How to Choose between Different Types of Mortgages
by: Rachel Jackson
With so many different types of mortgage available, it’s difficult to determine the right one for you. Before you start looking at available mortgages, however, it’s important to first evaluate your finances, as your financial situation is an important factor that will dictate the type of loan you need, and how much you can afford to borrow.
Step One: Evaluating Your Finances
Before you even think about the type of mortgage you should obtain, it’s important to evaluate your financial situation. Check your credit rating and FICO score, evaluate your income and debt level, figure out the size of the down payment you can afford, and determine how much mortgage you can afford and what your credit rating will allow you access to.
When it comes to your credit rating, know that between 620 and 699, you’ll probably pay a higher interest rate than if your credit rating is over 700, due to a slightly higher perceived risk on the part of lenders. If your credit rating is below 620, you may find it’s better to wait and improve your credit rating rather than be forced into a sub-prime mortgage with a high interest rate.
Step Two: Choosing the Best Mortgage
Once you have completed an evaluation of your financial situation, you’re ready to start thinking about the kind of mortgage you want. The mortgage that best suits you will depend on a long list of factors, not all of which are related to the amount of money you have for a mortgage. Think not only about how much mortgage you can afford, but also your credit rating, how long you plan to stay in the home, and whether you think your plans or financial situation might change in the future.
So what are your main mortgage options?
Fixed rate mortgage
Normally a 10, 15, or 30-year mortgage, you pay the same interest rate over the life of the loan.
Good for: If you like the security of paying the same amount every month and you’re planning on owning the home long-term, this is definitely the best option. There are some variations on this theme, including jumbo mortgages, which are larger-than-standard loans with a slightly higher interest rate.
Adjustable rate mortgage
These are mortgages with adjustable interest rates, which come in several different varieties. When you first get an adjustable rate mortgage the interest rate is lower than that you’d get with a fixed rate mortgage. However, at intervals, the interest rate can increase or decrease according to current market rates. This means your monthly repayments aren’t fixed, so these types of mortgages are more risky in comparison to fixed rate mortgages.
Good for: If you want a mortgage with an initial low rate and you’re prepared to take a risk on later rates (or you only plan to own the home for a few years), this may be a good prospect.
Interest-only mortgage
The standard type of mortgage is amortized, meaning your monthly repayments include both principal and interest. An interest-only mortgage is just what its name suggests - your monthly repayments don’t have to include principal (but you can pay off principal amounts at any time). This means you are not building up equity in your home while you’re only paying interest, but there are no pre-payment penalties.
Good for: This type of loan can work well if your income is at a consistent level overall but is subject to highs and lows, since you can pay off extra principal when you can afford to do so, and pay interest only when your income is at a lower level.
Balloon mortgage
This type of mortgage has a fixed interest rate and stable repayments over the life of the loan, with lower repayments in comparison to a fixed rate mortgage. However, the terms of the loan are generally short, with three, five, and seven years being the most common options. At the end of this time period, the entire balance of the loan is due. The final payment is typically very large, so a balloon mortgage is one which shouldn’t be taken lightly.
Good for: This type of mortgage can be a good option if you plan to stay in the home long term, want to get your mortgage paid off quickly, or if know you can afford the balloon payment. Alternatively, a balloon mortgage can be useful if you know you’ll be moving or refinancing before the balloon payment is due.
30-due-in-7
For the first seven years of the mortgage you have a fixed interest rate which is generally lower than that of a standard fixed rate mortgage. In the eighth year of the mortgage, the interest rate changes to be in line with whatever the current rate is at that time. For the remaining 22 years of the mortgage, the interest rate stays fixed at that rate. Another option is a 30-due-in-5 mortgage, where the interest rate changes in the sixth year.
Good for: These mortgages can be a good option if you’re planning to stay in the house for more than five or ten years and you are willing to risk the possibility that your monthly payments may change substantially when the second interest rate is due.
About The Author
Rachel Jackson is a freelance writer who writes about topics and pertaining to the mortgage industry such as refinancing home mortgage.
http://www.articlecity.com/articles/business_and_finance/article_10239.shtml
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April 16, 2009
Posted in: Debt, Personal Finance 
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Teen Savings Plans
by Kevin Walter
How to encourage teens to save…
My sixteen year old son works slinging groceries at the local market. It’s his first job and he now has money to burn in his pocket. He’s has been working there about two months when we sat down to review his financial situation. After two month’s work he had accumulated a total of $24.35 in his savings account. That and another $0.65 will buy you a $25 gift card… That’s about it. Not a lot to show for his efforts. In fact, he had earned just under $1,000 but had saved none of it. That was a light bulb that flicked on for him. He realized that at his current rate, he would need to work another six months just to save $100. Something had to be done.
I was pleasantly surprised when my son raised this idea himself. “Dad, I want to save 1/3, invest 1/3 and spend 1/3″. I think he was expecting me to reject his idea. Just like the time he decided it was a good job to see if the ice in the pond was thick enough by sending his baby brother out to ice skate. Unlike the pond plan, the savings plan actually had merit. So, we set about a strategy.
1. We set up direct deposit. This eliminated the immediate cash leakage that occurred by cashing his check at the store and plowing half of it right back into merchandise. A great windfall for the store, but not so good for my son’s personal financial picture. By setting up direct deposit, his hard earned cash landed safely in a bank account where each transaction could be viewed and he could see exactly what was happening.
2. Next, we investigated the employee stock purchase plan offered by the company. This option allowed my son to take a portion of his monthly check and invest it at a 15% discounted premium in the ESPP. Normally, I’m not a big fan of tying your financial future so tightly to one organization, but in the case of a sixteen year old learning how to save, it’s a great option.
3. We established an automatic transfer from savings to checking to give him an option to draw cash when he needed it. This had the same added benefit as direct deposit in that my son could see each and every transaction and where and how he was spending his money.
So, what are the results? After being on the plan for another two months, my son has saved $36 in his savings account, has purchased 25 shares of his company’s stock at an average price of $23/share), but most importantly, this month we moved $300 to a six month CD in his name. That’s a grand total of $911 in savings in the first two months alone! That’s a huge accomplishment.
And guess what, he still has enough money to go out with his friends and live a normal sixteen year old lifestyle. Gone are the impulse buys: the expensive video game controllers, ring tones and eating out after work every night. But, you know what? It hasn’t killed him!
http://www.thatmoney.com/readarticle.asp?id=156&page=1
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April 16, 2009
Posted in: Personal Finance, Savings One Comment
Trying to Retire With Less Money Than You Need
by: Elizabeth Williams
The younger you are, the easier it is to ignore what’s going on with the economy and the effects of the financial crisis on your personal finances. You can afford to be more optimistic about your financial future because you have so many years ahead of you before you need to worry about retiring.
The closer you are to retirement, the more concerned you will naturally be regarding the amount of money you have in your retirement savings. With every downturn of the economy, you watch your nest egg grow smaller. Here are some practical ways you can survive on less money during your golden years:
Decrease Expenses: You might be surprised discover how many things you pay for every month that are just not necessary. Go through your expenses with a fine toothed comb and make sure you are sticking to the mandatory expenses and not going overboard with unnecessary purchases or subscriptions. Try little changes, like grocery shopping from a list only to limit impulse purchases, take less expensive trips or vacations, get rid of credit card debt or take advantage of a balance transfer offer to save on interest expenses. The money you save can be added to your retirement savings, to help extend the length of time your savings will sustain your lifestyle.
Downsize: Do you have a house that was suitable for a growing family - but seems larger than what you and your significant other really need? Consider downsizing the home to save money on mortgage and/or utility costs. Maintaining a smaller home costs less than maintaining a larger home. You may also be able to move into a condo that involves no maintenance on your part at all, depending on your personal preferences.
Learn to Live Frugally: Cut back on your energy consumption by living by lowering your heat a degree or two, or helping the central air work less by keeping it a degree or two warmer in the summer. Change hot water heating setting to warm, instead of piping hot. None of these small changes will decrease your lifestyle any, and within a week or so you won’t even notice the changes other than in your wallet. Try energy efficient compact florescent bulbs for your whole house to decrease your electric bill, and unplug everything you’re not currently using since many items draw electricity even if they’re not on.
Consider a Part Time Job. If you feel like you’ve reduced your expenses as much as possible, consider a part time job that will let you earn a little extra cash. If you are computer literate you can work from home writing or doing virtual administrative assistant work. Otherwise, many retailers or restaurants are good places for part time work. In addition to boosting your income, keeping your mind active helps keep you sharp and alert.
Improving your financial situation is often as simple as making small adjustments to your everyday spending habits. Not all of the ideas in this article will work for everyone, but using just a few can add up to big savings over the long term.
About The Author
Elizabeth Williams, Editor-in-Chief for http://www.CreditCardFlyers.com
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April 6, 2009
Posted in: Personal Finance, Retirement No Comments
Time to Review Your Goals and Business Plan
by: Cheri Alguire
Just as planning your goals for the coming year should always begin with a look back at the year in review, so planning your business for the rest of this year should take a look back at the first quarter. Business planning isn’t just a numbers game, but also an accounting and analysis of the year’s overall progress.
Begin by asking the hard questions:
• What happened in your business this past year? Past quarter?
• Did you meet your goals? If not, why not?
• How did you accomplish your successful goals?
• Where did your business come from?
From there, analyze the specific sources of success or failure.
• Were your lead systems facilitating your goals?
• Did the number of listings support the number of closed transactions?
And yes, now analyze the numbers: closed sales, closed commissions, expenses, how many listings taken, how many listings sold, how many active? Quantify where the business came from in comparison to your goals: how many sales from sphere? Referrals? Websites? Print media? Signs? Other lead-generating systems?
Also take a look at the team. Who do you have working with you and what are their roles? Did they support last year’s business? Did they reach their goals? Were their goals congruous with your business plan? And let’s not forget that important last count: the one where you evaluate yourself, including how many hours you worked per week and how much vacation time you took during the course of the year or quarter.
Think of this business in review task as a report to imaginary shareholders in the business. They would need a reminder of last year’s goals, a comparison to the actual numbers, an analysis of the year’s operations and relative success, and an evaluation, ultimately, of your business strategy. The success of the past year forms the basis of your business plan for the next. You are able to determine if you need to completely overhaul your “to-do” list or merely fine-tune it. You are able to focus on the past year’s strengths in order to maximize their results for the future. You are also able to isolate weaknesses or “misses” and problem-solve them to a positive resolution.
The business “flashback” in review cannot be ignored if you hope to continue to grow your business into tomorrow. The necessary steps to planning for that future can only happen once you’ve seen what came before. That is when you learn not just from your mistakes, but from your successes. It’s then you can set the new goal and create the plan. It’s then you can focus your time and resources. It’s then you can make accountability a part of the process. It’s then you can move forward with the confidence that you have planned for an incredible year ahead.
About The Author
Coach Cheri Alguire helps Real Estate Professionals, even those who hate numbers, analyze and understand the numbers in order to create a more profitable business. Find out more at http://www.prorealestatecoach.com/ or http://www.RealEstateBusinessPlanningGuide.com/
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April 6, 2009
Posted in: Personal Finance No Comments
What Should I Do Now to Protect Myself in Case of Income Loss?
by: Patricia Payne
Many Americans are in a dire financial situation - companies are laying off thousands of employees, jobless rates continue to climb, and those out of a job are faced with finding the means to support their families. Most pressingly, homeowners must continue to pay on their mortgage and avoid losing their home in foreclosure.
If you are currently working, count yourself lucky. Though the present can give us false confidence in our ability to meet financial obligations for the unforeseeable future, anything can happen. Even tomorrow you may be faced with the real possibility of job loss. What can you do now to help protect your income if that happens?
Income Protection Insurance
Income protection insurance has been in existence for a long time. In its most popular form, income replacement is called ‘disability’ insurance, which helps replace income for those who are injured and unable to work.
There are insurance companies that will sell unemployment income protection policies, however. You can choose a policy that will start replacing a portion of your income, usually about 1/2 or 2/3 of your normal monthly earnings, approximately one month after you become unemployed. Rates can be high for this insurance, but the money you receive while unemployed can save your home and support your family while you find other work.
Mortgage Protection
Many companies offer mortgage protection insurance. This type of insurance will continue to pay your mortgage or a portion of your mortgage should you become disabled and unable to work or become unemployed. Though most mortgage protection insurance policies pay your full mortgage upon your untimely death, there are policies available that will simply take over payments if you become financially unable to do so.
Savings
Of course, you should have an emergency savings account with at least three to six months of living expenses available. If you suddenly lose your job, you will need this savings account to continue paying your mortgage and supporting your family. If you do not have an emergency savings account, set one up today and begin contributing funds into it as soon as possible.
Annuity
Another form of income protection is an annuity. Annuities are a type of investment option, usually through insurance companies, where you pay a lump sum or a monthly amount into the annuity, and at an agreed time, the insurance company begins paying you a regular monthly income. The payments to you are based on the interest returns on your money and how long you wish to receive payments. If you have a lump sum of money that you can afford to put into an annuity, the returns can be greater than leaving the money in a small interest-bearing savings account.
Protecting your income due to unforeseen events should be a high priority for everyone. Start planning today to save or buy insurance or an annuity so that you will have income if you are out of work for any reason.
http://www.articlecity.com/articles/business_and_finance/article_9885.shtml
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April 2, 2009
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6 Common Entrepreneurial Mistakes
by: Seomul Evans
One of the most difficult lessons for entrepreneurs is that the strategies they used to start their businesses are drastically different from the strategies they need to use to maintain their successful businesses. Here are 6 mistakes frequently made by entrepreneurs and how to avoid them.
1. Too-High Expectations. There’s a big difference between setting goals that will require you to stretch yourself and goals that are simply unobtainable. While it is certainly noble and honorable to set lofty goals, expectations that are too high mean that you have set yourself up to fail. Additionally, if you set expectations for your business that are too high, you will spend far too much money in the process of reaching those expectations. And that’s money that could be put to good use in the quest to reach obtainable, reasonable goals.
2. Focusing on the Wrong Things. Some entrepreneurs are so focused on costs that they forget to take a step back and look at the big picture. Yes, you need to be vigilant about what you pay in startup costs, but you also need to remember that you simply can’t make great strides in your business unless you are willing to invest significant amounts of money. Be bold about your spending, keeping in mind that only big investments yield big payoffs.
3. Looking Only at the Short-Term. When you’re just starting off, it’s very tempting to jump at almost any opportunity to make money. But consistently focusing on short-term opportunities means that you’re not taking time to make strides towards your long-term business goals.
4. Keeping Up With Everyone Else. As a new business owner, you’ll probably be tempted to compare yourself to your competitors and copycat the strategies that are working for them. But just because their strategies work for them doesn’t mean they’ll work for you. The reality is that you can only see part of their overall business plan, not the whole thing, so it’s impossible for you to replicate the parts of the strategy that you can’t see. This is a huge waste of time and effort for you, so stop worrying about what everyone else is doing and start focusing on your own plan.
5. Wearing Too Many Hats. Some entrepreneurs are obsessed with doing everything themselves instead of building a team. But when you take on the entire responsibility yourself, you’re too busy doing the everyday tasks to dream the dreams and have the visions that are going to carry your company forward. Build a team and delegate tasks, giving yourself time to continuing creating your business.
6. Sacrificing Customer Service. This is one of the biggest mistakes an entrepreneur can make. If you’re so focused on the bottom line that you end up sacrificing a customer’s experience, you will negatively impact your future revenues in ways that you can’t even understand at the time. An unhappy customer won’t hesitate to talk about his experience with anyone who will listen.
And what to do if you’re making, or have made, one of these mistakes? Don’t worry. All is not lost. Just remember these three philosophies:
Recognize the opportunities that will pay off in the end. They should always be in line with your goals, priorities, and values.
Slow down. Just because an opportunity looks good on paper or when pitched to you by a slick talker, doesn’t mean it’s a good way to use your time. Any opportunity put before you should motivate you to do a cost analysis before jumping on board.
Strategically Plan. If you have a strategic plan in place, you’ll always be ready tomake wise decisions when new opportunities come down the pike. If you don’t have a strategic plan, you’ll be more likely to jump at anything that looks profitable.
Seomul Evans is an Internet marketing and SEO services expert:
http://www.seo-1-marketing-services.com
http://www.nexplore.com/search-engines.html http://www.moetamani.com
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March 30, 2009
Posted in: Personal Finance No Comments
What Do Most Health Insurance Policies Cater For
by: Paul Abbey
Making a financial arrangement for when you may have you’re sick that stops you from living a normal life or is life threatening is not the simplest thing in the world but critical illness insurance covers this very real contingency. Providing monetary peace of mind for your family by taking out critical illness protection, for a mere few bucks each week should something occur to you, does not to seem as important to most of us as having that extra, luxury cup of coffee each day during luncheon.
Most health insurance policies now cater for many of the more standard sicknesses
and because figures show that there is a good chance you will suffer one of these at some stage in your life, it is a worthwhile plan to have. Recent studies have shown that one in five males will, unfortunately contract a life-threatening illness before they reach retirement age. That same study also shows that women are only slightly less likely with a one in six chance, to be impacted by a critical condition prior to retirement.
Specialists are of the opinion that the main reason for individuals failing to start a he
alth program is an ignorance of the risks of being impacted by it. Protection of mortgage payments is listed as the number one reason why individuals decide to have critical illness cover cover. Today, critical illness security and life insurance can be linked directly with mortgage repayments.
More and more individuals are starting to employ the facilities provided by the Inter
net to study and purchase insurance plans, including critical illness protection. Regrettably, being a relatively new facility, there are new problems that occur as more companies start offering services over the Internet for the first time. The reason for this lies in the fact that most critical illness cover providers call for their applicants to undergo an independent medical exam prior to the program being issued in an effort to stop any possible fraudulent claims in the future. If you’re in the awkward position of having to make a claim on your insurance , the last thing you want is callous hassle or apparent non-cooperation from your insurer.
One thing to study though if decide to apply for a health policy is if you are a smoker, and that includes anyone who has smoked within the last twelve months, because you are viewed as a higher risk applicant. It is now thoroughly acknowledged that smoking is dangerous for you and as a consequence your monthly insurance installment will cost more. For the most part though, when you apply for any type of health insurance, the company will look at your age, health, workplace, environment, activities and so forth. A typical insurance will cover you if your
medical prognoses are terminal or life-threatening, as well as cover you if you require certain surgery - the insurance will also] address your permanent job loss due to sickness. There can be no argument about the peace of mind that having a critical illness cover policy in place can bring to somebody who has a close family and monetary obligations.
Paul Abbey owns and operates http://www.employersliabilityok.com/umbrellainsurancecalifornia.html
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March 30, 2009
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How to Successfully Navigate Your Business through an Economic Downturn
by: Terry H Hill
An economic downturn is a phase of the business cycle in which the economy as a whole is in decline.This phase basically marks the end of the period of growth in the business cycle. Economic downturns are characterized by decreased levels of consumer purchases (especially of durable goods) and, subsequently, reduced levels of production by businesses.
While economic downturns are admittedly difficult, and are formidable obstacles to small businesses that are trying to survive and grow, an economic downturn can open up opportunities. A well-managed company can realize the opportunity to gain market share by taking customers away from their competitors. Resourceful entrepreneurs capture the available opportunities, from an economic downturn, by developing alternate methods of doing business that were never implemented during a prior growth period.
The challenge of successfully navigating your business through an economic downturn lies in the realignment of your business with current economic realities. Specifically, you, as the business owner, need to renew a focus on your core clients/customers, reduce your operating expenses, conserve cash, and manage more proactively, rather than reactively, is paramount.
Here are best practices that will help you to successfully navigate your business th
rough an economic downturn:
Goals:
The primary goal of any business owner is to survive the current economic downturn and to develop a leaner, more cost-effective and more efficient operation. The secondary
goal is to grow the business even during this current economic downturn.
Objectives:
• Conserve cash.
• Protect assets.
• Reduce costs.
• Improve efficiencies.
• Grow customer base.
Required Action:
• Do not panic… History shows that economic downturns do not last forever. Remain calm and act in a rational manner as you refocus your attention on resizing your company t
o the current economic conditions.
• Focus on what YOU can control… Don’t let the media’s rhetoric concerning recessions and economic slowdown deter you from achieving business success. It´s a trap! Why? Because the condition of the economy is beyond your control. Surviving economic downturns requires a focus on what you can control, i.e. your relevant business activities.
• Communicate, communicate, and communicate! Beware of the pitfall of trying t
o do too much on your own. It is a difficult task indeed to survive and to grow your business solely with your own efforts. Solicit ideas and seek the help of other people (your employees, suppliers, lenders, customers, and advisors). Communicate honestly and consistently. Effective two-way communication is the key.
• Negotiate, negotiate, and negotiate! The value of a strong negotiation skill set cannot be overstated. Negotiating better deals and contracts is an absolute must for realigni
ng and resizing your company to the current economic conditions. The key to success is not only knowing how to develop a win-win approach in negotiations with all parties, but also keeping in mind the fact that you want a favorable outcome for yourself too.
Recommended Best Practice Activities:
The Nuts and Bolts… The following list of recommended best practice activities is
critical for your business’ survival and for its growth during an economic downturn. The actual financial health of your particular business, at the outset of the economic downturn, will dictate the priority and urgency of the implementation of the following best practice activities.
1. Diligently monitor your cash flow: Forecast your cash flow monthly to ensure that expenses and planned expenditures are in line with accounts receivable. Include cash flow statements into your monthly financial reporting. Project cash requirements three-to- six mo
nths in advance. The key is to know how to monitor, protect, control, and put cash to work.
2. Carefully convert your inventories: Convert excess, obsolete, and slow-moving inventory items into cash. Consider returning excess and slow-moving items back to the suppliers. Close-out or inventory reduction sales work well to resize your inventory. Also, consider narrowing your product offerings. Well-timed order placement helps to reduce excess inventory levels and occasional material shortages. The key is to reduce the amount of your inventory without losing sales.
3. Timely collection of your accounts receivable: This asset should be converted to cash as quickly as possible. Offer prompt payment discounts to encourage timely payments. Make changes in the terms of sale for slow paying customers (i.e. changing net 30 day terms to COD). Invoicing is an important part of your cash flow management. The first rule of invoicing is to do it as soon as possible after products are shipped and/or after services are delivered. Place an emphasis on reducing billing errors. Most customers delay payments because an invoice had errors, and therefore, will not pay until they receive a corrected copy. Email or fax y
our invoices to save on mailing time. Post the payments that you have received and make deposits more frequently. The key is to develop an efficient collection system that generates timely payments and one that gives you advance warning of problems.
4. Re-focus your attention on your existing clients/customers: Make customer satisfaction your priority. A regular review of your customers’ buying history and frequency of purchases can reveal some interesting facts about your customers’ buying habits. Consider signin
g long-term contracts with your core clients/customers which will add to your security. Offer a discount for upfront cash payments. The key is to do what it takes to keep your current customers loyal.
5. Re-negotiate with your suppliers, lenders, and landlord:
i) Suppliers: Always keep your negotiations on the level of need, saying that your company has reviewed its cost structure and has determined that it needs to lower supplier
costs. . Tell the supplier that you value the relationship you have developed, but that you need to receive a cost reduction immediately. Ask your supplier for a lower material price, a longer payment cycle, and the elimination of finance charges. Also, see if you can buy material from them on a consignment basis. In return for their price concessions, be willing to agree to a long-term contract. Explore the idea of bartering as a form of payment.
ii) Lenders: Everything in business finance is negotiable and your relationsh
ip with a bank is no exception. The first step to successful renegotiations is to convince your lenders that you can ultimately pay off the renegotiated loan. You must point out to your lenders why it would be in their best interest to agree to a new arrangement. Showing them your business plan and your action plan that includes your cost-savings initiatives, along with “the how” and “the when” of the implementation of your plan is the best way to achieve this goal. Explain to them that you will need their cooperation to insure that you can survive, as well as, grow your business during the economic downturn. Negotiated items include: the rate of interest, the required sec
urity to cover the loan, and the beginning date for repayment. A beginning date for repayment could be immediate, within several months or as long as a year. The key is to realize that your lender will work with you, but that frequent and continual communications with them is critical.
iii) Landlord: Meet with your landlord. Explain your need to have them extend the term of your lease at a reduced cost. Make sure you have a clause in the lease agreement that entitles you to have the right to sublet any or all of the leased space.
6. Re-evaluate your staffing requirements: This is a very critical area. Salaries/wages are a major expense of doing business. Therefore, any reduction in the hours worked through work schedule changes, short-term layoffs or permanent layoffs has an immediate cost saving benefit. Most companies ramped up hiring new employees in the good times, only to find that they are currently overstaffed due to slow sales during the economic downturn. In terms of down-sizing your staff, be very careful not to reduce your staff to a level that forces you to skimp
on customer service and quality. Consider the use of part-timers or the current trend of outsourcing certain functions to independent contractors.
7. Shop for better insurances rates: Get quotations from other insurance agents for comparable coverage to determine whether or not your present insurance carrier is competitive. Also, consider revising your coverage to reduce premium costs. The key is to have the right balance-to be adequately insured, but not under or over insured.
8. Re-evaluate your advertising: Contrary to the other cost-cutting initiatives, evaluate the possibility of increasing your advertising expenditures. This tactic realizes the advantage of the reduced “noise” and congestion (fewer advertisers) in the marketplace. The downturn period a great opportunity to increase brand awareness and create additional demand for your product/service offerings.
9. Seek the help of outside advisors: The use of an advisory board comprised of your CPA, attorney, and business consultant offers you objectivity and provides you with pr
ofessional advice and guidance. Their collective experience in working with similar situations in past economic downturns is invaluable.
10. Review your other expenses: Target an across-the-board cost-cutting initiative of 10-15%. Attempt to eliminate unnecessary expenses. Tightening your belt in order to weather the downturn makes practical, financial sense.
Proactively managing your business through an economic downturn is an enormou
s challenge and is critical for your survival. However, through well-planned initiatives, an economic downturn can create tremendous opportunity for your company to gain greater market share. In order to take advantage of this growth opportunity, you must act quickly to implement the above best business practices to continue realigning and resizing your company to the current economic conditions.
Copyright (c) 2008 Terry H. Hill
You may reprint this article free of charge in your newsletter, magazine, or on your website, provided that the article is unedited, and that the copyright, author’s bio, and contact information below appears with each article. Articles appearing on the web must provide a hyperlink to the author’s web site, http://www.legacyai.com
Terry H. Hill is the founder and managing partner of Legacy Associates, Inc, a busin
ess consulting and advisory services firm. A veteran chief executive, Terry works directly with business owners of privately held companies on the issues and challenges that they face in each stage of their business life cycle. To find out how he can help you take your business to the next level, visit his site at http://www.legacyai.com
To download a copy of this article, click on this link: http://www.legacyai.com/Article_Downturn.html.
About The Author
An author, speaker, and consultant, Terry H. Hill is the founder and managing partner of Legacy Associates, Inc., a business consulting and advisory services firm based in Sarasota, Florida. A veteran chief executive, Terry works directly with business owners of privately held companies on the issues and challenges that they face in each stage of their business life cycle. Terry is the author of the business desk-reference book, How to Jump Start Your Busin
ess. He hosts the Business Insights from Legacy Blog at http://blog.legacyai.com and writes a bi-monthly eNewsletter, “Business Insights from Legacy eZine.”
By signing up for Business Insights from Legacy eZine at http://tinyurl.com/2t4fxs you can keep abreast of the latest tips, tactics, and best business practices. You will, also, receive the free eBook, Jump Start Your Knowledge of Business.
Contact Terry by email at http://www.legacyai.com or telephone him at 941-556-1299.
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March 26, 2009
Posted in: Personal Finance No Comments
Understanding the Mortgage Meltdown; What happened and Who’s to Blame
by: Richard Gandon
People are losing their homes and many more will lose their jobs before the mortgage meltdown works its way through the system.
To paraphrase Alan Greenspan’s remarks on March 17th, 2008, “The current financial crisis in the US is likely to be judged in retrospect as the most wrenching since the end of the Second World War. The crisis will leave many casualties.”
How many casualties? Experts are predicting that in the next few years, between 15 and 20 million homeowners could have homes worth less than what they owe. Walking away from a bad situation may actually make sense for people who mortgages that are ‘upside down’ considering the fact that refinancing is out of the question and home equity is nonexistent.
It seems quite easy to point fingers at greedy Wall Street titans for causing the sub-prime mortgage crises. They after all, put together the deals that allowed banks to underwrite mortgages and then offload these liabilities to investors. What many fail to realize is that there is no shortage of blame to go around from homeowners buying more home than they could afford to real estate agents looking for more commission dollars. Mortgage brokers and bankers, the banks themselves, ratings agencies such as Moody’s and Standard & Poor’s, Wall Street, the Fed and last but certainly not least, the Federal Government.
Let’s start with the homeowners–the people who are now in the process or soon to enter the process, of losing their homes. Some of these people had never before owned a home and as such, may not have been prepared for the costs associated with homeownership. Basic financial literacy is sorely lacking in this country despite there being no shortage of budgeting and tracking programs readily available such as Quicken and Microsoft Money. The lack of financial literacy does not absolve these buyers of their responsibility. Every borrower receives a truth in lending disclosure statement. Here is a portion of what the act covers:
The purpose of TILA (Truth In Lending Act) is to promote the informed use of consumer credit by requiring disclosures about its terms and cost. TILA also gives consumers the right to cancel certain credit transactions that involve a lien on a consumer’s principal dwelling, regulates certain credit card practices, and provides a means for fair and timely resolution of credit billing disputes. With the exception of certain high-cost mortgage loans, TILA does not regulate the charges that may be imposed for consumer credit. Rather, it requires a maximum interest rate to be stated in variable-rate contracts secured by the consumer’s dwelling. It also imposes limitations on home equity plans that are subject to the requirements of Sec. 226.5b and mortgages that are subject to the requirements of Sec. 226.32. The regulation prohibits certain acts or practices in connection with credit secured by a consumer’s principal dwelling.
Much of the subprime mortgage crisis can be traced directly back to variable-rate mortgages. As is clearly stated above, “TILA does not regulate the charge that may be imposed for consumer credit. Rather, it requires a maximum interest rate to be stated in variable-rate contracts secured by the consumers dwelling.” It also clearly states that TILA also gives consumers the right to cancel certain credit transactions that involve a lien on a consumer’s principal dwelling. One has to wonder whether or not these homeowners:
1. Bothered to read the truth in lending act disclosure at all.
2. Understood what the truth in lending act disclosure meant.
3. Chose to ignore the information printed clearly the truth in lending act disclosure.
A number of months ago, just as the subprime mortgage crisis was beginning to unfold, The New York Daily News ran an article about a family in New York City, who had bought a home and were now faced with the prospect of foreclosure. The article was sympathetic to this family, highlighting the fact that they’re living the American dream and that this dream was about to come to an end. What I found to be distressing was the fact that clearly visible in the photo that accompanied this sympathetic article was a very expensive flat screen television hanging on the wall. Perhaps I’m naïve, but I can assure you that if I were faced with the prospect of losing my home and having my family put out on the street, there is absolutely no way that I would still have that expensive television hanging on my wall. It would have been one of the first things to be sold and some financial relief would be found by jettisoning what I’m sure was the expensive cable bill.
Clearly the public needs easy access to financial literacy courses. Too bad we don’t see the need to make this a mandatory course of study in our educational system.
Mortgage bankers and brokers have in the last four or five years been raking in cash by the bucket load in the form of commissions paid when mortgages they’ve originated, close. Many of these people have not needed to do much in the way of prospecting. Instead, their phones have run off the hook as people have jumped on the homeownership and refinancing and take out extra cash bandwagon, despite their ability to pay for their home. No-document loans were readily available without the borrower having to produce documentation that backed up their income. Clearly this practice can and indeed has, lead to substandard loan underwriting processes. Were some of these mortgage bankers and brokers dishonest? Sure. Were all of them dishonest? I think not. To have a massive nationwide conspiracy, where thousands and thousands of people involved in the mortgage banking and mortgage brokering profession got together to create this situation is simply not feasible. Yes, some of the blame does belong with those in the mortgage industry, but they were simply a small cog in the huge machine that created this mess.
Let’s discuss real estate agents. In 2007, we bought a home, and also sold a home. The agent we used to purchase our home was absolutely fantastic. In our opinion, she went above and beyond to make our deal happen. She answered every phone call, followed up on every concern and was the epitome of professionalism. We consider this individual to be a friend, and we have sent referrals her way that have resulted in her earning additional commissions. We will continue to recommend her to all who ask or mention that they’d like to buy or sell a home in our area.
The real estate agent, we used to sell our home, could not have been more different. We got our old home ready to sell prior to closing on our new home. We decided to list it as “For Sale by Owner.” In the event that we didn’t sell this home on our own, it was our intention to list it with an agent as soon as we had closed on the purchase our new home. Literally, from the day we put the sign in front of our home and listed it on a “For Sale by Owner” website we were inundated with phone calls from real estate agents. We were told many lies and were constantly harassed; although we had already made it quite clear to every agent who called, and there were more to 60 who did; that we were willing to pay half the commission-the same as they would have received had they sold another agent’s listing. We also told every agent that called that we had already lined up an agent to sell our home in the event that we chose to no longer sell it ourselves. Our deadline was the closing date of our new home purchase. We did have an interested buyer who shortly after our closing date decided to keep looking so we listed our home with a local agent so that we could concentrate on getting our new home ready for our moving date at the end of the school year. This agent showed our home a maximum of two times and got an offer which we accepted. We ended up getting $1,000 less than we had wanted in a declining Real Estate market. The agents who had called many times to harass us called our listing agent on a number of occasions and he lied telling them that the house was under contract when in fact it wasn’t at that time-clearly a breach of our agent’s fiduciary duty. Quite frankly an ethical agent would have continued to show our home until closing in the event that the deal fell through.
But wait, there’s more. Our agent also acted as the buyer’s mortgage broker. At the closing table, we learned that he had signed documents from the buyer stating that he (our agent) represented them and we had signed documents stating that he represented us. We also learned that the buyer had effectively put down approximately 2-3% of the purchase price when financed closing costs were factored into the equation. Their first mortgage had what we thought was a high fixed rate and their second mortgage came with a rate in excess of 8.5%. Because the closing happened in August, literally in the midst of the first wave of the meltdown, if they didn’t close on the day they did (August 31st, 2007), Citibank wasn’t going to extend their rate. When my wife & I have bought houses in the past, it had always been a very happy day. These people looked absolutely shell-shocked at the closing table. I’m not convinced that they knew just how much their monthly payment was going to be until closing day. We knew down to the penny well in advance having budgeted and planned everything on a spreadsheet. Were these people stupid or just inexperienced and mislead by a greedy combination of real estate agent & mortgage broker? I’m extremely confident that they are intelligent people but inexperienced and taken advantage of by an unscrupulous agent.
The banks are also culpable. Prior to bank deregulation, Savings and Loans provided mortgages to home buyers and kept these loans on their books. Non-performing loans had a negative effect on the S&L’s profitability which of course caused tighter lending guidelines such as job stability and decent down payments in order for prospective home buyers to be approved for a mortgage. Way back then, a home buyer had to actually save up enough money for a down payment 10 or even 20% before a bank would ever consider underwriting a mortgage. The checks & balances kept banks solvent and borrowers responsible. Although this approach worked, some cried foul stating that the regulated system was racist and discriminatory-and there certainly was some truth to this. Skipping forward to the present, banks made a bundle on mortgages over the past five or six years. For the most part, they allowed their underwriting criteria to be stretched so far out of alignment that almost anyone could and indeed did, qualify for a mortgage despite their ability to pay. Some folks even applied for and received mortgages for more than the property was worth. Sometimes for as much as 25% more than their property was worth!
Under the prior system, 125% mortgages would not have been possible because of course these loans were held on the banks’ books and could have led to losses that would have had to have been absorbed directly by the bank.
So what went wrong? Under the current system, these loans were sold to the big Wall Street investment firms who repackaged them as collateralized mortgage obligations (CMO’s), Mortgage Backed Securities (MBS’s) and other similar acronyms. These instruments were then sent to the ratings agencies for their blessing and more importantly a letter rating. Many of these structured finance deals receive AAA ratings-the highest ratings available meaning that in theory, these instruments were least likely to default. How does one create a ‘triple A’ or AAA rated financial instrument out of sub-prime mortgages? Herein lies the magic. These Asset Backed Securities (ABS) are made up of different tranches or slices, each carrying a different risk and reward level. The first dollar of principle and interest is applied to the securities with the highest rating, and the first dollar of loss is applied to the tranche with the lowest ratings. The lower slices are designed to provide a security blanket that in theory protects the higher-rated securities. The investment banks that package or ’structure’ these securities in order to earn fat fees when they sell them to investors are the same entities that pay the ratings agencies to rate these instruments. Clearly the possibility for conflict of interest is present. If investors and not the investment banks that stand to rake in millions in fees were to pay for the rating, the potential for this conflict of interest would be negated. Furthermore, the investment banks have a vested interest in convincing the ratings agencies of the credit worthiness of these securities.
So we’ve already pointed fingers at homeowners, some greedy, many more I suspect, naïve or uninformed, real estate agents-one out of more than 60 in my experience was a gem, mortgage brokers & bankers, banks, Wall Street and ratings agencies so who’s left? The Federal Reserve and the Government of course.
The Fed as its known is responsible of the country’s monetary policy and for supervision and regulation of banks. This is the definition of the Fed’s roles in their own words:
Monetary Policy
The Fed is best known for its role in making and carrying out the country’s monetary policy-that is, for influencing money and credit conditions in the economy in order to promote the goals of high employment, sustainable growth, and stable prices.
The long-term goal of the Fed’s monetary policy is to ensure that money and credit grow sufficiently to encourage non-inflationary economic expansion.
The Fed cannot guarantee that our economy will grow at a healthy pace, or that everyone will have a job. The attainment of these goals depends on the decisions of millions of people around the country. Decisions regarding how much to spend and how much to save, how much to invest in acquiring skills and education, how much to spend on new plant and equipment, or how many hours a week to work may be some of them.
What the Fed can do, is create an environment that is conducive to healthy economic growth. It does so by pursuing a goal of price stability-that is, by trying to prevent inflation from becoming a problem.
Inflation is defined as a sustained increase in prices over a period of time.
A stable level of prices is most conducive to maximum sustained output and employment. Also, stable prices encourage saving and, indirectly, capital formation because it prevents the erosion of asset values by unanticipated inflation.
Inflation causes many distortions in the market. Inflation:
· hurts people with fixed income-when prices rise consumers cannot buy as much as they could previously
· discourages savings
· reduces economic growth because the economy needs a certain level of savings to finance investments that boost economic growth
· makes it harder for businesses to plan-it is difficult to decide how much to produce, because businesses can’t predict the demand for their product at the higher prices they will have to charge in order to cover their costs
Bank Regulation & Supervision
The Fed is one of the several Government agencies that share responsibility for ensuring the safety and soundness of our banking system. The Fed has primary responsibility for supervising bank holding companies, financial holding companies, state-chartered banks that are members of the Federal Reserve System, and the Edge Act and agreement corporations, through which U.S. banking organizations operate abroad.
The Fed and other agencies share the responsibility of overseeing the operation of foreign banking organizations in the United States. To insure that the banking system remains competitive and operates in the public interest, the Fed considers applications by banks for mergers or to open new branches.
The passage of the Gramm-Leach-Bliley (GLB) Act in November 1999, was the culmination of a multi-decade effort to eliminate many of the restrictions on the activities of banking organizations.
Some of the main provisions of the GLB are:
· Repeals the existing limitations on the ability of banks to affiliate with securities and insurance firms
· Creates a new organizational form that allows banking organizations to carry new powers. This new entity called a “financial holding company,” (FHC) and its non-banking subsidiaries are allowed to engage in financial activities such as insurance and securities underwriting
The Fed’s enlarged role as an umbrella supervisor of FHCs is similar to its role in supervising bank holding companies. The Federal Reserve Banks will supervise and regulate the FHCs while each affiliate is still overseen by its traditional functional regulator.
The Fed has to delineate the financial relationship between a bank and other FHC affiliates. Its primary goal is to establish barriers protecting depository institutions from the problems of a failing affiliate. To do this efficiently the Fed has to ensure increased communication, cooperation, and coordination with the many supervisors of the more diversified FHCs.
The Fed has access to data on risks across the entire organization, as well as information on the firm’s management of those risks. Regulators will be in a position to evaluate and presumably act on risks that threaten the safety and soundness of the insured banks.
It would appear that the Fed has failed to curb housing inflation which played a role in this entire debacle then made matters worse and in their efforts or lack there of, to properly supervise banking institutions.
Finally the government, a.k.a. Uncle Sam, the big Kahuna 10,000 pound elephant etc. Where do we begin? How about with: ‘Where were they?’
It now appears that after millions of horses are out of the barn (some horses ran, others were foreclosed upon) the government wants to step in with a bailout to save the rest. While nobody wants to see people lose their homes, the question that must be raised is this: What about all those of us who were responsible? Those of us, who scrimped and saved up a decent down payment, bought less-house than we could afford and who live below our means? Many of us drive older cars and keep them longer. We don’t run out and buy the latest and greatest at inflated prices, we watch, wait and budget.
When the World Trade Center was attacked, families who decided not to sue received government payouts and we certainly don’t begrudge them as I’m sure that given the choice, they’d prefer to still have their loved-ones over the money. The problem, in typical government fashion is that those who were responsible and had insurance policies in place received less than those who were irresponsible and didn’t plan ahead. I’m not talking about dishwashers at Windows on the World and blue collar workers; I’m talking about executives, traders and people who should have known better.
Now our government, the same government that sat by idly watching as this bubble got bigger and bigger despite many warnings, wants to step in and bailout people who are in danger of losing their homes. There has been no talk about educating people, let’s not teach people to fish, rather, let’s give them a fish and bail them out once again at the expense of those who are responsible.
Clearly, by keeping the majority of the population financially ignorant, there is a lot of money to be made by the poverty industry.
http://www.articlecity.com/articles/business_and_finance/article_9809.shtml
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March 25, 2009
Posted in: Debt, Personal Finance No Comments
Investing for Dummies/Personal Finance for Dummies
Handling the dynamic nature of personal finance can be challenging. Sometimes dumbing it down or spelling it out in layman’s terms is the best way to go. Finance is a big word with big challenges surrounding its concepts. Give yourself a break and take in a little knowledge from the experts…
March 25, 2009
Posted in: Investing, Personal Finance No Comments