Net Worth Week 77 – Flexibility Helps Edition

Gentle Readers,
I am off to my sick relative this afternoon. I will miss 3 days of work for this visit, but seeing him before the radiation and chemo wreck havoc on him will be worth it. Thankfully, I just had to pay the cost of taxes since I still had miles available.
It’s been quite a busy week. I put my first invisalign tray in on Tuesday and it was painful. It is stillpainful, but the pain for days two and three are different from day one. I met with my client yesterday to fulfill his last minute request, and earned a little money for my business. I gave my business another loan this week to get me through the next month. Hopefully, that will be the last loan necessary. The downsides to owning a small business include needing to handle things even when your family is in an emergency.
For my relative, I have no idea how he’ll respond to treatment. If he’ll respond. So far, he is in remarkably high spirits. Perhaps my girlfriend was right to believe that my family’s ornery-nature could prove the odds wrong???

This week’s net worth numbers

9/22/2017 9/29/2017
 Joy 1109 1109
 Travel 1  1
 Down Payment 19 19
 Retirement 21 21
 Health 46 46
 Moving 286 286
 EF 11 11
Business 5 5
Life 4548  3466
 IRA  14213  14542
 Brokerage 837 827
 Rewards Card 2 0
 CC (largest) 0  0
 CC (longest) 0  0
 Rewards Card -6270 (BT)  -6270 (BT)
SL 1 -105734 -105849
SL 2 -46596 -46649
 Earnest -3160 -3167
 Net Worth -140664 -141602
 Percentage Change .49% -.67%

How many times have your miles saved you money? I think I am at 4 or 5 “free” trips so far this year.

Trump’s First Executive Order and Your Mortgage

Gentle Readers,

You remember when I learned last summer that changes in FHA Mortgage Guidance would alter my ability to acquire a mortgage. My debt to income ratio has not improved significantly in the past 6 months, as anticipated. I did not think I would be able to pay off $45000, commonly referred to as SL2.

One of Trump’s first acts as the new President of the United States was to make mortgages harder to acquire for middle class folks.

The previous administration had a policy that Trump’s Administration blocked immediately upon assuming office. The policy was on track to reduce the cost of mortgages slightly for many home buyers. The policy was not yet in effect, but was imminently going to impact folks.

What policy are we talking about?

HUD sent a letter suspending the 0.25 % point premium rate cut for FHA-backed loans.  Nearly 20% of mortgages are FHA-backed. The beauty of the FHA is that their criteria make it accessible for more people to access capital necessary to buy a home and enjoy the tax benefits of home ownership. Their most-touted benefit is the significantly lower down-payment. As low as 3.5% of the purchase price. Homes in my high COL area regularly go for over $400,000. A standard 20% down payment is $80,000. A 3.5% down payment is $14,000. It is not hard to see why so many Americans need the help afforded by FHA.

How big is this impact?

Frankly, not big at all. The cut Obama attempted to enact would have saved homeowners with a $400,000 mortgage $58 per month.  Not insignificant, but not overwhelming for most people shopping for a mortgage.

The housing market in parts of the country, mine included, have been on fire lately. The prices are sky-rocketing. Some folks look at high prices and want in. It is unclear if this action will throw water on the housing bubble, but it might.

The most fascinating part for me is that Trump has re-made the fortune he was gifted by understanding the benefits our tax code gives to real estate. Having learned every trick in the book, is he going to encourage the IRS to re-write the book? May the US end a half-century long policy of encouraging home ownership through the tax code? If they did, would that be a bad thing necessarily?

A lot remains to be seen, but I think these tea leaves are impossible to read just yet.

Would you be happy to amend US tax code and move away from a home ownership model?


What’s a Basis Point and How Will It Impact My Mortgage?

Gentle Readers,

You’ll recall that I want to buy a small place of my own, but that I have a lot of learning to do in the meantime. I understand how mortgages work in general, but a term I didn’t fully understand is Basis Point.

Mortgages are simple.

They are loans that are supported by collateral, ie the building you live in. You don’t make the proper payments, and your home can be returned to the mortgage lender. Your right to “your” home is conditional while there is a mortgage outstanding. Not a good look for you since you would prefer to remain living in the home. The lender makes money off of the loan itself through origination fees and interest payments. The lower the mortgage rate, the lower the cost of the loan for you. There are other parts of the mortgage, ie taxes and insurance, but I’m not going to write about those today.

There are a range of available down payments that are based on percentages of the total house and land value. It used to be standard for a buyer to pay in cash 20% of the value of the home. That standard is less likely these days. Some down payments are 3.5% of the home’s value or lower. I hope to do a 10% down payment for a home that is less than $170,000. My down payment would be $17,000 plus or minus some fees and my mortgage would be for $153,000. When I look at Bankrate’s Mortgage Calculator for those terms with today’s interest rates (3.39%), I would expect to pay $677.68 monthly for 360 months. Roughly equivalent to my current rent, which is why it is the top end of what I’d like to pay. I would actually prefer to pay much less.

Most lenders and buyers will agree to a 15 or 30 year term. That means, if you pay the stated amount every month for 30 years, the mortgage and associated payments will be completely paid off. You’ll actually own the home and not have the risk of a foreclosure from the lender. You will have satisfied the condition of the loan.

The interest rate on your mortgage determines how much you will pay in the long run. A higher interest rate means that the cost of borrowing that money will be greater for you. People with less than stellar credit are penalized by these higher interest rates, because lenders consider them less likely to fulfill their payment obligations. This means you have some control over how much you pay for your house. If you increase your credit score, you will look like less of a risk to lenders.  The less-risky version of you will have a lower interest rate and pay less.

All of that makes sense to me.

Basis Points are strange to me.

I know they exist, but I don’t understand what they have to do with my life. When I googled Basis Point, I got the following result:

“In addition to the interest rate, the lender could also charge you points and additional loan costs. Each point is one percent of the financed amount and is financed along with the principal.”

And also this definition:

“A basis point is a unit of measure used in finance to describe the percentage change  in the value or rate of a financial instrument . One basis point is equivalent to 0.01% (1/100th of a percent) or 0.0001 in decimal form. In most cases, it refers to changes in interest rates and bond yields.”

Why are mortgages stated this way? Why have an interest rate of 3.375% plus the ability to buy basis points? Why not just state the entire interest rate in one blow? It seems unnecessarily complicated to me.

One example I found explains that a way average consumers encounter basis points is during the lock-in period for a mortgage with your loan officer. She guarantees a certain rate at closing, which will be sometime in the near future, but not today. You are charged 50 basis points to lock in the rate. That is you are charged one-half of 1 percent of your mortgage loan balance to guarantee the interest rate you agreed upon. To me, it looks like an interest rate of 3.50% with fifty basis points ends up being a interest rate of 4.0.%. Am I wrong?

It also looks like a basis point can be known as a discount point. A discount point is a way to pay for a lower interest rate. I don’t really understand how this is different from a higher down payment, even with the following explanation.

“Discount points are a form of prepaid interest by which you pay the bank an upfront fee in exchange for it lowering the rate. The amount you can cut your loan’s rate will vary depending on how many points you pay and on how your bank underwrites it, but assuming that paying one point, or 1 percent of the loan’s balance, will lower the rate by 25 basis points.”

What do you wish you understood about basis points before securing your first mortgage? Is my understanding, or lack of understanding, off?


Net Worth Week 2

Gentle Readers,

I have made many changes to my finances in the past two years, and have been building up my efforts to achieve financial freedom in earnest in the past six months. These changes will result in my net worth getting closer to zero, but involve a lot of hovering around the negative $150,000 mark for now. It can be discouraging, but I know that progress is happening. Even when it does not appear true.

To show myself that my efforts have value and to encourage myself to keep them up, I am tracking my net worth weekly. I know this is obsessive and do not intend to do it indefinitely, but I think that there is a value in having meticulous attention to these matters for the time being.

The Changes

I started a business from my liquid savings in 2014. In 2015, I opened and fully-funded an IRA. In 2016, I opened a separate brokerage account, paid off (with help explained here) two of my credit cards, and began preparing to purchase a coop or condo.

All of these changes feel big, but my bank account feels small. Hopefully my focus will get me to and beyond zero.

Date 4/1/2016 4/8/2016 4/15/2016 4/24/2016
Joy 1097 1097 1097 1097
Travel  752 322 322 322
Down Payment  284 18 18 18
retirement  221 21 21 21
health  45 45 45 45
Moving  31 31 31 31
EF  9 9 9 9
Business  1 1 1 1
Bed  .29 0.29 0.29 0.29
Life  471 1066 907  963
IRA  6928 6885 7026  7100
Brokerage  220 217 221  222
CC (largest)  -11883.98 -983 0 0
CC (longest)  -567.28 0 0 0
Rewards Card  -2762 -2850 -3000  -3160
SL 1  ?  -101791 -101892 -102041
SL 2  ?  -44970 -45001 -45046
Earnest  -10000 -10009 -100036 -10054
–$151,728 -$150,890.71 -150230.71 -150471.71
-1.0% change .99% change .99% change  -1.0% change

What changes have you made in your finances recently?