of his or her income. Next, the initiative would match further reductions in interest payments dollar-for-dollar with the lender to bring that ratio down to 31%. If that borrower had a $220,000 mortgage, that could mean a reduction in monthly payments by over $400. That lower interest rate must be kept in place for five years, after which it could gradually be stepped up to the conforming loan rate in place at the time of the modification. Lenders will also be able to bring down monthly payments by reducing the principal owed on the mortgage, with Treasury sharing in the costs.”

The monthly payment on a $220,000, 30-year mortgage, assuming an interest rate of 6%, would be $1,319. On top of that, the typical borrower would have to pay about $660 for taxes and insurance each month for a total payment of $1,979. If that were 43% of income, it would mean income of about $4,600 a month or $55,200 a year (which is higher than the $50,200 median household income).

Could this mean back to the drawing board for The Obama team? If Foxbusiness is correct I hope so.

Economic pundits of the plan say the math doesn’t work with the numbers put forth by the Obabma Administration because the Tax and Insurance portions of the payments are fixed leaving all the altering to the Principal balance and the Interest rates. Coupled with the fact that the $75 billion pledged to bail out the housing market won’t be nearly enough to cover all loans in need of assistance. Many on Wall Street say it will cost closer to $275 billion to fund such an ambitious plan.

Here’s an idea, why doesn’t the government simply wave all property taxes for five years instead of forcing lenders to take less for contracts signed in good faith by mortgage holders?

Would that be more cost effective than doling out what many authorities on this stuff say will cost upwords of $275 billion?

Would this not help out the banks with all their bad paper too?

Wouldn’t they get the money the lended with at least most of the interest they’ve been counting on to stay afloat?

These are my thoughts. I’m just trying to make sense of a Cracked World.

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Firefox 3

Computers | Posted by C.C.Mitchell
Feb 18 2009
Mozilla Firefox
Image via Wikipedia

Ever since I first started using Firefox about 3 years ago I have loved this browser. I was discussing problems with a slow internet connection with a colleague at work when he suggested to me that I try an alternative to Internet Explorer. That was when I discovered Firefox by Mozilla and after that there was no looking back.

Getting Firefox is easy. And its FREE! You just go to the Firefox website and click the download button. The program is only 7.1 MB, with a DSL or Cable internet connection it shouldn’t take more than a minute or two for download.

Once you have it downloaded to your desktop just double-click the installer and let it go. upon installation firefox will prompt you on a few basic choices.

Firefox needs to know a few things about preferences such as:

  • Would you like Firefox to import your favorites from Internet Explorer?
  • Would you like to use your Home Page from Internet Explorer?
  • Would you like to make Firefox your Default Browser?

I answered yes to the first two of these options. I wasn’t willing to change my default browser until I was sure I liked this better than IE.

Opening the browser for the first time took me to my regular Home Page which I asked to be imported from Internet Explorer and to the Firefox start page. Here you find a lot of tips and features which were now at my finger tips.

Some of the more prominent features Firefox has to offer are:

  • Tabbed Browsing
  • A comprehensive Bookmark system
  • A superior Download Manager
  • An integrated Search Bar

This just names the most obvious of the best features, There are many others that run behind the scenes that are unseen but certainly noticed.

The Tabbed Browser was and still is my favorite feature of them all. It allows you to open multiple web pages in one single window. This is not only convenient but more efficient for my computer too. When you want to follow a link to a new web page you have several options; you can 1) right click the link and select open in new tab, 2) drag and drop the link into the Tab Bar next to your currently open tab, or 3)  if you have a mouse with a scroll wheel, (and most of us do), you can center-click the Mouse Wheel to automatically open the new tab.

The Book marks are another great feature allowing the user to store numerous web pages of choice in the Bookmarks toolbar at the top of the browser window, (right below the standard navigation buttons). This allows you to open your favorite websites without having to open a Bookmarks (Favorites) Pane. I have well over a dozen book marks in the bookmark toolbar many of the are organized into separate Folders I have placed in the toolbar. I can open the folder and select a web page or open the entire folder of web pages at the click of the button. Filling the Bookmark toolbar is easy, just drag and drop the site you want from either your Bookmarks Pane which opens on the left with the bookmarks Nav. button, or right from the webpage the itself, open the web page and drag the title that’s in the tab to the toolbar and its there.

To Bookmark a web page just right-click its tab and select Bookmark this tab, or bookmark all tabs if you wish. The bookmarks slider on the left side will hold an indefinite amount of bookmarks and bookmark folders if you run out of room in the toolbar.

The Download Manager once set to your liking in preferences, is a matter of clicking download and Firefox will automatically download any given file to where ever you tell it to. Firefox is intuitive enough to default the same location as other files of like formats. So if you downloaded a video clip to Windows Media Player. Firefox will automatically download other files of that or similar formats to the same application unless you tell it otherwise. Firefox also keeps a detailed log of all you downloads which can be found in Tools on the Main Menu. From there you can see all the recent file downloads you’ve made.

The Integrated Search Bar is located in the upper right corner of the browser and is usually defaulted to Google,  this can be changed, just click the drop down arrow next to that familiar Google G and select the search engine of your choice. Firefox provides a broad selection of different Searches including Amazon, Ebay, Yahoo, and Ask to name a few as well as a tool to download more searches if you don’t find the one you want.

Firefox has many other behind the scenes things going on that you don’t see or know about but they give a performance superior to other internet browsers n areas like security and Pop Up blocking. I have literally had less then 10 pop ups on my computer in the last 12 months using Firefox.

Next time I will explain how extensible Firefox is and show some of my favorite extensions for Firefox. Until then give Firefox a try and help mend The Cracked World.

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New Found Wealth - Part 6

Personal Finance | Posted by C.C.Mitchell
Feb 18 2009

First of all Congratulations on your New Found Wealth! Now that we have worked on preventing your money from working against you we’ll look at how to make it work for you. When I say work for you I mean lets make your money make more money for you. Your money used to make more debt it can also make you more money. I’m talking about compound interest.

Compound Interest can be your worst enemy or your best friend. If you carry a balance on your credit cards, it’ll be your worst enemy. That 15% interest rate on your Credit Card means that 15% of your card accounts balance will grow by 15% annually. At this rate a $1000 balance with a 15% interest rate will grow to $1150 in a year. That amounts to an additional $12 a month; that doesn’t seem like much but when you consider the amount of debt the average consumer takes on it can be a formidable foe. A $6000

Compound Interest

Compound Interest

balance would grow to $6900! A $900 dollar increase, that breaks down to $75 a month. THAT SUCKS! What sucks even more is that growth is added to the balance and the next month the 15% interest rate is figured based on the new higher balance. For instance that $6000 that grew to $6900 now will grow another $1035 to total $7135 the next year. OUCH!

But we have dealt with debt earlier in this series. Now we are going to see the alter ego of compound interest.

When it comes to compound interest the same rules apply to you that apply to the average credit card. meaning that you can be the recipient of that compounding cycle. The way this is done for the average Joe, or Joann, is through investment in mutual funds usually through an IRA or 401(k).

Mutual Funds don’t earn an interest rate. They do however earn a rate of return based on how profitable your mutual fund or funds are. This rate of return is presented in the form of a percentage score. A 15% rate of return produces the same effect as a 15% interest rate. Remember the $6000 dollar credit card balance we just discussed?

Now imagine having $6000 in a mutual fund(we’ll call it Fund X). Fund X earns 15% in one year, you just made $900! Now the idea is that you reinvest your returns right back into Fund X and if it were to make 15% in the following year, it earned $1035 and is now worth $7135 that’s a $1935 profit for doing NOTHING! Nothing but waiting. Keep in mind these rates of return are averages they won’t earn the same amount every year some years Fund X may earn 20% and other years only10%. It takes a lot of years, but in the grand scheme of a lifetime its worth the wait.

TIP! - Time is Money

The sooner you start the better. The more years you spend harnessing the power of compound interest the more money you will finish with. Therefore you have to put it in and leave it in, (don’t pull out all of your money because of one or two down years). This builds momentum like the locomotive in Dumping Debt. The compound rate grows exponentially over time.

I started investing at age 20, I bought stock in a mutual fund and built up my contributions to $1000 by age 22. From there I have never added another nickel to that fund, if this fund continues its historical average return of 12% over the remaining 43 years until retirement it will have grown to $130,729.91. That’s the power of compound interest working for you.

Here’s the great part, what if I start contributing to the fund again? Or I start contributions to a new fund?

On both counts I grow even more wealth over the years. I am now 38 years old. Opening another $1000 fund account now would grow to $21,324.88 in the remaining 27 years until I turn 65. If I never added another penny to it.

Contributing another $1000 to my existing fund now would grow it to $152,054.72 an increase of $21,324.80! For $1000!? That’s impressive. I guess I need to come up with another $1000. If I wait just one more year to make that new contribution, it would grow to $135,763.14, so one year makes a difference of 16,291.58.

There are no guarantees in life, the numbers in these scenarios are not carved in stone. But in the history of mutual funds, no fund has ever lost money over a ten year period of time. That is a pretty good track record since mutual fund became a legal financial entity in 1934 — that’s in the middle of The Great Depression! I’ll cover how to investing more thoroughly in a later installment in the series.

Now you know what to do with your money in a Cracked World.

Any questions?

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Refinancing is All the Buzz

Economics | Posted by C.C.Mitchell
Feb 16 2009

Refinancing is on the rise. With rates for refinancing at a 37 year low Americans are coming out in droves to hammer out a new loan and save big bucks each month. According to Fox Business.com applications for refinance loans are up 25% this month alone.

The prospect of reducing their home loans to a more affordable rate in a financially strapped economy is very appealing. With rates hovering around 5%, consumers can save hundreds of dollars a month by refinancing to a lower interest rate, while others, who are uncertain about the future want to shorten their mortgages with 15 year loans.

These rates are slightly higher then the  record lows in January because the government purchased $500 billion of mortgage based securities. This should free up lending capital for banks. But are still very low and allow the banks more breathing room to lend to consumers.

No one has a greater opportunity to better their position than those who got saddled with an ARM (Adjustable Rate Mortgage), these kinds of loans can cause serious damage to a monthly budget when the rates go up. Right now they’re at a 37 year low, where do you think there going to go?Up! That’s where. This can cause their mortgage payments to go up, sometimes, by hundreds of dollars. Such a move can allow many to stay in their homes who would otherwise lose them to bankruptcy when the interest rates rise on their ARM and increase their payments to levels they cannot pay.

Of course you need to have a good credit rating to really take advantage of these ultra-low rates. A credit rating of 700+ is preferable by most lenders to take advantage of the new low rates. While lower credit ratings will render a much higher interest rate.

Before you hurry off to the bank for your new loan make sure you take with you some proof of income. That’s right proof of income. The days of no income verification loans are over. Lenders are now going to require borrowers to verify their income, after all failure to do so is one of the major causes of the tumble the banks took in the fall of 2008.

Lenders want to establish that the borrowers income is stable and sufficient to make the payments when they come do each month.

Another factor to consider is ones debt ratio. Banks are not going to dole out new mortgages that encompass 50% of the borrowers monthly income. As a rule of thumb I would recommend staying under 33% of monthly income, to ensure that other obligations can be met as well.

Consider as well:

  • Your closing costs, closing on a refinanced mortgage can be expensive. (Closing costs will amount to a couple thousand dollars in many cases and even more in others).
  • Are you sure the savings you will gain from refinancing will pay for it as well.
  • How long it will take you to recover the closing costs from your monthly savings.
  • How long you intend to say in your home. (If you plan to sell before you recover your expenses tan maybe you should reconsider refinancing.
  • You will spend another 30 years paying this new mortgage. Maybe a shorter term loan is in order so you don’t add years on to your payment schedule.

These are all important points to think about. Before any decision is made consider them all carefully. I for one want to pay off my house early enough to be able to save for a few years before I retire. Thats whats important to me.

Is refinancing right for you?

Whats important to you in a Cracked World?

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