What is an ARM Mortgage?

ARM, or “adjusted/adjustable rate mortgage”, is a mortgage with a fluctuating interest rate that varies in accordance to the market. So, in the beginning of your mortgage, while you might pay a lot of interest, should the market drop, so will your interest rate. This allows your mortgage payments to vary from month to month, depending on economic changes and the period with which your mortgage rate will be adjusted. For many borrowers, this is a very cost effective way to handle their mortgage payments, while also allowing them to save money.

The Benefits of ARM Mortgages

As previously mentioned, if you sign up for an ARM mortgage, you will find that your monthly payments will be much lower when interest rates are low. This would help a borrower to afford a higher priced home without having a higher monthly payment. Or, if you take the extra money you save and put it away in an interest bearing account, you will be able to make even more money while still maintaining the benefits of owning a home.

You will also find that ARM mortgages are readily available for a number of different potential home buyers. Even if you have bad credit, you might be able to find an ARM lender for your needs. Borrowers that can’t afford a high down payment will also find that there are ARM mortgages available to cover both the down payment and the actual house payment.

The Negatives of ARM Mortgages

The main concern with ARM mortgages is the fact that they transfer interest rate risk onto the borrower.

While you can save a significant amount of money when interest rates are low, there’s also an equal chance that your monthly payments will increase if there is an upswing in interest rates. Lenders such as Quicken Loans like writing adjustable-rate mortgages for this very reason. If you like to have steady payments that you can count on each month, then an ARM mortgage is not the right choice for you.

Those that don’t have access to a steady source of income, such as freelancers and the self-employed, might want to think twice before applying for an ARM as they may have trouble consistently making their payments every month.

However, if you are a person that can budget your monthly expenses particularly well, you will most likely find that the ARM gives you an opportunity to save more money than you would be able to with a fixed-rate mortgage.

In the end, it is best to consider your lifestyle and your financial history to determine which mortgage is the best choice for you. Sitting down with a mortgage officer to discuss your options is the best way to start the decision making process. ARM mortgages are right for many Americans, and they might just be the answer you have been looking for.

Not too long ago, my wife and I were in the process of window shopping as our home was in dire need of window replacement.

We received quite a few estimates and ultimately made our selection. Right now we are in the midst of the installation with a little more than half of the windows installed.

While we had saved the money for the cost of the replacement windows, we have been thinking about a few additional home improvements that have yet to be saved for in advance. As such, we have been discussing a few different alternatives as to how we should pay for these home improvements.

There have been three methods that we have discussed thus far – wait and save for the improvements, use a HELOC to cover the cost of improvements or use a 0% balance transfer offer to pay for the improvements and put a little extra in savings.

Saving For Improvements
As we did with the windows, we can hold off on any additional home improvements until we have saved the funds to cover the entire cost in advance. The key advantage with this approach is that we maintain our preference to avoid any form of consumer debt and owe nothing once the improvements are completed.

On the down side to this approach, we will have to delay the improvements until we have all of the funds set aside for each job. With all of the windows being replaced right now, it would be awfully convenient to get the remaining improvements hammered out at the same time and be done with everything at once.

Use a HELOC
As I mentioned above, my wife and I have been adamant about not paying any interest ever since we eliminated all of our non-mortgage debt. Right now we do have a small amount of non-mortgage debt but that is a 0% balance transfer from American Express that is sitting in our HSBCdirect account.

We do have a considerable amount of equity in our home so this is a feasible option. However, I recently reviewed the rates listed at BankRate.com and saw that most of the HELOC offerings were in the 7-8% range. As nice as it would be to leverage the equity in our home to cover the cost of home improvements, I just don’t like the idea of paying interest.

You are able to deduct the interest paid on a home equity loan but I am still not sold on the idea.

Balance Transfer
The third option that we have discussed is to take advantage of a 0% balance transfer offer that we have right now. The offer does not have any associated fees and the rate is good until October of 2008.

With this option, we would have the money deposited into our checking account and pay for the desired improvements. Any remaining funds would be deposited into our HSBC account to sit and earn a little bit of interest. We would then pay the minimum amount due each month and direct additional funds into our savings so that the balance could be paid off completely when the teaser rate expires.

This method also involves a new debt but since we will have covered the cost of the home improvements by the time the teaser rate expires, I am more open to this than the HELOC.

The Home Improvements
The home improvements that we have been discussing include new blinds and window treatments throughout the house to be coupled with the new windows. In addition, we would like to paint the entire interior of the home, replace the carpeting in two rooms on the main floor that have carpeting and the entire upstairs as well as buy new furniture for the kitchen, dining room and family room.

Based on our initial estimates, we would be able to save the funds to cover the costs of these improvements by the end of March next year. However, as I mentioned earlier it would be much more convenient to schedule these improvements now while the windows are being replaced.

As we continue to discuss the best alternative for us, I thought I would request feedback from all of you. Which option would you select if you were in our shoes?

Would you delay the home improvements until next year when you have all of the funds saved? Or would you complete the improvements now and leverage your home equity or take advantage of the balance transfer?

Have you taken the time to investigate the true cost of having a bad credit score?

Often times people believe that having a bad credit score will only result in less attractive credit card offers or slightly higher interest rates on their credit cards.

However, having a poor credit score can impact you in many other financial situations such as when trying to secure a loan for a new vehicle or a mortgage on a new house. With a poor credit score, you will likely still receive approval for your loan but it will come at a much higher cost than if you had a good credit score.

Impact of Bad Credit Score
To see the impact that a bad credit score can have on the cost of a mortgage, consider the following example with two couples that are looking to buy their first home.

For purposes of this example, let’s assume that both couples are looking at a 30-year, fixed rate $150,000 mortgage.

• Mr. and Mrs. Good Credit have a credit score of 730. Due to their good credit, they qualify for a rate of 6.0%, with monthly principal and interest payments of $899.93.
  
  
• Mr. and Mrs. Bad Credit have a credit score of 560. As a result of their poor credit score, they are only able to obtain a loan with an interest rate of 8.5%, making their monthly principal and interest payments $1,153.37.

Due to their poor credit score, Mr. and Mrs. Bad Credit will be paying more than $250 extra per month than Mr. and Mrs. Good Credit. In this example, having a bad credit score would cost you over $3,000 more per year than someone with a good credit score for the same loan amount.

Using the numbers in this example, that would translate to a difference of $91,456.00 over the full term of the mortgage. That is a very high price to pay for mismanaging your credit and is one that many people with poor credit do not take the time to understand.

What You Can Do
If you find yourself resembling Mr. and Mrs. Bad Credit more so than Mr. and Mrs. Good Credit, it is not too late to begin working on improving your credit score.

For more suggestions on what you can do to improve your credit score, please take a look at the following:

• 5 Steps To Improve Your Credit Score
• Should I Close My Credit Card After Paying the Balance?
• Credit Score and the Importance of Payment History
• Use Low-Rate Balance Transfers to Your Advantage

Please feel free to ask any questions you have regarding the steps needed to improve your credit score.

What do you do when you’re upside down on a car loan?

Let’s assume that you have a high-interest car loan that you’re upside down on (you owe more money on the vehicle than it’s worth). How do you turn this situation into something better?

STEP #1 – Determine how upside down you are.

First call your lender and get an accurate payoff. The payoff is what you owe on the car. Here’s what you need to know to get the correct payoff:

If you purchased your car, the payoff is simply the total outstanding debt you must pay off in order to get a clear title.

If you leased the car, you need to ask for the remaining payments, PLUS the residual value (the amount you can buy the car for at the end of the lease, if you decide you want to purchase it), and any early termination fees.

If you know for sure you’re trading in the car, cancel all extra insurances (e.g., credit life, disability insurance, extended warranties) you might have bought when you signed your contract. To cancel them, you’ll need to call the dealership you bought the car from and sign cancellation forms for this refund to be applied to your loan. The refund can take anywhere from two to six weeks to reflect on your payoff with your lender.

If you buy your next car from the same dealership where you bought the car you’re trading in, they can give you an immediate refund and apply it as a down payment on your new loan.

STEP #2 – Find out what your car is worth.

Here are my top three resources to find the most accurate trade-in value for your car.

1. The most accurate website for appraisals is kbb.com (Kelly Blue Book). Click on, “Used car values by make and model.” Then enter in all of your vehicle’s information… remember to be accurate. Click “Good” for condition even if you think your car is in excellent condition. The amount given for “Good” condition will be what the dealer will offer you 95% of the time.
   
   
2. You should also go to Edmunds.com. Click on, “What’s your car worth?” Once you enter all your vehicle’s information it will show you the trade-in value.
   
   
3. If there’s a CarMax® dealership close to you, you can drive your car there and they’ll give you a free appraisal. And, even though their appraisals are free, I’ve found them to be very accurate.
   

STEP #3 – Use car manufacturer rebates to get the best deals.

To best explain the rebate strategy, I’ll use an example. Let’s assume you’re $5,000 upside down on your car—believe it or not you do have options.

Your best strategy is to find out which new car manufacturers offer a rebate equal to or greater than $5,000.

Car manufacturers offer rebates all the time to stimulate sales. You can use the rebate to remove the negative equity on your existing vehicle so you don’t end up carrying that debt into the next car you finance.

Again, KBB.com and Edmunds.com are good resources to research the auto manufacturers that offer the highest cash rebates in your market area.

If it were me, using the example above, I’d look for rebates higher than $5,000. That way I could get into a new car with potentially no cash out of my pocket…as long as the dealer knows how to structure the deal properly.

Another way to achieve a bigger discount is to ask the dealer if they have “aged” inventory. If a car has been sitting on their lot for 60 days or longer, that dealer is really motivated to discount that car just to stop paying the high floor plan fees. Every car that doesn’t sell within 60 days is just taking up space and is preventing the dealer from replacing it with another car that will sell quicker.

STEP #4 – Determine which car manufacturers will work with you.

Get on the telephone and call the local car dealerships. But don’t talk to just anyone in the car dealership…and you especially don’t want to talk to a car salesman.

You want to speak with the finance director. If you just ask for someone in the finance department you might end up with a part-time person with no real knowledge. You need someone who can tell you if you have a snowball’s chance in “the hot place” to finance a new car with the rebate you need.

If they begin asking you permission to review your credit reports/credit scores you know what to say, right?

“No, thank you. I just need to know your experience in getting a person with FICO® credit scores of X, Y, and Z financed?”

You don’t want to apply for credit. At least not yet.

All you need to know is if there’s a high likelihood you’ll get financed with your current credit scores.

You don’t need a promise written in blood that you’ll get financed. Just reassurance you’re not barking up the wrong tree.

STEP #5 – It’s all about your credit scores.

Be sure to pick a car manufacturer that uses your highest FICO credit score to make a lending decision.

By using the steps outlined in above, you not only have a way to get rid of the negative equity in your existing car, but you’ll be able to finance a NEW car at a low interest rate through a good mainstream lender with a lower monthly payment and with little or no money down.

How many people do you know that have taken advantage of financial products such as interest-only mortgages, piggyback loans or option adjustable-rate mortgages in order to *afford* a more expensive home?

Many of these options carry a considerable amount of risk and have been resulting in more people defaulting on their loans when the initial terms of the loan expire and the rates adjust, resulting in a payment that is no longer affordable. Now there seems to be a new option that has been gaining some popularity and that option is shared equity financing.

What is Shared-Equity Financing?
In a shared-equity financing arrangement, you have one or more investors that are contributing funds towards the purchase of a home or property with the payback being a percentage of any appreciation in the property. In many cases, the investors will be the parents of the purchaser but the possibility exists to have 3rd party investors as well.

There aren’t any clear cut guidelines to how these deals are arranged and they can be negotiated between the parties to determine things such as who is responsible for the property taxes and who receives the tax deduction for mortgage interest. While these arrangements are fairly informal and flexible, it is still advisable to have a written contract explaining all of the details that have been agreed upon.

Benefits of Shared-Equity Financing
From the perspective of the purchaser, the largest benefit is that a shared-equity arrangement will allow them to buy a more expensive home than they may qualify under normal circumstances. Depending on the market, it can be rather difficult to afford a home large enough for a growing family and this allows the purchaser to live in a nicer neighborhood and/or home than might otherwise be possible.

As the investor in a shared-equity arrangement, you gain the opportunity to participate in the real estate market and property appreciation without having to go out and purchase or maintain a property. Rather than dealing with rental properties and being a landlord, you can invest a set amount of money and then receive a percentage of the future appreciation. In many cases, the shared-equity arrangement include an end-date that specifies when the investor will get their money either through the sale of the property or a refinancing.

Negatives of Shared-Equity Financing
Too many times people attempt to buy a home that they truly cannot afford and this type of financing arrangement has the potential to contribute to that problem. When a homeowner stretches themselves to afford the monthly payments, any unexpected problems such as a broken water heater or furnace can derail their financial situation.

Given that many shared-equity arrangements are taking place between parents and their adult children, you run the risk of family tension should any problems arise. What happens if the new homeowners neglect the property and the house depreciates in value? Will the parents resent the children for their actions that may have cost them money? Will the parents want to intervene in decisions given that their money is on the line?

As the investor, I don’t think this is a viable solution unless you are already financially independent and very secure. If the funds would have to come from your retirement savings or otherwise put you at risk, this is probably not the wisest decision for you. While it doesn’t happen very often, real estate can depreciate in value and there are no guarantees that you will see any financial gain from your investment in a property. You should only be willing to invest money that you are willing to lose.

Verdict on Shared-Equity Financing
While I do see some benefit to a shared-equity financing arrangement, I do not think it is the right choice for most people. There is the potential for a win-win situation for the purchaser and investor if everything is carefully arranged and well detailed.

However, in my opinion, the potential risks involved outweigh the gains and I would encourage people to stay within their means and buy a home that is affordable for their situation. Personally, this is not something that I would ever ask of my parents nor would I entertain for my own children.

If you would like to read more about shared-equity financing, check out the Parents Backed Mortgage article over at Yahoo! Finance.

Apparently the 50-year mortgage is being offered by some lenders as an alternative to an interest-only mortgage. However, when you really look at the details it becomes apparent that this really seems to be targeting people that prefer to live above their means. The 50-year mortgage really does not seem to make much financial sense, at least not for those of us striving towards being free of debt and becoming financially independent.

Is There Any Benefit?
If you were trying to decide between the 50-year mortgage and an interest-only mortgage, the 50-year mortgage could be a better option? The reason is that with the interest-only mortgage, you are really not building any equity in your home unless you are paying extra towards the loan. Unfortunately, many people with the interest-only loans are not paying extra each month. With the 50-year mortgage, you are paying a small amount each month towards the princpal of the loan.

Not All Roses.
While the monthly payment will be lower than a more traditional 30-year mortgage, it does come at a considerable cost. Over the lifetime of the mortgage, you will pay nearly double the amount of interest on the 50-year mortgage and have a fraction of the equity given the large payments towards the interest.

In addition, some of the 50-year mortgages are imposing prepayment penalties. This means you could be stuck in this mortgage longer than you would desire and could face additional penalties if you decide to refinance or pay more towards the mortgage. Speaking of refinancing, since this is very similar to an interest-only mortgage you would essentially be purchasing the house all over again if you do refinance early in the term due to the lack of equity being established.

My Thoughts.
In my opinion, using a 50-year mortgage sounds like it would be a very poor financial decision and is certainly not one that I would ever make for my family. As the article states:

Prime candidates for 50-year mortgages would be professionals who don’t have the current income to qualify for their dream homes but are anticipating significant increases in their earnings over the next few years. A longer loan, where buyers are paying mostly interest, allows them to get the house now, then take out a more traditional loan when their income goes up later.

This quote from the article just screams to me that this is for people living above their means and making purchases that they truly cannot afford. What happens if that anticipated increase in income never materializes? Or what happens if the housing market turns south and the value of the home declines? In my opinion, this mortgage product is for people that want to push the envelope of being house rich and cash poor while running a serious risk of financial ruin.

Do you agree with me that the 50-year mortgage is a ridiculous possibility? Or do you see any validity to using this product to leverage your financial situation?

“Having over $100,000 in student loan debt is not fun,” wrote one reader, a new lawyer who joined me during a recent online discussion. “Do I regret going? No, but it certainly didn’t pan out the way I thought it would. I am working like a fiend, not getting paid what most people think lawyers make, and struggling daily with money and budgeting. There are hundreds, from my class alone, who are in the same boat.”

To some degree, this is a sentiment that I share as well. While my student loans were not in the six-figures, I did come to realize that attending a private college was likely not the best choice. I did not regret the decision but felt that I could have received a comparable education at a cheaper public school.

Fortunately, I was lucky to land a well paying job out of college and never felt burdened by my student loans.

Not all students are that lucky. Depending on the field of study, some graduates are finding it difficult to land a job in their field regardless of pay. That makes the thought of thousands of dollars in student loan debt rather unappealing, whether people want to call it “good” debt or not.

The article continues to discuss key points such as the fact that federal student loans are not discharged in bankruptcy and the pros and cons of using investments and/or savings to reduce the overall student loan debt. While many people will argue that student loan debt is a good debt, there is still the potential for the burden of debt to lead to financial ruin and in my opinion, that would make student loans a “bad” debt.

The problem with negotiating on the monthly payment is that the car dealer can basically construct the loan in such as fashion that you pay far too much for the vehicle even though you stay within your target range for a monthly payment. For instance, if you tell the dealership that you are looking to keep your payment under $400 per month, they might add an additional year to the term of the loan in order to charge more for the vehicle but still keep you within your budget.

The “out the door” price of the vehicle should be the number that you are interested in the most, as that is the number that will ultimately determine your payment. However, you still need to stay alert so that the dealer does not try to compensate for a lower sales price by increasing the costs somewhere else in the deal such as a lower trade-in price, extended warranties and options, etc.

Ideally, you will have arranged for financing (if needed) before you even set foot into the dealership to begin negotiating on a new vehicle. Once you have negotiated that price with the car dealer, then you can offer them the opportunity to beat your prearranged financing. Since you planned ahead and came to the dealership prepared, you might end up with even more attractive loan terms when they try to keep the financing in-house.

Take the time to do your homework before beginning the negotiations with a car dealer and you will likely save yourself a considerable amount of money. If you have other car buying tips or have any questions, please share them below.