Month: May 2009


SHOULD I REFINANCE?


With interest rates near historically low levels, the recurring question homeowners are asking – 'Should I refinance my mortgage?' Answers will vary depending upon individual factors. A few common reasons to consider include available interest rates (potential rate relative to current loan rate), current loan (i.e., Adjustable Rate Mortgage), how long you anticipate remaining in the home, direct costs associated with refinancing (i.e., fees/closing costs), etc.

BREAK-EVEN ANALYSIS.
The most common method of assessing the potential benefits of refinancing is a break-even analysis. This is a process that estimates the amount of time it will take (through interest savings) to “break even” on the upfront costs associated with refinancing the loan. Obviously, in order to justify refinancing, the benefits need to outweigh the costs. Several [free] online calculators are available to assist you in breaking down (and simplifying) this analysis – Dinkytown, Fair Isaac, and Zillow are popular examples.

CURRENT INTEREST RATES.
Although interest rates have crept up in the past couple of weeks, interest rates are still very favorable (under 5% on 15-year mortgages). Bankrate.com is a great tool for finding current rate information. The rate available to you will depend upon your creditworthiness/credit score (a score over 740 will get you the best rate).

COSTS.
Many consumers view loan costs as fixed. If you go in with this mindset, you will wind up overpaying for your loan. Some simple tips: (1) Get a quote from your current lender, they will obviously have less “work” to do to qualify you than a company with which you've never done business; (2) Get quotes from multiple companies – you will be amazed at the variability in fees from company to company; the information you'll obtain will provide leverage in working with your ultimate “choice,” and; (3) Get a quote from an online company; see #2 above. Information is power, but in this instance, the difference in fees is often amplified as online companies can typically offer lower fees because they don't have the same costs that a brick and mortar lender would have. Use this leverage to your advantage!

GOVERNMENT ASSISTANCE.
If you are in a situation where you may not meet ideal refinancing conditions as defined by a lender (owe more on the home than it is worth), you may still be able to benefit from the current interest rate environment. Pres. Obama has passed “Homeowner Affordability” initiatives to aid homeowners in refinancing unaffordable mortgages. If you are not eligible for a government-assisted refinance, you may be eligible for a loan modification. Information on the current government programs is available at:
Government Refinance Assistance
Making Home Affordable (eligibility requirements)

CREDIT C.A.R.D. REFORM


Changes to current credit card practices are imminent. On Tuesday, the Senate approved CARD (the Credit Card Accountability, Responsibility, and Disclosure bill) by a 90-5 vote; today (Wednesday), the House voted 361-64 in favor of the legislation which would alter many of the credit card practices that have commonly come under fire. President Obama has said that he'd like to sign the bill by Memorial Day to “protect consumers and to bring some commonsense rationality to our financial system.”

While most consumer advocates are in favor of the legislation, some have questioned the delay in implementation (9 months for many of the changes). Others have begun theorizing about potential unintended consequences to “responsible cardholders” (those who pay their balances in full each month). To compensate for lost revenue, some have predicted a resurrection of annual fees and an end to many card reward programs.

Summary of the CARD bill.
* Some of the changes are already on track to take effect in July 2010 under the Federal Reserve regulations that were established last year. The CARD legislation would uphold the outlined Fed changes and provide additional restrictions on card policies.

45 day notice on rate hikes and certain contract changes (15 prior).
Eliminates fees charged for processing payments.
Eliminates over-the-limit fees.
Eliminates universal default.
End to double-cycle billing.
Mandatory 5 year life for gift cards.
Rates cannot be raised for the first year after an account is opened.
Reasonable payment allocation (Apply payments to highest rates).
Restrictions on interest rate increases of existing debt.
Restrictions on late fees.
Statements must go out 21 calendar days in advance of the due date.
Tighten issuance of credit cards to those under age 21:
–> Must have a proven capacity to repay OR
–> Complete a financial literacy course OR
–> Have a cosigner.

** Unfortunately, an amendment initiated by Senator Sanders of Vermont which would have also capped credit card interest rates at 15% was defeated in the Senate (60-33).

INDEX VS ACTIVE FUND MANAGEMENT


Every day we're faced with choices — PC or Mac? Pepsi or Coke? Boxers or Briefs? Kobe or Lebron? Active or Passive [mutual fund management]? Ok, so most of our daily decisions are not life or death, but many decisions will have a direct bearing on our overall financial well-being.

Active vs. Passive (Index) Fund Management.

Active Management.
Accompanying a typical [active] mutual fund are high costs/ maintenance fees (i.e., expense ratio). Why? You're paying a fund manager to select the investments (stocks, bonds, etc.) that will comprise the fund. Is it worth it? Ultimately, only you can decide the answer to that. In the final analysis, you will need to determine if the higher fund costs are yielding higher fund returns …

According to Morningstar Principia, a database of over 15,000 mutual funds, the median annual fund expense was 1.42%. (In addition, more than 10,000 of these funds also levy a sales charge or “load” – a topic for another day …)

– 42% of funds had expenses over 1.5%
– 52% of funds had expenses between .5% and 1.5%
– 6% of funds had expenses less than .5%

Passive Management.
The most common example of passive fund management is an index fund. A fund designed to track the activity/return of its underlying index (i.e., S&P 500, Nasdaq, Dow, etc.). The S&P 500, a broad market index of 500 of the largest companies in the U.S., is one of the most common types of index funds. Since the listing of those 500 companies is readily available (not stocks that would need to be 'handpicked' like an actively managed fund), you can typically purchase this type of passive management at a fraction of the cost of active management. In the listing of expenses above, index funds are going to be the prominent group with expenses under .5% …

While most mutual fund companies are strong advocates of actively managed funds (for obvious business reasons), more and more people are moving to passive management. In fact, some fund companies actually cater specifically to index investors – most notably, Vanguard and DFA Funds.

The Winner.
Every year, Standard and Poors publishes a scorecard that declares the “winner” of the Index vs. Active Management “battle”
The winner? If you've done any reading in this area, you already know the answer. The winner this time around is consistently the winner [and not who most people would assume] … PASSIVE MANAGEMENT! Over the five year market cycle from 2004 to 2008, the S&P 500 outperformed 71.9% of actively managed large cap funds, the S&P MidCap 400 outperformed 79.1% of actively managed mid cap funds and the S&P SmallCap 600 outperformed 85.5% of actively managed small cap funds! These results are similar to that of the previous five year cycle from 1999 to 2003. International stock funds? Same results – indices outperformed the majority of actively managed funds. In addition, S&P did not factor in the sales fees that “loaded funds” charge investors, which would have made the contrast even more startling. (Click here for an archive of past scorecards).

According to Princeton University's Burton Malkiel, the average actively managed mutual fund has returned 1.8% per year less than the S&P 500. 1.8% per year may not sound like a big deal, but it is a HUGE deal over time. A pretty compelling argument for passive management.

NOTE. Although index funds typically carry lower costs (and should), don't jump in without knowing what the specific costs are. While some index funds will charge as little as .1% or .2% in expenses, I am aware of a couple index funds (nothing special, just 'plain vanilla' S&P 500 funds) whose expense ratios are 1.06% and 1.50% respectively! So never assume the costs will be low merely because it is passively managed. It obviously would not make a lot of sense to pay “active management fees” for an index fund.

"MY MONEY" RESOURCES


The federal government has taken several stabs at reviving the economy in the past several months. As an educator, one move I support one hundred percent is the pooling of resources to help consumers better understand and more wisely use their money.

As consumers, we are involved in money-related activities/decisions every day. Paying bills, balancing the checkbook, shopping for loans, reviewing credit card statements, saving, investing, viewing a credit report, and simply deciding whether to use cash or to charge a purchase are some common examples of these regular activities. To aid in this daily battle, 20 government agencies (in response to the Fair & Accurate Credit Transactions Act mandate) formed a Financial Literacy & Education Commission and created a very easy to use resource with links to tools that can benefit anyone at any stage of life to manage money more effectively. Website resources include:

– Budgeting & Taxes
– Credit
– Financial Planning
– Home Ownership
– Kids
– Paying for Education
– Privacy, Fraud, & Scams
– Responding to Life Events
– Retirement Planning
– Saving & Investing
– Starting a Small Business

In addition to these “always useful” topical areas, time-sensitive resources are also provided (i.e., recent market events, foreclosure avoidance, health benefits after job loss, smart borrowing, etc.). Are you financially smart? Take the quiz to test your smarts… Do you know what our national strategy for financial literacy is? Did you know there was a national strategy??

TOOL KIT.
In addition to the online resources, you can order a free “My Money tool kit” containing information to help you choose and use credit cards, get out of debt, protect your credit record, understand Social Security benefits, insure bank deposits, and start a savings and investment plan. Simply complete the online form and they’ll send the tool kit materials at no cost or by calling toll free 1-888-MYMONEY.

CHECK IT OUT … WWW.MYMONEY.GOV

HIGH YIELD CHECKING?


You've likely heard of high yield online savings accounts. The best of these “high yield” accounts are currently only paying about 2% (according to Bankrate.com, an online resource that provides aggregate interest rate data) — pretty tough to get excited about 2%. Ironically, one of the best [high yield] alternatives currently is an option that until recently would never even have been a remote consideration – a checking account…

These accounts, High Yield Reward Checking Accounts, are readily available through insured (e.g., FDIC, NCUA) banks and credit unions across the country and are paying upwards of 6% interest! Many of the financial institutions are small, available to local/state residents. Using a directory will help narrow the field of potential options (see list of resources that follow the tip) … some accounts are not restrictive and are available nationwide.

Some of these accounts require certain 'activity' in order to be eligible for the higher rates – a certain number of debit transactions, direct deposit, electronic statements – these are common examples of potential requirements. The resources below will help you navigate these “hurdles.” Unlike many checking accounts, most reward checking accounts don't have monthly fees or minimum balance requirements. In an economic environment where savings accounts and CDs offer paltry yields, reward checking accounts hold a viable solution!

HIGH YIELD CHECKING RESOURCES.
Article – 'Reward Checking Pays High Yields'
Bank Deals — Best Rates & Deals
Checking Finder
High Yield Checking Deals




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