Username or Email Address
Do you already have an account?
Forgot your password?
  • Log in or Sign up

    VWVortex


    Page 1 of 2 12 LastLast
    Results 1 to 35 of 55

    Thread: The Money & Investing FAQ

    1. 08-14-2006 11:28 AM #1
      Nothing to see here yet.

      This is a buildout thread.


    2. Senior Member ChrisMD's Avatar
      Join Date
      Jun 15th, 2001
      Location
      Maryland
      Posts
      20,812
      Vehicles
      Mercedes-Benz GLK250, BMW 335is
      08-14-2006 08:43 PM #2
      I told Peter I would write a FAQ for this forum but it's going to take me a while to do that. Please be patient. I have many ideas in mind but if there's something specific you think I should address, let me know (might be best to send me a PM).

    3. Senior Member ChrisMD's Avatar
      Join Date
      Jun 15th, 2001
      Location
      Maryland
      Posts
      20,812
      Vehicles
      Mercedes-Benz GLK250, BMW 335is
      08-14-2006 10:45 PM #3
      Retirement

      How do I start saving for retirement?

      There are two major tax-advantaged ways to save for retirement: employer sponsored plans such as a 401k (private employers) or 403b (public employers like schools) and Individual Retirement Accounts (IRA). The numbered names may look funky but they are named after the IRS codes that established them. Employer sponsored plans are only available through your employer and only if your employer offers one. Anyone can open an IRA as long as he/she meets the IRS criteria for contributing to an IRA. Although there are other ways to save for retirement, these are the two places to start.

      Note that neither of these options is actually an investment. Rather, they are containers for investments. Think of them as a lady's purse. A woman does not use her purse to buy things and unless she has a handbag fetish the purse isn't worth a whole lot, but the purse is a container for her cash and credit cards, which are very valuable. Likewise, a 401k and IRA are value-less containers that hold investments (mutual funds, stocks, bonds, etc) and provide tax advantages to any investments held within them. Although people commonly refer to "investing in a 401k" they are not actually investing in a 401k. They are investing in shares of a mutual fund, for example, inside the 401k.

      How do I contribute to a 401k?

      Through your employer. You will specify how much of your paycheck you want to contribute (usually as a percentage) each pay period at the time you sign up. You can always change the amount later. The designated amount is then taken out of your pay before taxes are calculated. This is called pre-tax money; you have not paid any income taxes on the money in your 401k (or 403b). This lowers your tax liability in the tax years in which you contribute.

      That's great. So when do I pay taxes on the money in my 401k?

      When you withdraw money from the 401k in your retirement years. Distributions received from your 401k account are taxed in the year you receive them and at the tax bracket in which you find yourself at that time, not the tax bracket you were in when you put the money into the account.

      What does it mean when my employer says they "match" my 401k?

      Many employers encourage you to contribute to the company 401k by offering to match a portion of your contributions. For example, your employer matches 50% of your contributions up to 6% of your salary. (This is a fairly common match amount although some employers will match 100% or may only match up to 4%. It varies by employer.) Your gross pay per period is $2,000 and you contribute 6% to the 401k. That is $120. Your employer matches half of that and contributes $60 on your behalf. That is an immediate 50% return on your $120 investment. If your employer matches, do not pass that up.

      Please note that if you contribute more than the 6%, your employer will only match the 6%, or the $60 in this example. There are IRS limits to how much you can contribute to a 401k so make sure that you are not contributing too much above the match early in the year so that you render yourself ineligible to contribute later in the year and thus miss out on a portion of the match.

      What does it mean when my employer talks about how I am "vested" in the 401k?

      Vested refers to how much claim you have to the portion contributed by the employer to your 401k on your behalf. As an incentive for employees to stay with the company, the company may lay out a vesting schedule for milestones at which you increase your claim to the company match. An example may be:

      Until one year of service, you are 0% vested. This means you have no claim to any amount of the company match if you leave before one year of service.
      After one year of service, you are vested in 25% of the company match. If you leave after one year of service, you will only be able to take 25% of the company's matching contributions with you.
      After two years of service, you are 50% vested. At this point, you would be able to take half the matching contributions with you when you leave.
      After three years of service, you are 75% vested.
      After four years of service, you are 100% vested. If you leave after four years, you can take all the matching contributions made by the employer with you.

      What types of IRAs exist?

      There are several types of IRAs and I can't cover them all here. The two basic types of IRAs that are available to almost everyone (subject to income limitations, which I'll explain later) are Traditional IRAs and Roth IRAs. (Trivia: Traditional IRAs used to be simply called IRAs until the creation of other IRAs, such as the Roth IRA, which was created in 1997 and named after Senator William Roth who created the IRA bearing his name.)

      A Traditional IRA is funded with pre-tax money, much like a 401k or 403b. The contributions do not come out of your paycheck, however. You will contribute money on your own to your IRA and then take a tax deduction on your tax return the following April, which makes it pre-tax money. Distributions from a Traditional IRA are taxed in retirement like a 401k.

      A Roth IRA is funded with after-tax money, unlike a 401k or 403b. You will contribute money on your own to your IRA but you do not get the tax deduction if you contribute to a Roth IRA. The tax-advantage here is that your distributions from the Roth IRA are completely tax free, provided you are at least 59.5 years of age and the account has been open for a minimum of 5 years. If you are younger than 59.5 or the account is younger than 5, you may always withdraw your contributions free of tax or penalty but the earnings must remain in the account until those two conditions are met.

      What are the limits to contributing to a Traditional or Roth IRA?

      First you must qualify to make contributions to a Traditional or Roth IRA. You must have taxable income during the year. For a Traditional IRA, you must be younger than 70.5 years of age and you will only qualify for the tax deduction if you make less than the modified adjusted gross income (MAGI) limit defined by the IRS for each tax year. For a Roth IRA, you may not contribute at all if you make more then the MAGI limit.

      If you qualify, you are then limited to how much you can contribute to an IRA in any given tax year. For the purposes of IRA contributions, the tax year runs from January 1 to April 15 (or the designated tax day which may fall on the 16th or 17th) of the following year. At the time of this writing (2006), the limit for IRA contributions per person is $4,000 per tax year. The contribution limit applies to all IRA accounts of all types in an individual's name. You can contribute to multiple different IRA accounts during the year but the total contributions across all accounts may not exceed the annual limit.

      Do I have to choose between a 401k and IRA?

      Absolutely not. You can have both types of accounts open at the same time and you may contribute to both in the same year.

      What if I don't have money for both a 401k and IRA? How do I choose?

      The general rule is to contribute to your 401k up to the point where you max out the employer's match first. If that is 6%, contribute 6%. No more for now. If you have more money you would like to contribute to retirement savings, you then contribute to an IRA, preferably a Roth IRA if you qualify. If you are maxing out the IRA and still have money left to invest for retirement, go back to the 401k and contribute above the amount of the match but of course not more than the annual IRS limit. If you still have even more money to invest after you max the 401k, that is beyond the scope of this FAQ. Post separately or seek advice from a good financial adviser.

      Which is better: Traditional IRA or Roth IRA?

      Both have advantages; however, if you're young you'll probably see more benefits from the Roth IRA. There is a very real possibility that tax brackets will go up in the future (by the time you retire) so paying taxes now when you are young and probably not in a very high tax bracket (after all, you can't be in a high tax bracket if you qualify for the Roth to begin with) is better than leaving it to chance on what tax brackets will be and how much money you'll have when you retire.

      In addition to when you pay taxes, Roth IRAs have other advantages. Your contributions (the money you put in) are always accessible to you. You can withdraw it at any time without penalty or tax. Although you shouldn't do this unless you really need the money, it is nice to have this option in the event of an emergency. Getting money from a 401k or Traditional IRA before retirement age is limited to certain situations and is almost always a ripoff.

      Also while a Traditional IRA mandates Required Minimum Distributions, in other words you must begin withdrawing money from a Traditional IRA at age 70.5, a Roth IRA does not require this. If you get to retirement and do not need the money in your Roth IRA (maybe you have money from other sources), you are not required to ever withdraw money from the Roth during your lifetime. You can pass the account to your heirs untouched. You may also continue contributing to the Roth IRA if you still qualify after age 70.5, unlike a Traditional IRA.

      Where do I open an IRA?

      At an investment firm. Or a bank, but I don't recommend opening an IRA at a bank. Some popular firms with good service and low fees are, in no particular order: Charles Schwab, Muriel Siebert, Fidelity, TD Ameritrade, Vanguard, T Rowe Price, and Etrade.

      Keep in mind that an IRA is, itself, not an investment; it is merely a container for investments. Pick a company that offers the investments you want to invest in. Most of these companies offer many of the same funds so your choice may come down to minimum opening balances or annual maintenance fees. Annual maintenance fees are somewhat common and usually very small, but vary by company, and they are acceptable. What is not acceptable (in my opinion) are loaded mutual funds that charge you simply to buy and sell them. Avoid "A share" and "B share" funds; these are loaded funds.

      Annual fees will often be waived if you have an account balance over a certain amount. All the more incentive to save.

      My employer says I can take a loan from my 401k if I need the money before retirement. Should I do this?

      Absolutely not! Taking a loan from a 401k is one of the biggest mistakes you can make with money.

      Remember your 401k is funded with pre-tax money. When you repay the loan, you are paying it back with post-tax money. Now when you retire and take distributions from the 401k, guess what.. you get to pay taxes all over again on the money you used to repay the loan and on which you've already paid taxes. Most people don't like paying taxes once, let alone twice!

      Also another thing to keep in mind is that if you terminate employment with the company for any reason (you leave, get fired, get downsized, etc) while you have an outstanding 401k loan, the full balance of the loan is due IN FULL within 30 days of your departure from the company. If you do not repay the loan within that period, the outstanding balance will be taxed and penalized as an early withdrawal which means you will pay a 10% penalty and have to claim the balance as income on that year's tax return (thus owing taxes on it).

      What do I do with a 401k account when I leave an employer?

      If you have a large amount of money in the account, you may be allowed to leave it with the employer. If you have a smaller amount, you'll probably have to move it or they'll force a cash-out. The only bad option is cashing-out because it's treated as an early withdrawal and will be both taxed and penalized.

      The best option is usually a rollover. There are two types of rollovers: indirect and direct. An indirect rollover (often called simply a "rollover") means the 401k plan administrator gives you the money and then you have 60 days to invest that money in a qualifying retirement plan (such as a traditional/rollover IRA or the 401k plan of a new employer) without owing tax or penalty. If you don't complete the rollover in 60 days, you will be taxed and penalized for an early withdrawal.

      The preferred method of rolling over funds is a direct rollover (also called a "trustee-to-trustee transfer"). This means the 401k plan administrator cuts a check for your assets that is directly payable to the new qualifying retirement plan. For example, you open a rollover IRA at Vanguard and tell your employer you wish to roll over your 401k to the Vanguard IRA. The plan administrator cuts a check payable to "Vanguard FBO (for the benefit of) Your Name Here" and then either sends it directly to Vanguard or mails it to you and you send it to Vanguard. You can usually do this entire process online or by telephone and it is very easy. Even if they send the check to you, it is a direct rollover as long as the check is not payable to you.

      Can IRAs be converted between types?

      You have never paid taxes on money in a Traditional IRA so you can convert a Traditional IRA to a Roth IRA by paying taxes on it. You must be eligible to make Roth IRA contributions to do this but it does not count toward your annual contribution limit. If you make $50,000/yr that is all taxable and you wish to convert a Traditional IRA worth $10,000 to a Roth IRA, you will end up claiming $60,000 in taxable income for the tax year in which you convert.

      Be careful when converting. Since the converted amount counts as income, you could potentially render yourself ineligible to contribute to a Roth IRA by converting a large amount at once. It could also bump you into a higher tax bracket. If you're contributing a large sum, it's best to break it up and convert smaller amounts each year over a period of several years.


    4. Senior Member ChrisMD's Avatar
      Join Date
      Jun 15th, 2001
      Location
      Maryland
      Posts
      20,812
      Vehicles
      Mercedes-Benz GLK250, BMW 335is
      08-15-2006 12:07 AM #4
      Credit Cards

      Credit cards are evil. Why would I want one?

      Many reasons. Among them convenience. It's simply more convenient to pay for expensive items with a credit card than carrying cash or writing a check. It's also the preferred means of making purchases on the Internet. Paying at the gas pump with a credit card is more convenient than paying inside. Paying for routine purchases, such as lunch, even in smaller amounts is often more convenient to charge and pay once at the end of the month versus paying every day in cash.

      There's also the very big reason of building credit. You will need good credit to purchase things later like a new car or a house, unless you have buckets of cash, and the easiest way to build credit is with a credit card.

      I have a Visa Check Card. Will that build credit for me?

      No. Visa check cards, or any other types of check cards, are debit cards, not credit cards. Debit cards do not appear on your credit report and do not help you build credit.

      What exactly is the difference between a credit card, a charge card, and a debit card?

      A credit card is a plastic card that represents a line of credit. You have a credit limit that defines the maximum balance you are allowed to carry. As you charge purchases, your available limit decreases and you have less room to make additional purchases. You receive a bill each month noting your new balance and a minimum payment that is usually quite a bit less than your outstanding balance. Although you certainly may pay the balance in full, you do not have to. As you pay down the balance, your available limit increases and you once again have more room for future purchases. Visa and Mastercard are two very popular examples of credit cards.

      A charge card is sometimes used synonymously with credit card, but it's actually a different type of card. A charge card is more of a convenience card that allows you to delay paying for a period of 30 days. You may or may not have a spending limit but when you receive the monthly bill, the entire balance is due in full. American Express offers some of the most popular charge cards in the form of their Green, Gold, and Platinum cards. (Relatively recently, American Express has begun offering the Blue and Clear cards. These are credit cards.)

      A debit card is linked to a pre-paid account. Instead of receiving a bill at the end of the month, your purchases are debited directly from the account. In the case of check cards, the account is your checking account. Check cards can be processed as either ATM cards (you enter a PIN on a keypad) or credit cards (you sign the receipt), but the end result is always the same: the amount is deducted directly from your checking account balance. Visa Check Card is the most popular form of debit cards.

      I want a credit card. Which card should I get?

      That depends on why you want the card. Do you want to use it as a convenience card and plan to pay in full or do you plan to carry balances? If you plan to carry a balance then you want a card with the lowest interest rate possible. If you don't plan to carry a balance then you probably want a card with a decent rewards program. Rewards can include points, cash back, or frequent flyer miles. In my opinion, the best reward is cash back. Points are nearly worthless and frequent flyer miles are only good if you can actually use them for a trip you want to take when you want to take it (think blackout dates) and if the value of the reward is more than what you would have paid for the ticket had you purchased it on your own.

      Citibank and American Express are my current favorites as far as national credit card companies. Specific cards include the Citi Preferred Dividends Platinum card, American Express Blue Cash, and American Express Clear. These three cards have good cash back programs but may not have the lowest interest rates so look around if you need a low non-promotional rate. I can not speak about cards offered by regional banks so please also check with your local banks when shopping for a card.

      Read the disclosures of any card carefully. In my opinion, annual fees for the "privilege" of having a certain card are not worth the price of admission. Also if you see the term "Two-Cycle" run away. Two-cycle will cause you to pay more interest if you occasionally carry a balance.

      How do credit card companies make money?

      Credit card companies make money in lots of ways. First, they collect transaction fees from the merchant (where you used the card) every time you use the card. Second, if you do not pay the balance in full within the grace period, they charge you interest which goes directly into the card company's pockets. Third, you may be paying annual fees. See my opinion above concerning annual fees. Fourth, misc fees such as if you go over your limit or miss the payment due date.

      I received an offer for a 0% card. Is this too good to be true?

      Competition is very high right now in the credit card industry and they will offer anything to get your business, provided of course you are a customer worth having. More about that later when I discuss credit reports and FICO scores.

      The 0% offer is probably only for balance transfers (transferring an existing balance from one card to another) and not new purchases or cash advances, although sometimes a card may include a 0% offer for purchases for a very limited time.

      It is not too good to be true but there are some things to watch out for. Transaction fees for the balance transfer will eat into your savings. For example, a 3% fee with no cap for a $10,000 transfer is $300. Some cards may cap the transaction fee at something like $75. One very important thing to know is that payments are always applied to your account to pay off portions of your balance with the lowest interest rate first. If you have a balance of purchases at 10%, a balance from balance transfers at 0%, and a cash advance balance at 22%, your payments will pay off the balance transfers before paying off the purchases (second) and cash advances (third). If you do a transfer, make sure the card has no existing balances before the transfer and do not use the card for anything else after the transfer until the transfer balance is paid off.

      What's a secured credit card?

      People with no credit or bad credit may have to use a secured credit card to build credit up to the point where they will qualify for a regular, unsecured credit card.

      A secured card is one for which you secure the credit limit with a deposit of an equal amount. You give the bank $500 and they give you a credit card with a $500 limit. They will send you a bill each month and you will be expected to pay it just like a regular card but in case you don't pay, the bank will use your deposit to cover your debt. It's like a security deposit when you rent an apartment. Hopefully it won't be needed but it's there to protect the landlord from loss just as the deposit protects the bank. If you never default on the account, you will get the full deposit back when you close the account.

      I've applied for several cards and keep getting denied. What can I do?

      The very first thing to do is stop applying. Each denial of credit is hurting your chances of approval even more. You will have to wait at least six months to "reset the clock" so to speak. In the meantime, you may wish to consider a secured card.

      I have credit card debt. How do I pay it off?

      If you have good credit, first transfer as much of the balances as you can to the lowest interest rate possible. Then arrange your cards in order from highest interest rate to lowest. Pay the minimum payment on all but the highest rate. When you pay the highest rate card, send every available penny you have. Eventually you will pay off the card and when you do, move on to the now-highest rate card and do the same thing; send the minimums to all the others and every available penny to this one. It may take a while depending on your income and how much debt you have but this is the fastest way to get out of credit card debt.

      A mortgage broker told me I can use equity in my home to pay off my credit cards. Should I?

      No! This is another big mistake like taking a loan from a 401k. First of all, home equity loans and lines of credit are secured by the equity in your home. If you can't pay, they'll take your house. If you can't pay the credit cards, the worst they can do is sue you but if you can't pay then chances are good they won't. You may think this is no big deal because you can pay (slowly) but stuff happens. Don't chance it.

      Second, particularly with home equity lines of credit, the interest rate is variable and currently HELOC rates are going up along with all other interest rates. The 5% rates you saw a while ago no longer exist and people are currently paying 10% or more on HELOCs. How is that better than a low-rate credit card balance transfer? It isn't. Not even the tax deduction will make up that difference.

      Another important consideration is that people who get into credit card debt once more often than not tend to do it again. Paying off your cards with home equity and suddenly finding yourself with zero balances on your credit cards is a very dangerous situation for anyone who will continue using the cards the same way they were before. Not only will you have the equity debt but also you'll run the cards right back up and now you'll have both debts. Now you've really endangered your house.

      Furthermore, the real estate market is uncertain right now. You may have considerable equity, but it could disappear tomorrow if house values drop. It's not certain to happen and maybe not even likely, but it's possible. In the event it happens and you have no equity cushion because you used it up to pay off the debt, you are in a bad situation where you can't sell the house and you can't refinance it because you owe more than it's worth. You're just stuck and that's not good even if you aren't planning to move. As I said, stuff happens. Or possibly you're in an ARM/interest-only/negative-amortization or other "creative financing" situation with the mortgage anyway and then you're REALLY stuck. Playing with fire is not smart.

      The best way to pay off credit cards is to first examine why you're in credit card debt, change your spending habits if those habits led to the debt, and then use the method described in the question before this one to pay off the highest rates first.


    5. Member dak125's Avatar
      Join Date
      Apr 7th, 2005
      Location
      Chicago
      Posts
      1,074
      Vehicles
      2010 135i, 2008 4Runner V8
      08-16-2006 04:52 PM #5
      Nice. Looking forward to future additions to this thread. Thanks!

    6. 08-16-2006 07:24 PM #6
      Excellent thread!

    7. Banned FBMphil's Avatar
      Join Date
      Feb 18th, 2006
      Location
      Chicago 'burbs
      Posts
      7,930
      Vehicles
      Focus hatch
      08-16-2006 11:32 PM #7

    8. Senior Member ChrisMD's Avatar
      Join Date
      Jun 15th, 2001
      Location
      Maryland
      Posts
      20,812
      Vehicles
      Mercedes-Benz GLK250, BMW 335is
      08-20-2006 04:53 PM #8
      Saving

      Should I save or invest?

      Saving is setting money aside to earn a modest return with the goal of keeping it safe usually for a short-term goal or necessity. Investing is purchasing investments (stocks, funds, bonds, etc) or other items (a house, antiques, etc) with the expectation of making money but understanding the possibility exists to lose money. Because investments may drop in value in the short term, investing is more for long-term goals or short-term "fun" when you can afford to lose the money.

      If you're 25 and planning for retirement, you want to invest. If you want to buy a house in two years, you should be saving for the house and not investing your down payment money. Planning ahead for your two-year-old daughter's college education? Invest. Have a son already in high school? Save.

      How do I save when my bank pays 0.1% interest on a savings account?

      Keeping your savings in a regular savings account at your local bank is not putting your money to best use. Online savings accounts and money markets have the best returns, highest level of simplicity (you don't need to change banks or open new checking accounts, and transfers are done online), and still allow you to have access to your money when you want it. At the time of this writing, your choices are ING Direct (the "Kleenex" or "Band-Aid" of online banks: http://www.ingdirect.com), Emigrant Direct (www.emigrantdirect.com), HSBC (www.hsbcdirect.com), and GMAC (www.gmacbank.com). Rates vary but the average is currently around 5%.

      If you are willing to give up some liquidity, you have the option of Certificates of Deposit (CD). When you buy a CD you give the bank a certain amount of money for a certain period of time. The bank gives your money back to you with interest at the end of that time period. The interest rate is fixed from the beginning.

      CDs pay more so that's the best option, right?

      Not necessarily. CD interest rates are usually higher than a savings account but the catch is you have committed your money for a set period of time and withdrawing it early will result in a penalty or forfeiture of interest. Additionally the interest rate is usually locked for the whole term of the deposit regardless of whether interest rates rise or fall during that period. This is good for you if rates fall but not so good if rates rise. There is such a thing as a "bump-up" CD that allows you to adjust the terms of the CD during the period (usually one time) subject to terms and conditions of the account, but do not rely on a bump-up if there is a strong likelihood of rates rising.

      When is the best time to buy CDs?

      When interest rates are falling. 2001 and 2002 were good times to buy CDs because rates were falling rapidly. 2004 and 2005 were, generally speaking, bad times to buy CDs because rates were rising quickly. Of course it's easy to look back and say that but the industry is always talking about interest rates and the Federal Reserve so a little research will give you a pretty good idea of the current climate.

      Here's another hint: don't immediately go with the CD term that has the highest rate. Banks have a good idea of which direction interest rates are going to travel and they push customers into CDs that are more favorable to the bank. The bank wants you locked into today's low rates when rates are rising and wants you locked into today's high rates for very short periods of time when rates are falling. CD rates are typically higher with longer terms because you're committing your money to the bank for a longer period and they can use it to make more money. If you notice shorter terms with higher rates than longer terms, that's a strong clue that rates are going down and the bank doesn't want you locked in for those longer periods.

      What does it mean to "ladder" CDs?

      Laddering CDs means that instead of buying one long-term CD, you split your money into equal portions and buy CDs of 1-year, 2-year, and 3-year terms, for example. This reduces the low liquidity factor of CDs since you would have some of your money maturing each year. It does not, however, reduce your risk of interest rates rising since you still have portions of the money locked up for longer terms.

      I have a limited amount of money to save and invest. How do I determine where to save?

      You'll need to make a list of your goals, both short-term and long-term. Generally speaking, contributing to a 401k to get a company match comes first; it's free money you shouldn't pass up. Paying down high-rate debt comes next. Paying down a credit card balance on which you're paying 20% interest is the same as saving 20% because you pay less interest.

      Your savings after that will depend on your age and what goals you have. If you want to buy a house, start saving for that. You should have an emergency fund but you can actually use a house fund as an emergency fund if an emergency comes up while you're saving.

      If you already have a house and an emergency fund, start thinking harder about retirement and kids' educations. If you can't afford both of those, do not sacrifice your own retirement for your kids' educations. Kids can always get student loans but asking a bank to fund your retirement is a more difficult task.


    9. Senior Member ChrisMD's Avatar
      Join Date
      Jun 15th, 2001
      Location
      Maryland
      Posts
      20,812
      Vehicles
      Mercedes-Benz GLK250, BMW 335is
      08-20-2006 06:46 PM #9
      Mortgages and other loans

      How do I qualify for a loan?

      The lender will pull your credit report and score to see how you treat the credit you already have. (More about credit reports and FICO scores later.) Your income is not part of your report or credit score, but the lender wants to know that you have the ability to repay the loan. In addition to the actual amount you earn, they consider your Debt To Income Ratio (DTI). This is the portion of your monthly income that is spent on debt payments: mortgages, car payments, credit card payments, student loan payments, etc. Someone who makes $50,000/yr and has little debt has a lower DTI than someone who also makes $50,000/yr but is already in serious debt. Your credit and income/DTI are the largest factors.

      What does it mean when a loan is "secured?"

      A secured loan is one that is secured by the value of an asset (collateral). A mortgage is secured because the lender places a lien on your title stating that you owe the bank money. When you sell the house, that lien must be paid off before the title can be transferred. Additionally, if you default on the loan the bank has the right to initiate a foreclosure. Foreclosure is a legal process in which the bank takes your house and sells it to use the proceeds to pay off the loan you have not paid. Car loans are also secured with the value of the car. Likewise, the lien must be paid before you can sell the car and the bank can repo the car if you fail to pay.

      A loan that is not secured by the value of an asset is called "unsecured" or a "signature loan" because it's backed only by your signature. A personal loan is unsecured and most lines of credit are unsecured except for home equity lines of credit (HELOC) and a special type of credit card called a "secured credit card."

      What types of mortgages exist?

      There are more than I can list. The two basic types are fixed and adjustable. A "30 year fixed" mortgage is amortized over 30 years and your payment never changes. After 30 years, you own the house free and clear. A 15 year fixed mortgage is much the same but amortizes over 15 years.

      Adjustable rate mortgages (ARMs) generally have lower initial rates than fixed mortgages but the rate adjusts over the life of the loan. This means your payment may rise. Some ARMs may be fixed for the first few years of the mortgage to attempt to combine the features of a fixed mortgage and an ARM. For example, a 5/1 ARM is fixed for the first 5 years and adjusts every 1 year after that. Most ARMs have adjustment caps to protect you from outrageous adjustments. You may see a rate cap listed as 2/1/6. This means the rate may adjust a maximum of 2% the first adjustment period, a max of 1% each adjustment after the first, and a max of 6% over the life of the loan.

      What mortgages are not a good idea?

      Interest-only mortgages have been around for a while but recently gained popularity as housing prices sky-rocketed. With an interest-only loan you pay only interest and no principle for a predetermined period of time. This lowers your monthly payment but means you owe exactly the same amount at the end of the interest-only period as you did at the beginning. This can be risky and is not recommended unless you know what you're doing and are positive that it is a good idea. Do not let someone talk you into an interest-only loan. If you don't know whether it's a good idea, it's not.

      Negative amortization is an even higher risk than interest-only because you pay less interest than you're supposed to pay. If your rate is 5% but you're only paying 2%, sure your payment is very low, but the other 3% is being added to your loan balance so the amount you owe is actually increasing. This is very dangerous because it will put you "upside down" (you owe more than the house is worth) if the house is not appreciating fast enough to keep up with the negative amortization. You cannot sell a house in which you are upside down unless you come up with cash to cover the difference so you may find yourself truly stuck in a bad situation.

      What's a balloon loan?

      Balloon loans exist for both houses and cars. Whereas a fixed loan has equal payments and is paid off with the last payment, a balloon loan is one that has a final payoff significantly larger than the monthly payment. When the balloon is due, you must pay it off either with cash or with another loan.

      A balloon loan on a car is very similar to leasing the car where the balloon payment is equal to the lease's residual amount at the end of the term. The major difference is that you own the car instead of the lessor. A balloon loan is preferred over a lease for those who plan to purchase the car at the end of the term or for those who live in states where leases are tax-disadvantaged (Maryland and Texas being two). You have the additional end of term option of giving the car back (like a lease) instead of paying it off or refinancing.

      A balloon loan on a house does not have many advantages and you very well may be better off with an ARM if you do not plan to stay in the house for long. If you plan to stay, you want a fixed rate mortgage.

      Please explain closing costs and points.

      Closing costs are all costs that you owe at the table when you close on your new house. These include such third-party costs as appraisal and inspection (if not paid already), credit report charge, and courier fees, as well as title fees and interim taxes and interest until your first tax bill and mortgage payment are due. These items are generally not avoidable and won't vary much if you compare lenders.

      Closing costs may also include lender fees such as application fee, processing fee, underwriting fee, administration fee, funding fee, and any other "junk fees" that are pure profit to the lender. These can sometimes be avoidable and may vary greatly if you compare lenders.

      One point is equal to 1% of the mortgage amount. Points may be charged as origination points or discount points. Origination points are just more fees that are pure profit to the lender. If you are getting a mortgage for $300,000 and the lender charges 1 point, you will pay an extra $3,000 for... well, nothing. A banker will tell you it covers the bank's cost of making the loan happen but that's bull. The 37,000 other fees they charge are all for that same purpose and really the interest they earn on the loan covers their costs of the loan with PLENTY of profit to spare.

      Discount points (also called buydown points) reduce your interest rate (slightly) by paying more money up front. This doesn't really save you much, particularly if you sell the house or pay it off early, and basically amounts to just prepaying interest.

      Negative points are the opposite of buydown points. Instead of paying points to get a lower rate, you get points from the lender in exchange for a higher interest rate. The idea here is that you effectively finance your closing costs by paying more interest. In this manner you can truly buy a house with nothing down and very little out of your pocket at closing, but I don't recommend doing this. It is one more thing that if you are not positive that it's a good idea for you, then it's not.

      Private Mortgage Insurance (PMI) sounds like a ripoff. Is it?

      Yep! The rule is if you put down less than 20% of the house's value you will have to pay PMI. If you put down 20% or more and default, you will have enough equity in the house so that the lender will be able to cover its losses with foreclosure. Financing more than 80% increases the risks that a lender will not be able to cover its losses with foreclosure. So the lender takes out an insurance policy (similar to GAP insurance on a car lease) that protects the lender from your negative equity. Of course the lender makes you pay for this even though it benefits the lender.

      Piggyback loans (or 80/20) were created as a way to avoid PMI. Instead of financing 100% and paying PMI, you would take a first mortgage of 80% (you won't owe PMI on this) and a second loan for the remaining 20%. If you had 10% to put down, you'd have two loans of 80% and 10% (80/10) with the other 10% being your down payment. The two major advantages are that you avoid PMI and the interest paid on the second loan is tax deductible whereas PMI is not. However, the major disadvantage is that the interest rate on the second loan is significantly higher and may adjust even higher. You may pay more in interest on the second loan than you would have on PMI.

      Although the preferred method is putting 20% down and avoiding this whole mess, you also have the option of single-premium PMI (called Single File). Instead of paying PMI monthly or doing piggyback loans, you pay the mortgage insurance up front as a single premium and roll it into the mortgage. It's usually about 1% so if your mortgage is $400,000 then you would actually be financing $404,000 and you're done with PMI. The whole mortgage is at the same (hopefully low) interest rate and the extra interest is tax-deductible.


    10. Senior Member
      Join Date
      Mar 24th, 2001
      Posts
      26,642
      08-20-2006 11:45 PM #10
      You may want to preface country or locality specific information with an indication of which country or locality it applies to. For example, 401k and IRA accounts are specific to people subject to US income tax.

    11. Senior Member
      Join Date
      Mar 24th, 2001
      Posts
      26,642
      08-20-2006 11:53 PM #11
      Quote, originally posted by ChrisMD »

      A Traditional IRA is funded with pre-tax money, much like a 401k or 403b. The contributions do not come out of your paycheck, however. You will contribute money on your own to your IRA and then take a tax deduction on your tax return the following April, which makes it pre-tax money. Distributions from a Traditional IRA are taxed in retirement like a 401k.

      Note the existence of nondeductible traditional IRA contributions.

      Quote »
      The best option is usually a rollover. There are two types of rollovers: indirect and direct. An indirect rollover (often called simply a "rollover") means the 401k plan administrator gives you the money and then you have 60 days to invest that money in a qualifying retirement plan (such as a traditional/rollover IRA or the 401k plan of a new employer) without owing tax or penalty. If you don't complete the rollover in 60 days, you will be taxed and penalized for an early withdrawal.

      Note the 20% withholding applied against a distribution from a 401k payout. If you intend to do a rollover with the money, you'll need to make up the money from other sources in order to roll over the full amount. A direct rollover avoids this withholding.

      Add a reference to IRS Publication 590 for IRAs and whatever publication applies to 401k plans.


    12. Senior Member
      Join Date
      Mar 24th, 2001
      Posts
      26,642
      08-21-2006 12:01 AM #12
      Quote, originally posted by ChrisMD »

      Negative points are the opposite of buydown points. Instead of paying points to get a lower rate, you get points from the lender in exchange for a higher interest rate. The idea here is that you effectively finance your closing costs by paying more interest. In this manner you can truly buy a house with nothing down and very little out of your pocket at closing, but I don't recommend doing this. It is one more thing that if you are not positive that it's a good idea for you, then it's not.

      "No cost" (no points no fees) refinances are typically done with negative points. While the interest rate of such a refinance is higher than if you refinanced paying fees or fees + points, the "no cost" refinance may be basically free money if it offers a lower interest rate for a loan that is similar to the remainder of your existing loan. During interest rate drops, some people were doing "no cost" refinances every few months.


    13. Senior Member ChrisMD's Avatar
      Join Date
      Jun 15th, 2001
      Location
      Maryland
      Posts
      20,812
      Vehicles
      Mercedes-Benz GLK250, BMW 335is
      08-21-2006 01:58 PM #13
      Quote, originally posted by tjl »
      You may want to preface country or locality specific information with an indication of which country or locality it applies to. For example, 401k and IRA accounts are specific to people subject to US income tax.

      Everything I post in this thread applies to people living and working (legally) in the United States.

      Sorry, Canadians, I don't know enough about your options and laws to speak intelligently about them.


    14. 08-22-2006 01:00 AM #14
      Why would you not open a Roth at a Bank or credit union ?


      Thanks
      DL


    15. Senior Member ChrisMD's Avatar
      Join Date
      Jun 15th, 2001
      Location
      Maryland
      Posts
      20,812
      Vehicles
      Mercedes-Benz GLK250, BMW 335is
      08-22-2006 02:32 PM #15
      Quote, originally posted by dl7265 »
      Why would you not open a Roth at a Bank or credit union ?

      Limited choices. There's a world of investment options out there and banks will mostly try to push you toward CDs. Unless you're already 60 years old, you do not want CDs in an IRA. You want growth. Go get the growth elsewhere.

      Also the service often leaves a bit to be desired. It's a scarily common practice among banks to treat customers like criminals whereas even a discount broker will treat you like a king/queen. Obviously everyone's experiences differ but the less business I have to do at a bank the better.


    16. 08-23-2006 12:27 AM #16
      Quote, originally posted by ChrisMD »

      Limited choices. There's a world of investment options out there and banks will mostly try to push you toward CDs. Unless you're already 60 years old, you do not want CDs in an IRA. You want growth. Go get the growth elsewhere.

      Also the service often leaves a bit to be desired. It's a scarily common practice among banks to treat customers like criminals whereas even a discount broker will treat you like a king/queen. Obviously everyone's experiences differ but the less business I have to do at a bank the better.


      Sorry to drag this on..

      I have contributed anually to a Roth since its inception. How can you "invest" ? in a Roth ? I though there was a fixed rate/period not unlike a CD ?


      On the service end, I picked the rate/term, signed the paper. got a copy .Took about 7 minutes of my time.

      Thanks,
      DL


    17. Senior Member ChrisMD's Avatar
      Join Date
      Jun 15th, 2001
      Location
      Maryland
      Posts
      20,812
      Vehicles
      Mercedes-Benz GLK250, BMW 335is
      08-23-2006 02:23 PM #17
      Quote, originally posted by dl7265 »
      I have contributed anually to a Roth since its inception. How can you "invest" ? in a Roth ? I though there was a fixed rate/period not unlike a CD ?

      Remember a Roth IRA is simply a container for investments and is, itself, not an investment. A Roth IRA has no rates or periods at all. You can have CDs inside a Roth IRA if you open the Roth at a bank and then the CDs have fixed rates and terms. But CDs in an IRA is a mistake if you're not looking at retiring in the next few years.

      If you have time until retirement then you should be investing in things like stocks and funds that will give you a much better return over the next 20+ years than a CD. If you already have an IRA at a bank and it has CDs in it and you want to do better (and you do) you can transfer the account to a discount broker and choose better investments.


    18. 08-23-2006 03:34 PM #18
      OK I follow now. Unfortunatly the way my 457 is dropping like a rock. I might prefer 5.50% rather than take a loss. I know im way too conservative...


      DL


    19. Senior Member beng's Avatar
      Join Date
      May 13th, 2002
      Location
      NutVegas, NJ
      Posts
      30,149
      Vehicles
      Family Truckster
      08-25-2006 11:07 AM #19
      Great posts Chris!
      1 3 4 5 7 8 8 9 10 15 16 23 32 37 42 44 49

      "I don't know half of you half as well as I should like; and I like less than half of you half as well as you deserve"

    20. Member SteveMKIIDub's Avatar
      Join Date
      Nov 6th, 2003
      Posts
      12,987
      Vehicles
      2013 Toyota Corolla, 2010 Toyota Corolla.
      12-03-2008 10:46 PM #20
      Quote, originally posted by beng »
      Great posts Chris!


      Bump!


      Any updates planned for this by any chance Chris? Maybe one about Christmas shopping??

      "I don’t want the company to be driven by numbers. I want it to be driven by making better cars and contributing to society. That will turn into profit, which we can use to develop better cars. That should be the cycle, and that will, as a result, build a company with a strong foundation."
      -Akio Toyoda

    21. 12-03-2008 11:21 PM #21
      Great idea and good info...

    22. 12-04-2008 12:03 AM #22
      How is this not stickied?

    23. Member SteveMKIIDub's Avatar
      Join Date
      Nov 6th, 2003
      Posts
      12,987
      Vehicles
      2013 Toyota Corolla, 2010 Toyota Corolla.
      12-04-2008 09:55 AM #23
      Quote, originally posted by osiris »
      How is this not stickied?


      Agreed! Would love to see this stickied!

      We really need more of this kind of information in the forum.

      "I don’t want the company to be driven by numbers. I want it to be driven by making better cars and contributing to society. That will turn into profit, which we can use to develop better cars. That should be the cycle, and that will, as a result, build a company with a strong foundation."
      -Akio Toyoda

    24. 12-04-2008 11:01 AM #24
      Market Data
      Yahoo Finance - http://finance.yahoo.com
      Google Finance - http://finance.google.com
      Customizable stock charts - http://stockcharts.com
      Bloomberg - http://bloomberg.com
      Spot Gold - http://www.kitco.com/charts/livegold.html

      Discount brokers
      E*TRADE Financial - http://etrade.com
      TD Ameritrade - http://tdameritrade.com
      Schwab - https://www.schwab.com/
      Fidelity - http://personal.fidelity.com/p....cvsr
      Scottrade - http://www.scottrade.com/inves...s.asp
      Options Express - http://www.optionsxpress.com/i...nid=0

      Financial market information.

      http://www.bloggingstocks.com
      Mergers, Acquisitions, Venture Capital, Hedge Funds - http://dealbook.blogs.nytimes.com/
      Investopedia - http://www.investopedia.com

      Active Trading, Theories and forecasting

      Carl Futia - http://carlfutia.blogspot.com/
      Jason Kelly - http://jasonkelly.com
      Market Karma - http://marketkarma.com
      Market Tells - http://markettells.com
      Trader Feed - http://traderfeed.blogspot.com
      Stock Market Guru tracking - http://www.cxoadvisory.com/gurus/#individuals


    25. Member jnm2.0t's Avatar
      Join Date
      Oct 2nd, 2005
      Location
      Sunnyvale CA
      Posts
      18,229
      Vehicles
      List your car(s) owned here
      12-04-2008 11:20 AM #25
      you finally got off your ass and did it!

      now get back to work

      I'm just a regular Joe, with a regular job. I'm your average white, suburbanite slob.

      Quote Originally Posted by Rabbit5GTI
      You have cornered the entire 'I hate Ford Fusions' market around here

    26. Member SteveMKIIDub's Avatar
      Join Date
      Nov 6th, 2003
      Posts
      12,987
      Vehicles
      2013 Toyota Corolla, 2010 Toyota Corolla.
      12-04-2008 11:42 AM #26
      Quote, originally posted by jnm2.0t »

      now get back to work


      Minting wenches is a tough job... especially wearing pajama pants (Chris wtf??)

      "I don’t want the company to be driven by numbers. I want it to be driven by making better cars and contributing to society. That will turn into profit, which we can use to develop better cars. That should be the cycle, and that will, as a result, build a company with a strong foundation."
      -Akio Toyoda

    27. Senior Member ChrisMD's Avatar
      Join Date
      Jun 15th, 2001
      Location
      Maryland
      Posts
      20,812
      Vehicles
      Mercedes-Benz GLK250, BMW 335is
      12-04-2008 12:00 PM #27
      Quote, originally posted by jnm2.0t »
      you finally got off your ass and did it!

      Two years ago. Note the dates.


    28. Member jnm2.0t's Avatar
      Join Date
      Oct 2nd, 2005
      Location
      Sunnyvale CA
      Posts
      18,229
      Vehicles
      List your car(s) owned here
      12-04-2008 12:28 PM #28
      OH! i totally missed the bump, thanks Steve, make me look like a jerk. what happened to this since then?
      I'm just a regular Joe, with a regular job. I'm your average white, suburbanite slob.

      Quote Originally Posted by Rabbit5GTI
      You have cornered the entire 'I hate Ford Fusions' market around here

    29. Senior Member beng's Avatar
      Join Date
      May 13th, 2002
      Location
      NutVegas, NJ
      Posts
      30,149
      Vehicles
      Family Truckster
      12-04-2008 02:02 PM #29
      Quote, originally posted by jnm2.0t »
      what happened to this since then?

      I complete market meltdown and maybe a Great Depression. Zing!

      This needs a sticky...and Ill see if I can dig up info on the following just in case:

      Soup Recipes

      Tips on Living in a Hooverville

      1 3 4 5 7 8 8 9 10 15 16 23 32 37 42 44 49

      "I don't know half of you half as well as I should like; and I like less than half of you half as well as you deserve"

    30. Member SteveMKIIDub's Avatar
      Join Date
      Nov 6th, 2003
      Posts
      12,987
      Vehicles
      2013 Toyota Corolla, 2010 Toyota Corolla.
      12-04-2008 02:07 PM #30
      Quote, originally posted by jnm2.0t »
      OH! i totally missed the bump, thanks Steve, make me look like a jerk. what happened to this since then?

      haha take that!

      I'm just speculating, but I would imagine Chris gave up on everything, devoted his life to the pajama pant and went into hiding at the nearest lighthouse.

      I can't speak for Chris but that's what I think happened. The FAQ drove him over the edge!

      "I don’t want the company to be driven by numbers. I want it to be driven by making better cars and contributing to society. That will turn into profit, which we can use to develop better cars. That should be the cycle, and that will, as a result, build a company with a strong foundation."
      -Akio Toyoda

    31. Senior Member ChrisMD's Avatar
      Join Date
      Jun 15th, 2001
      Location
      Maryland
      Posts
      20,812
      Vehicles
      Mercedes-Benz GLK250, BMW 335is
      12-04-2008 02:08 PM #31
      Quote, originally posted by beng »
      I complete market meltdown and maybe a Great Depression. Zing!

      Yep, I stop telling the people what they need to know and look at the **** that happens!


    32. Member SteveMKIIDub's Avatar
      Join Date
      Nov 6th, 2003
      Posts
      12,987
      Vehicles
      2013 Toyota Corolla, 2010 Toyota Corolla.
      12-04-2008 02:08 PM #32
      Quote, originally posted by beng »


      Soup Recipes

      Campbells Chunky FTW.


      "I don’t want the company to be driven by numbers. I want it to be driven by making better cars and contributing to society. That will turn into profit, which we can use to develop better cars. That should be the cycle, and that will, as a result, build a company with a strong foundation."
      -Akio Toyoda

    33. Member jnm2.0t's Avatar
      Join Date
      Oct 2nd, 2005
      Location
      Sunnyvale CA
      Posts
      18,229
      Vehicles
      List your car(s) owned here
      12-04-2008 02:10 PM #33
      Quote, originally posted by SteveMKIIDub »
      Campbells Chunky FTW.

      lucky man, i think it'll be boiled leather boots for me.

      I'm just a regular Joe, with a regular job. I'm your average white, suburbanite slob.

      Quote Originally Posted by Rabbit5GTI
      You have cornered the entire 'I hate Ford Fusions' market around here

    34. Member SteveMKIIDub's Avatar
      Join Date
      Nov 6th, 2003
      Posts
      12,987
      Vehicles
      2013 Toyota Corolla, 2010 Toyota Corolla.
      12-04-2008 02:13 PM #34
      Quote, originally posted by jnm2.0t »

      lucky man, i think it'll be boiled leather boots for me.


      Well.... I don't want to eat any of bengs recipes (where do you think the old wenches go???).


      I'm just gonna sell organs to pay for the good stuff

      "I don’t want the company to be driven by numbers. I want it to be driven by making better cars and contributing to society. That will turn into profit, which we can use to develop better cars. That should be the cycle, and that will, as a result, build a company with a strong foundation."
      -Akio Toyoda

    35. Senior Member beng's Avatar
      Join Date
      May 13th, 2002
      Location
      NutVegas, NJ
      Posts
      30,149
      Vehicles
      Family Truckster
      12-04-2008 02:16 PM #35
      Here's my theory on the new class system that will result.

      Upper Class - Cambells Chunky
      Middle Class - Cambells Tomato Soup (not creamy)
      Lower Class - jnm's boot leather soup

      1 3 4 5 7 8 8 9 10 15 16 23 32 37 42 44 49

      "I don't know half of you half as well as I should like; and I like less than half of you half as well as you deserve"

    Page 1 of 2 12 LastLast

    Posting Permissions

    • You may not post new threads
    • You may not post replies
    • You may not post attachments
    • You may not edit your posts
    •