Are mortgages a risky business?Written by Jenny Barclay
A bank or mortgage company is nothing more than a box in which to keep money. The owner of box has to do a few calculations. Firstly, how much is he going to offer those people who deposit cash in his box, in return for such a deposit? Secondly, how much of that money should he keep as cash in case owners of that cash want it back? Maybe 5%, maybe 10%, what are regulations in his jurisdiction? Thirdly, how much is he going to charge those people who wish to borrow money of others, previously deposited in his box?The person who owns box then sets out to find lots of other people to put their spare cash in box, in return for which he promises to give them their money back plus interest. In eyes of some economists, these people are lenders and not investors. This terminology is based on fact that capital investment of lenders does not change, whereas capital value of investors, in stocks or property for example, can go up or down. The owner of box then has to find other people who do not have spare cash, but in fact wish to borrow it. Fixed or variable? Both lenders and borrowers can sometimes be bewildered by variety of terms offered by such institutions. The easiest terms to understand are those that are based on a current rate that will vary according to market for interest rates, which alters daily, although companies will try to even out such daily fluctuations with only periodic changes in rate. Fixed rates, for a given period, are more difficult for average lender or borrower to understand, a fact that has given rise in past to greedy companies being able to reap huge benefits from such lack of knowledge. The reason for an institution wanting to attract deposits at a fixed rate could be based on fact that their advisors calculate that interest rates are going to rise. Should they find it possible to attract deposits at e.g. 3% over 3 years, and then find that current rates are 5%, they will be somewhat pleased. In case of a borrower finding that they are in this situation they should be congratulated for being better at guessing than company’s advisors. On other hand, a borrower tied in to a contract at say 10% for several years who then finds that rates have dropped to 5%, will not exactly be celebrating. In my short experience since I started at university fourteen years ago, I have seen deposit rates vary from 14.5% down to 1.5%.
| | 5 Tips for Savvy Use of Your Home Equity Line of CreditWritten by Tim Paul
Tapping your home's equity to pay college expenses, consolidate credit card debt or even to buy a new car or boat is common place. Many economists attribute additional buying power afforded consumers through home equity debt as a primary reason nation's economy has been able to emerge from recent recession. Yet, aside from simply allowing consumers to spendmore, flexibility and efficiency of a home equity line of credit (HELOC) can provide financially savvy person with means to savemoney, make money or simply take advantageof opportune situations he or she might otherwise miss out on. Here are five tips to show you how:Tip 1: Take Advantage of Higher Insurance Deductibles! You probably know that raising deductibles on auto and homeowners insurance policies can mean big savings on insurance premiums. If you increase deductible on a homeowner's policy from $500 to $1,000, you'll cut your premium by as much as 25%! Yet many people don't do this because they fear they may not have necessary cash available in event of a loss. With low-interest cash readily available through a home equity line of credit you'll have security and confidence you need to raise your deductibles and reap savings! Tip 2: Lock In Big Savings! Credit card companies (e.g. GM card) frequently have shopping programs with names like "Main Street Savings" on a 30-day free trial basis. These programs allow you to buy discounted gift cards (20% discount) for major national retailers like Target, Sears, and Home Depot. The flexibility afforded by a home equity line of credit can allow you to purchase (during free trial period) a large amount of discounted gift cards for major retailers you frequent. Then use these cards instead of cash or credit when you purchase everyday items (The cash you would have spent can be used to pay down HELOC). Although you pay low interest on home equity credit line, you receive a front-end discount of 20% on everything bought. When combined with store coupons and sales, you can realize total savings of 70% or more! In short, a HELOC provides low interest cash availability to take advantage of bargains like this that you might otherwise have to pass on. Tip 3: Take Advantage of 0% Balance Transfer Offers! We've all seen no-fee credit card offering "0% APR" on balance transfers for 6, 12, and even 18 months. If you have a balance on your HELOC, you may be able to take advantage of these offers. Here's an example of how: last year I accepted such an offer and promptly transferred $10,000 from my home equity credit line balance (which had a 4.25% rate). Then I cut up card! For next eleven months, I paid monthly minimum credit card payment (3% of outstanding balance) by writing a check from my home equity line of credit. In twelfth month, prior to expiration of 0% offer, I paid off remaining balance with another home equity credit line check. During 12 months, I also made sure to continue my regular payment towards HELOC at same level, meaning that more of each went to pay down principal and less went to interest. Net result: interest savings of over $350.00, lower principal balance on my HELOC, and a positive addition to my credit repayment history!
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