Dollars And Nonsense

Written on July 30, 2010 – 9:01 am | by admin |

With the 40 year mortgage becoming increasingly common in states such as California, where high home prices make mortgages less affordable for the average home-buyer, the latest mortgage product has been rolled out-the 50 year mortgage.

During the 1980s, mortgage interest rates in America topped 18%, prompting the introduction of the 40 year mortgage. The 40 year mortgage increased in popularity again in 2005, when Fannie Mae introduced a program to offer these extended-term mortgages. in 2007, approximately five percent of all mortgages are 40 year mortgages, with that figure reaching 25% in high-cost housing markets such as on the West Coast. with the 40 year mortgage becoming a more main-stream product, the 50 year mortgage has been introduced. while this type of mortgage further reduces the monthly cost of loan repayments, there are some definite disadvantages involved.

The Pros

The main advantage of choosing a 50 year mortgage is a fairly obvious one-the extended terms of the mortgage make monthly repayments lower, and it means that owning a home becomes more affordable. There’s not always a huge difference between the monthly repayment on a 40 year mortgage and on a 50 year mortgage, but those few dollars can mean the difference between affording your own home now and having to wait a few more years to save a larger down-payment.

One of the important things to note about the 50 year mortgage is that after the first five years, the interest rate is adjustable. That means after the fixed-rate period is over, your interest rate can increase and decrease along with current market rates. this is one of the aspects of the 50 year mortgage that keeps that initial interest rate so low. If you’re looking for a low-cost mortgage with a view to refinancing within five years, the 50 year mortgage can be a good way of approaching this.

Finally, the 50 year mortgage is typically a safer way of affording a home if you’re unable to afford a conventional 30 year fixed-rate mortgage. Options such as interest only loans or balloon mortgages offer initial lower payments, but these come with some very risky drawbacks. unlike other low-initial-cost mortgage options such as the interest-only mortgage, there’s no possibility that you’ll end up with negative amortization with a 50 year mortgage. this makes it a much safer way of achieving a lower-cost mortgage.

The Cons

Of course, the 50 year mortgage has some drawbacks of its own. Tacking that extra ten years onto the terms of the loan means you add a big chunk of interest, making the total cost of the loan significantly higher. That 50 year long will reduce the amount you must pay each month, but over the life of the loan it’s going to cost you. in addition, the interest rate on a 50 year mortgage is typically slightly higher than with a 30 year or even a 40 year mortgage. Longer terms mean increased risk for the lender, and you pay for that risk with extra percentage points on your interest rate. it may not be much-less than 1%-but even that adds several thousand dollars to your loan total.

Another disadvantage with the 50 year loan is a result of the way in which mortgage payments are structured. all conventional mortgages are front-loaded with interest, meaning that the first years of repayments are almost all interest, and you don’t start paying off a significant amount of principle immediately. The longer the terms of the mortgage, the longer it takes to build up equity in your home-more than twice as long to build up just 20% equity in comparison to a 30 year mortgage.

A related problem with this very slow build-up of equity occurs in cases where your down-payment is less than 20% of the home’s appraised value. in these cases your lender typically requires you pay for private mortgage insurance until you reach that 20% equity figure. with a 50 year mortgage, it’ll take much longer to reach 20%, so you’ll be paying extra for private mortgage insurance for much longer than with any other type of loan.

What does this mean for Home-Buyers?

For people who find that the 30 or 40 year mortgages aren’t affordable, the 50 year mortgage can make the dream of home-ownership a reality, but these mortgages are best used with a view to refinancing as soon as possible. The 50 year mortgage shouldn’t be considered a long-term loan, simply because those extended terms are so expensive in the long run. As long as you’re planning to refinance within five to ten years, the 50 year mortgage is a good alternative to riskier low-cost products such as the interest-only mortgage.

About Author:

Stephanie Larkin is a freelance writer who writes about topics in the mortgage industry such as California Mortgage | California Interest Rates

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The 50 Year Mortgage-pros and Cons – Realestate Information Blog …

I’m sure many of you have heard of or been affected by the credit card companies slashing credit indiscriminately in order to clean up their balance sheets. in fact, they have been doing so in a rather coordinated way since 2007 when this financial mess hit the fans (see graph below). Of course, that’s exactly what they should do, since it is we, the consumers, that are to blame for this mess and not the bankers and predatory lenders who specifically sought to sell mortgages to under-qualified borrowers at a time when home prices had reached such exorbitant price levels that qualified buyers were no longer interested. three years have passed since we ventured into this mess and are final at the blame-casting stage of this game. unfortunately none of the rhetoric comes remotely close to helping to solve the real problems that plague the real economy (and the banks tangible balance sheets). unfortunately, I am not in a position, personally, to rectify these issues. however, I have recently been forced into a situation that permits me to speak knowingly from one perspective and therefore to showcase at least one very negative result (or side effect) of this crisis that will necessarily have long-term ramifications for this country, its economy, and most certainly its middle class.

On April 19th, 2010, I received a letter from Citibank, explaining that:

“a routine review of your account activity shows that you have not used your Citi Account for and extended period of time. we are sorry if this card has not met your needs. Due to prior inactivity, your account will be closed on May 13, 2010. Use of this card between now and the date listed will not enable us to revers this decision and your account will still be closed. we appreciate your business.” blah blah blah.

Now, on the surface it seems pretty straight forward: you have been extended credit; you don’t use that credit; when we extend credit to someone we have to take a hit on paper in terms of liabilities; therefore, since you haven’t used your credit card we are going to remove the liability from our balance sheet.

Okay fine. but what they don’t tell you is, A) I have had this account since 1999–yup, 11 years! B) I have never once had a late or missed payment in those 11 years. C) I have a credit rating of 790. D)Here’s a crucial one–I tried to cancel this account 3 times (2001, 2003, 2004) with each attempt being met with incredible pitches aimed at keeping my business. Each time, the one that won me over was, “sir, you have been a customer with us for quite some time and you have an excellent credit history with us. If you cancel your account you will lose those years of credit history unless you have another card that you have had longer.

I did not, in fact, have any cards longer than this one. The truth was, this credit card is my Student Associates Bank Credit Card. It was my very first credit of any kind and it came with a measly $400 credit line. The selling point for the card was that every 6 months if the card was in good standing, the customer could request a credit line increase without a credit report being pulled. The automatic credit line increases were incremental, but perfect for a student starting out in the world with no credit to his/her name. Well 11 years later, I have worked that card up to a credit line of $7,600. I only use it when my next oldest credit card, an Amex card that gives me 5% cash back, isn’t accepted. Well, during the past few years–which coincides with the financial chaos that has ensued–I haven’t used my credit cards as much. why? Well, because that was what we were instructed to do, by our President, by our media, and by the true head Chieftain, Dr. Common Sense.

Does that mean I don’t care about this credit card? No, absolutely not. does that mean I’m a credit risk, or that my credit score should take a 50-60 point hit because Citibank decides after all this time, that I no longer need the credit. Emphatically, No! one does not get a credit card for the singular and linear purpose that they want to max out the dang card and pay 31% interest. in fact, the credit card banks business model depends as much on the good credit risk customers as it does the bad credit risk customers. Those with higher risk profiles end up paying the company directly at such high rates that even if they default the Credit Card company still ends up making a profit on the whole (at 30% interest, it doesn’t take long to earn a profit). On the other hand, those with extremely low risk profiles would become part of CC bank’s other revenue stream, i.e. the merchants’ fees that get paid as a right to accept the much easier to deal with credit cards of their customers. there is another angle on this (those who keep the card as an emergency or back up card), but it is tangential, so I will ignore it for now.

So, then, once again, it makes sense that the credit card company would want to remove individuals from the system that are not positively impacting their major revenue streams, especially when they have Uncle Sam breathing down their necks to raise the share price of their stock in order that they might sell it at inflated prices so that they can report back to the people that the “bailout” was actually an investment. in any case, as far as the Credit Card is concerned the formula works like this: remove liabilities from the deficit side of the balance sheet–regardless if its low risk and harmless to the actual business model long term–as it makes the bottom line appear much more healthy than it was before. in reality, what really just happened–at least in my case–is that they just pissed off a dormant but very happy customer of 11 years with an incredible credit history who never thought negatively towards the Citigroup/Citibank brand. How is that going to help the longer-term health of the company? I’ll let you decide.

Now my real beef with this whole thing is that I never even got a warning. They never sent me an email or a letter explaining, if you do not start using your card we may be forced to retract the credit we have offered you. furthermore, contrary to what they wrote in the letter, this wasn’t an indiscriminate routine review. How do I know this? Well, for one my fiance, who has the same card, received the same letter the same day. (She too has a great credit history and score). my brother, who lives in an entirely different state, also received this same letter on the same day. Lastly, and this was what led me to write this post, from chat rooms and other blogosphere interactions I gather that a whole lot of people, specifically with very high credit scores received similar letters from many banks during the past several weeks.

The ultimate point of the post can be extrapolated from the graph below (click to enlarge):

As the graph from my favorite blog Calculated Risk shows, this trend has been well underway for a very long time and had just recently begun to subside. Looking at the chart, it appears that although low, we are at a point at which we might expect the trend to reverse. On the contrary, however, a whole new wave of credit has just been or is scheduled to be removed from the system that has yet to be reflected in the chart.

In the most recent Federal Reserve Report, the Chairman explains:

Consumer credit decreased at an annual rate of 5-1/2 percent in February 2010. Revolving credit decreased at an annual rate of
13 percent, and nonrevolving credit decreased at an annual rate of 1-1/2 percent.

The report goes on to imply likely stabilization. I don’t buy in. indeed, my knowledge of business and real-life experience tells me three very important things as a result of these actions: first, the banks are definitely not as healthy as they portend since they are kicking out their VIP’s in order to mask their balance sheets. Secondly, the net result of this whole escapade is that a great deal of people who really need credit to get past this “bump in the road” or those who are doing alright but whom were potentially about to make a large and important purchase are going to be unable to navigate the waters for a long time as their bearings get messed with from the sidelines. I, for example am saving up for a home right now (and have been for 5 years). I’m just shy of a 20% down payment for the kind of home I’d like to buy. however, this reduction in available credit will affect not only my credit history, but also my debt to credit ratio, two crucial components to the rate that the banks will expect me to pay. This rate, in turn, could very potentially effect the available funds I might be able to procure. Lastly, with residential construction spending still at abysmal levels, and the termination of the Federal Home Buyers Tax Credit set to negatively impact demand for existing home inventory moving forward, now is not a good time to be chipping away at the credit scores of responsible borrowers; they are categorized as “responsible” for a reason. This “recovery” is going to need all the help it can get from the consumer. Yet, all consumers seem to be having the punch bowl taken away from them regardless of whether or not he or she has had too much to drink. therefore, how can any kind of consumer spending recovery take hold? (for those that don’t know, roughly 70% of US GDP since WWII comes from consumer spending).

Those concerned with inflation, although a very real concern that I plan to discuss in a later post, must also consider the alternative when so much spending power is being sucked out of the system so indiscriminately and “routinely.” I realize that banking reform and the Consumer Credit Protection Act was enacted with good intentions, but just because the shoulder shove that put you on your a$$ was intended to be a love tap, it doesn’t ensure that you’re not bruised as a result. Intentions only matter to a point.

There is No Spoon: another one bites the dust: credit card …

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By Sarah Turner, MarketWatch

LONDON (MarketWatch) — Sharp declines on Wall Street helped send share prices in London lower at the close on Thursday.

The U.K. FTSE 100 index /quotes/comstock/23i!i:ukx (UK:UKX 5,406, +51.42, +0.96%) fell 1.4% to 5,145.74 at the end of trading.

Shares in the U.S. fell sharply in morning trading on weakness in technology issues. See full story on U.S. markets.

Shares trading in other European stock markets were also lower. Read Europe Markets.

AstraZeneca /quotes/comstock/23s!a:azn (UK:AZN 2,929, +45.50, +1.58%) /quotes/comstock/13*!azn/quotes/nls/azn (AZN 43.99, -0.13, -0.29%) shares fell 4.7% on the London Stock Exchange after the firm forecast lower 2010 profits. it reported a 24% climb in fourth-quarter profit, helped by generic drugmakers’ inability to produce a competitive blood pressure drug. Read more on AstraZeneca.

Rival GlaxoSmithKline /quotes/comstock/23s!a:gsk (UK:GSK 1,230, +15.50, +1.28%) /quotes/comstock/13*!gsk/quotes/nls/gsk (GSK 37.03, -0.11, -0.30%) declined 1.4%.

Miners were also under pressure, as copper futures sold off, with shares of Chilean copper miner Antofagasta /quotes/comstock/23s!a:anto (UK:ANTO 916.00, +32.50, +3.68%) down 3.8%.

TODAY’S INTERNATIONAL MARKET STORIES

• MarketWatch Topics: Greece • Asia Markets | Europe Markets | LatAm Markets • Canadian Markets | Israel Stocks | London • U.S.: Market Snapshot | After Hours

Tools• Latin American/Canadian indexes • European indexes | Asian indexes

More on the Markets • Bond Report | Oil News | Earnings Watch • Currencies | U.S. Economic Calendar

/conga/story/misc/international.html 53366

Shares of Barclays /quotes/comstock/23s!a:barc (UK:BARC 312.15, -0.35, -0.11%) /quotes/comstock/13*!bcs/quotes/nls/bcs (BCS 18.83, -0.34, -1.77%) ended down 0.7%, after trading higher by more than 3% earlier in the session.

Rolls-Royce /quotes/comstock/23s!a:rr. (UK:RR. 562.00, +4.00, +0.72%) shares were up 0.5%.

The aerospace group said it has won a share of an order from Jetstar Airways that is worth up to 1.2 billion pounds ($1.9 billion) to the company if all options are exercised.

The order is for V2500 engines to power up to 90 Airbus A320 aircraft and also includes a long-term engine service agreement for the engines on those aircraft as well as a further 40 already in service. Jetstar is a subsidiary of Australia’s Qantas Airways.

Shares of clothing retailer next /quotes/comstock/23s!a:nxt (UK:NXT 1,856, -19.00, -1.01%) ended up 1.3% while shares of department store retailer marks & Spencer /quotes/comstock/23s!a:mks (UK:MKS 330.80, +0.70, +0.21%) fell 0.46%.

Swedish fashion chain Hennes & Mauritz — which operates in the U.K. — posted a 21% rise in fourth-quarter profit on Thursday. See full story.

Sarah Turner is a markets reporter for MarketWatch in London.

British shares end lower after Wall Street slide London Markets …

In order to get a lower monthly payment lenders will give the borrower the opportunity to pay an up front fee which lowers the interest rate thus, paying less on their month to month housing note.

A good online mortgage calculator will do all the computation and analysis for you but we’ll explain it for you below….

The up front fee is called “points”. You typically pay 1% of the amount borrowed for each point:

If the amount borrowed was $100,000 then 1 point would cost you $1000 ($100,000 x 1%) This in turn will lower, or “buy down” your interest rate by .25%. For example, if you only qualify for a 6.75% mortgage rate on a $100,000 loan, paying your broker $1000.00 up front can reduce the rate to 6.5%.

Determining if this is a wise move financially for your family depends on a few factors, mainly the length of time you are planning on staying in the home. Again, a good online mortgage calculator will compare the loan with and with out points. (The online mortgage calculator will ask you for principal, interest rate and number of points)

In another example borrowing $100,000 for 30 years at 6.75% with no points would result in a payment of $648 monthly (Principal and interest only… no tax or insurance in this example)

The same loan but charging the borrower 2 points:- drops the interest rate to 6.25 %

- lowers the monthly payment to $615.00 monthly

- save $11,880 in total interest repayment

The above scenario makes sense if you plan on staying in the home for at least 5 years (break even point).

Again a good online mortgage calculator will clearly let you compare a loan with points and without points so you can determine :

- Total interest saved

- how many years break even

Break Even Point …Huh?

The break even point is the number of years it takes to re-coup the expense of paying for the points upfront. To get a financial benefit from buying down your interest rate by purchasing points you need to stay in your house until after the total of the monthly savings realized is greater than the total amount of cash dished out on points.

The cost for 2 points above was $2000. each month you save 33 bucks because you lowered your interest rate. so… $2000/$33 = 125 (payments or months) which is about 5 years

After about 5 years you’ve paid back all the cost of the points which now gives you the opportunity to avoid $11,880 in interest had you not purchased points.

So, points are not always bad if you want to lower your interest rate, It really depends on how long you plan on staying in your home and how much cash you have at the time of closing.

Points or no Points? A Good Mortgage Calculator can Help

In the days ahead, you’re sure to hear a lot of talk about financial resolutions to make for 2010.

Most of the time it will be good advice, but it’s just that – advice. It’s folks like me, financial planners and writers, telling you what’s good for you. this year, I’m going to take a different approach by sharing with you some of my financial resolutions for the New Year.

The truth is that even those of us who dispense financial advice for a living could do a better job of managing our money. Sometimes, in fact, I feel like I spend so much time helping others that I let things slide on my end.

That’s why I’ve made a few financial resolutions of my own for 2010. I suspect most readers will find that at least one of these goals could apply to them as well.

Hoping to end 2010 in better shape than I began, here are my top five New Year’s financial resolutions:

1. get back on budget: for years, I kept a family budget of one kind or another. It started as a hand-written summary of monthly income and expenses. Later on, I used the budgeting function in Quicken, the personal finance computer program. However, I found that to be overkill with so much detail provided that it overwhelmed.

Most recently, I used a simple spreadsheet that tracked gross monthly income in comparison to fixed and variable monthly expenses with one column dedicated to the current scenario and a second one to a projected (or maybe wishful) scenario. this proved to be the most effective approach, and I need to get back to it.

2. get taxes done early: Once upon a time, I prepared my federal and state tax returns each February with the aim of receiving refunds in March. At that time, I worked for a large company, had taxes withheld from my paycheck, filed a fairly simple tax return and could count on receiving a refund.

Now, I’m self employed, and that means considerable more complexity. There are business deductions to track, variable income to juggle and estimated tax payments to make. As a result, there’s a strong incentive to procrastinate. over the past few years, I could be found rushing to finish my tax returns in the days leading up to April 15.

Top five Financial Resolutions To make in 2010

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WASHINGTON (MarketWatch) — Economic data to be released this week are expected to show faster growth, but doubt remains whether the economy will be able to maintain the pace next year.

Over the past few weeks, there have been better-than-expected reports on employment, retail sales and inventories.

As a result, many economists think gross domestic product could easily top a 4% annual rate in the fourth quarter. That would be the faster rate of growth since the first quarter of 2006.

U.S. Week Ahead: Short but Significant

It’s a holiday-shortened week on Wall Street, yet investors will contend with numbers on home sales, consumer spending and jobless claims. In Washington, Democratic leaders want to bring health-care overhaul to a vote. Christopher Noble reports.

Some are even more optimistic. Edward Yardeni, president of Yardeni Research, has raised his fourth-quarter growth forecast to a 6.4% rate from 4.5%. this would be the fastest pace in nine years.

At some point, economists know that the boost to growth from fiscal stimulus and the inventory rebuilding will ease back. the key question remains whether the recovery can become self-sustaining before the stimulus eases.

Jim O’Sullivan, chief economist at MF Global inc. in new York, is betting that the economy will accomplish this feat.

Companies will soon start to hire back laid-off workers, he said, boosting spending and income.

Some important voices are sounding notes of caution.

For instance, Harvard economic professor Martin Feldstein and the economic team at Goldman Sachs, both watched closely by other economists, remain pessimistic.

They believe the economy is in danger of running out of steam early next year.

“We … continue to think that the recovery will be sluggish and that hiring will, if anything, come closer to following the ‘jobless recovery’ templates of 1991-1992 and 2001-2003,” the Goldman Sachs team wrote in an email to clients.

This debate won’t be settled this week. instead, investors will generally be able to enjoy a feast of positive news.

The most critical data for financial markets will come on Thursday with the release of the new orders for long-lasting durable goods for November.

Economists expect durable goods orders to rebound 0.4% in November after a 0.6% fall in October.

Companies are starting to place more orders for big-ticket items, said Jonathan Basile, economist at Credit Suisse.

“Companies have found they don’t have enough product on hand recently. they ran down inventories to a point where it was too low,” Basile said.

Home sales remain impacted by the government’s homebuyer tax credit, which was set to expire in November but has been extended until the middle of next year.

Sales of existing homes probably rose about 2.5% to a seasonally adjusted annual rate of 6.25 million, according to a survey of economists. That translates into a 37% year-over-year increase, the biggest since September 1983, economists at Barclays Capital noted. Thinking that there was a deadline, homebuyers rushed to complete their deals, analysts said. the data will be released on Tuesday.

Meanwhile, sales of new homes probably fell about 2.3% in November to a seasonally adjusted annual rate of 420,000. the tax-credit is having a more muted impact on new homes because they typically are more expensive, Barclays said. the data will be released Wednesday.

Income and spending data for November will also be released on Wednesday and is expected to be strong.

“Against all expectations, Americans still appear to be in a shopping mood heading into the holiday season,” wrote Meny Grauman, economist at CIBC World Markets inc in Toronto.

Personal income is expected to rise 0.5% in November, a faster pace than October’s. That is based on a 0.6% jump in hours worked and a 0.1% gain in average hourly earnings in the November nonfarm payroll report.

Consumer spending is expected to have popped up at a 0.6% pace based on the November retail sales report that showed a stronger-than-expect increase.

Also on Wednesday, the University of Michigan and Reuters will report a revised estimate of consumer sentiment for December.

The Michigan sentiment reading jumped to 73.4 in the first half of December from 67.4 in November and close to the recent peak in September of 73.5.

Analysts polled by MarketWatch are looking for a result of 74 in the final reading of the month.

Greg Robb is a senior reporter for MarketWatch in Washington.

Economy picks up, but can it maintain pace?