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As regular readers have probably picked up on, I’ve been in the process of relocating once again.  This should be the last move for a very long time, perhaps ever.  I loved my time in the Midwest (and it certainly had its advantages), but I’m happy to be back in New England.  While many costs between the two locations are similar, there are a few differences worth considering.

Housing

This is the major difference.  In the Midwest, people complained about the high cost of housing, but they really had no idea how inexpensive it was.  One woman lamented that “you can’t even get a starter home for under $60K any more.”  I hate to tell her, but a comparable home here in New England costs upwards of $300K.  Out there we built a brand new, 5 bedroom home with all the upgrades for just over $200K.  Here we found a wonderful 4 bedroom home, built in the early 70s, that cost well over twice as much.  My mortgage payment basically tripled.  Higher property value also means

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This week’s book review is Right on the Money by Pat Robertson.

The first thing many readers would probably want to know about Right on the Money is the amount of spiritual influence found in its pages.  Author Pat Robertson gained fame as a televangelist, founding the Christian Broadcasting Network and hosting The 700 Club.  Right on the Money is not at all preachy.  While Robertson’s beliefs are certainly evident within the book (particularly in the introduction and the chapter on families), the book reads much more like it was written by a true financial expert with strong spiritual beliefs rather than a preacher who also knows something about finances.  Robertson balances his actions (”In my financial planning, giving takes precedence”) with the caveat that you may have different priorities and should tweak his generalized advice to your particular situation.  In one part, he specifically states that an implementation strategy is intentionally omitted, since you’ll need to tailor that to your situation.

The book starts with a concise summary of how the financial crisis occurred. So few people realize the chain of events that led to our current economic state that many would be well serve to read the book just for this point. I liked this book right from the start.  To paraphrase an early excerpt: “Ignorance is no excuse….nor has it served finances well.”  I couldn’t agree more.

Robertson advocates using the

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photo credit: woodleywonderworks

Skyrocketing mortgage payments as adjustable rate mortgages (ARMs) reset was a leading contributor to the burst in the housing bubble.  These events reconfirm that fixed rate mortgages are generally the safer course of action for home buyers.  But which type of fixed rate mortgage is the best?  There are many different terms for fixed rate mortgages, but today we’ll be comparing the two most common types: the 30 year fixed and the 15 year fixed.

At first glance, you might expect a 15 year mortgage to have twice the payment of a 30 year, since you’ll pay the house off twice as fast.  In fact, since 15 year loans generally carry a lower interest rate and much of the cost of a mortgage goes out to interest, a 15 year mortgage may only have a marginally higher payment than a 30.

Let’s look at an example: Today’s rates are

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This post is part of my Freaky Financial Fridays series, where I argue a case from an opposing view, generally in contradiction to my own philosophy or conventional financial advice.

Interest only mortgages are often associated with the sub-prime meltdown and generally dismissed by responsible financial advisers.  While interest only loans are often poor vehicles for potential homeowners, there is one type of buyer who could stand to gain from their use.

Interest only mortgages are just that, only the interest portion of the loan is paid each month.  At the end of the term you’d owe just as much as when you started because no principal payments had been applied.  Unless the house appreciated, which is of course possible but less likely in today’s market, you would have zero equity in the home.  The one upside to that huge downside is that your monthly payment will be lower.  This fact has caused

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FHASecure is the program started last August to allow sub-prime borrowers to switch to low, fixed-rate mortgages after they fell behind on payments because their adjustable rate mortgages reset.

Only about 1.5% of the 200,000 refinances through FSASecure are reported to be for those who were about to lose their homes. The rest were homeowners who met the criteria for the program who simply wanted to lower their payments. You can’t fault the homeowners for taking advantage of the program. New requirements in July will change who is eligible.

The new rules, are as follows:

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There are many reasons why my finances are in good shape. In coming up with a list of those reasons, I noticed that a few were key to my getting ahead. I call these my wealth accelerators because they have had a dramatic effect on my net worth. Without these I would still have a positive net worth, but it wouldn’t be anywhere near where it is. Your wealth accelerators may not be the same as mine, but I suspect that many of these are common to most people.

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As someone who is debt free in all other aspects of my life, it’s probably not surprising that I prepay my mortgage. By prepaying, I mean paying more than the required payment each month. This will allow me to pay off my mortgage in about a third of the time. I’ll save a ton on interest and it seems like good financial sense, but there are some opposing views to consider. The fact that opinions vary so widely on the subject is a good indication that the right answer is highly dependent on your personal situation. Statements like “prepay 10% extra each month and you’ll be in a great position” are of no real value to anyone. There are simply too many other factors:

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A little competition between potential mortgage lenders can help to get you the best deal. Going into the process, it’s good to know the prevailing rates for the type of loan you are looking for. I get that information from the “today’s feature rates” section at Capitol Federal. Those rates may not be what you’ll get depending on your credit rating and location, but give you a ballpark estimate of what you can expect. If lenders come back radically different than what you see there, that indicates that something is wrong. It could be you (bad credit,etc) or them.

The next step is to apply with multiple lenders. You want to balance the work of applying with the benefit of having multiple offers. I usually get two quotes, but more may be even better. Having multiple quotes allows you to bargain back and forth with each company. I’ve found it useful to deal with a specific person (preferably a manager) at the lenders rather than with a generic customer service rep who may not be able to make a deal happen.

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I’ve mentioned it in the past, but confusion over the tax deduction for mortgage interest warrants it being repeated: the deduction is not a reason to have a big mortgage. Too many people get talked into buying more house than they can afford because they get sold on the idea that a big mortgage means a big deduction from the interest you pay. While it’s true that the more you pay in interest, the larger your deduction will be, that deduction is simply returning a portion of your money to you. You would be much better off not paying the interest in the first place.

The amounts vary with your tax bracket, but let’s assume that you are in the 28% bracket. That would mean that for every dollar you spend in mortgage interest, you’d reduce your taxable income by a dollar, which would save you 28 cents in taxes. If you were in the 25% bracket, you’d save 25 cents per dollar spent, etc. Spending a dollar to save 28 cents means that you are losing money. Having a larger mortgage and paying more in interest means that you are losing more money.

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With the current crisis in the mortgage industry, the likelihood of getting a mortgage with little or no money down is considerably less. Usually coming up with 10% down is sufficient to get a loan. The major drawback of putting down less than 20% is that you almost always have to pay PMI.

The method I used to avoid paying PMI on my first house was something called an 80/10/10 mortgage. The idea is that once you put 10% down on your house, you automatically have 10% equity in your home. That most likely qualifies you for a Home Equity Line of Credit for at least 10% of the value of your home. Taking out that credit effectively allows you to double your down payment and avoid PMI.

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