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About Richard Barrington, CFA & Senior Financial Analyst
Richard Barrington

Richard Barrington, CFA, is the primary spokesperson and personal finance expert for MoneyRates. He is a 20-year veteran of the financial industry, including having served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. He earned his Chartered Financial Analyst designation in 1991 with the Association for Investment Management and Research (AIMR). Richard has written extensively on investment topics, including investments, money market accounts, certificates of deposit, and personal finance as it relates to retirement.

Richard has been quoted by numerous media publications such as The New York Times, The Wall Street Journal, and Pensions & Investments magazine.[...] Read more Richard can discuss economic and market history in detail and is well respected for his ability to relate to a broad audience from a personal financial standpoint. Richard approaches financial topics with an understanding that fresh perspectives are often more valuable than mainstream consensus. He has written for over 50 financial Web sites, such as Investopedia, Yahoo, MSN, Allbusiness, and Encarta, and is most sought after by members of the media for his niche expertise in these topics: Certificates of Deposit, Money Market and Savings Accounts, Saving for Retirement, Housing and Mortgage Meltdown, Interest rates, Investments, Macro Economic and Government Policy Issues, Historical Financial Events, Discerning Long Term Implications

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Is a townhouse a good investment?

August 15, 2014

| Senior Financial Analyst, CFA

Q: My wife and I are currently renting, but we just saw a townhouse for sale in California wine country that would be perfect for us. However, the only way we could buy it would be if I borrowed from my 401(k) to make the 3.5 percent FHA down payment. Is that a terrible idea? Also, are townhouses good investments, and is this a good time to buy?

A: Breaking your question down into its component parts, here are some answers to the issues you have raised.

  1. Is borrowing a down payment from a 401(k) plan a good idea? Your need to borrow for a relatively small down payment raises some questions about your cash flow. Borrowing from a 401(k) means you will miss out on any investment earnings while you are repaying what you borrowed. If you have to borrow against your 401(k), you should have a budget plan for repaying the amount in as little time as possible, and if you have been unable to save up for a down payment, you also might find it difficult to repay your 401(k) plan in an accelerated time frame.
  2. Is a townhouse a good investment? With any property, the keys from an investment standpoint are the pricing and the location, but with a townhouse you are in effect buying into the association that runs the complex. Beside checking out the current fees, you should ask about what those fees have been historically, so you can get a feel for how quickly they are rising. Also, spend some time around the complex, so you can see whether it is well-maintained and whether you will be comfortable with your neighbors.
  3. Is this a good time to buy? California is home to some of the nation's most expensive real estate markets, but at least prices are not yet back to the peak levels of the housing bubble. Perhaps the thing that most makes this a good time to buy are current mortgage rates. Those rates are still among the lowest in history, so you would be getting a break on borrowing costs. Current mortgage rates have only a slim margin over a rising inflation rate, so you might not want to count on rates staying as low as they are now.

Real estate is an especially hard market to predict, in large part because each property is somewhat unique. However, what matters most when buying a home is not where the value might be in five or 10 years, but how readily the mortgage payments fit into your budget. Only if you can comfortably make those payments -- and especially if they compare favorably to your rental expenses -- does the decision to buy make sense for you.

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Why do interest rates vary in different markets?

August 7, 2014

| Senior Financial Analyst, CFA

Q: Why do interest rates vary in different markets?

A: To answer this question, it might help to start with the components that make up interest rates, and then describe some of the things that cause those components to vary.

First, to get one factor out of the way, length is important in setting interest rates. The longer the loan or the bond, the more uncertainty there is about the future, and higher rates are generally the way that greater uncertainty is reflected. However, that does not account for differences in rates for instruments of essentially the same length. Market forces act on the various components of interest rates to create these differences.

The following are key components of interest rates:

  1. Inflation expectations. Any lender wants to get at least as much purchasing power back at the end of the loan as the principal was worth at the beginning. So, one component of interest rates is an amount intended to keep pace with the expected rate of inflation.
  2. Default risk. The less reliable the borrower, the greater the risk of default. Some component of the interest rate reflects the percentage chance that future interest or principal payments will not be made.
  3. Profit margin. The above two components are designed to make sure lenders do not lose money, but people do not lend money just to break even. Some component of the interest rate is designed to represent a profit after inflation and default risk are covered.

None of the above components is a constant, and here are some things that cause them to vary:

  1. Inflation environment. Expectations about future inflation are very much a function of the recent inflation environment, so at times when inflation has been low, interest rates will generally be low as well.
  2. Credit quality. The more reliable the borrower, the less of a default premium is needed. This is one reason why savings accounts that are backed by FDIC insurance generally have some of the lowest interest rates in any given environment.
  3. Economic strength. This is a supply-and-demand factor: The stronger the economy, the higher the demand for capital, so interest rates will be higher when the economy is thriving. Current mortgage rates and the interest on savings and money market accounts reflect the persistently iffy economy since the Great Recession.

Within any one nation's markets, the first and third of these factors will be pretty much the same across all issuers, so credit quality becomes a major factor in determining interest rate differences within domestic markets. When it comes to international markets, the inflation and growth environments can vary greatly from one country to the next, which is why interest rate differences can be especially large across national boundaries.

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Should I give up my bank for bitcoins?

August 1, 2014

| Senior Financial Analyst, CFA

Q: With interest on savings accounts near zero and checking account fees going up all the time, would I be better off with an alternative like bitcoins? I see that more and more places are accepting them for payments.

A: Many people share your frustration with traditional banking, but that does not mean that Bitcoin is a good alternative.

Here are some of the things you would be giving up if you traded your bank accounts for bitcoins:

  1. FDIC insurance. You can argue whether Bitcoin is the wave of the future or a speculative fad, but you really cannot argue that bitcoins and deposit accounts resemble one another in any meaningful way. Deposit accounts at FDIC-member institutions are guaranteed up to $250,000 -- a level of security you cannot get with alternative currency investments.
  2. Regular interest. Sure, interest rates on savings accounts and other deposits are frustratingly low, but at least they offer interest. Bitcoin speculators are betting that the value of bitcoins will rise as more and more people buy into the concept. Remember though, that's also the principle by which people hope to make money in Ponzi schemes.
  3. Stability. It is one thing to not pay interest, but another crucial difference between a deposit account and Bitcoin is the wild swings in the value of the Bitcoin. You may not like checking account fees, but how would you feel if your balance was worth $500 one month and $300 the next, simply because the value of the Bitcoin changed?
  4. Widespread acceptance. You mention seeing more and more places accepting bitcoins, and it does seem that every week or so there is a news article about a retailer agreeing to accept them as payment. However, the fact that this is considered news means the Bitcoin is still far from enjoying universal acceptance.

Ultimately, it is difficult to view an investment in bitcoins as anything other than speculative, because procedures for managing the currency are still being formulated -- as are the regulations that govern it. Because New York State is home to many Bitcoin-related firms, it recently proposed the first wave of Bitcoin-related regulation. However, if regulation evolves on a state-by-state rather than a national basis, it could put a damper on the free exchange of this alternative currency.

If you find your interest rates too low and your checking account fees too high, take out your frustrations on your current bank -- not on all banks. Shop around and chances are that you can find both free checking and a higher savings account rate. After all, if security and liquidity are what you want, you probably should not be a Bitcoin pioneer. Remember, pioneers are often the ones with the arrows in their backs.

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Refinance or restructure our mortgage?

July 25, 2014

| Senior Financial Analyst, CFA

Q: Our refinancing options are limited because we do not have much equity in our home, but we are negotiating with our current lender to re-work our loan, which is a relief because we've really been struggling to keep up with the payments. We are about seven years into a 30-year mortgage, and the lender has given us a couple of options: either start a new 30-year mortgage at a lower interest rate, or spread the payments out even more with a 40-year repayment period. The problem is, with that second option the interest rate isn't as low. Which is better?

A: The following are some things you should factor into your decision, though to a large extent, the first item is the most decisive:

  1. The affordability of your new monthly payment. Since this is your motivation for these negotiations in the first place, it is not worth starting a new 30-year loan if the payments do not fit into your budget. However, between the fact that refinance rates should be significantly lower than mortgage rates were seven years ago, and the benefit of spreading your remaining principal out over another 30 years instead of the 23 years remaining on your mortgage, it seems there is a good chance that refinancing into a 30-year loan could do the trick.
  2. The opportunity in current mortgage rates. Whatever decision you make, you need to make sure it is one you can live with, because a better opportunity to refinance may never present itself. Current mortgage rates are still among the lowest in history, and even lower than they were a year ago.
  3. Total interest over the life of your loan. Use a mortgage amortization calculator to compute how much total interest you would pay under the 30-year and 40-year scenarios. Between the longer repayment period and the higher interest rate of the 40-year option, you might be shocked at how much more expensive that solution would be in the long run.
  4. Your age and future plans. If you view yourself as staying in that house for decades, you might actually want to opt for the shorter loan, so you can foresee a time when the mortgage is paid off. On the other hand, if you plan to move in a few years, you might want to choose the longer loan so you pay as little as possible into the house before you leave.

If lengthening your repayment period out to 40 years is the only way you can afford the monthly payments, then that is probably your only viable option. However, if refinancing into a new 30-year loan makes those payments affordable, then most of the other factors line up on the side of a shorter loan.

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How should we handle a jump in mortgage payments?

July 17, 2014

| Senior Financial Analyst, CFA

Q: My husband and I restructured our mortgage a few years ago when we were having trouble making the payments. The mortgage company agreed to reduce the payments for the first 10 years, but after that they are higher than ever. I'm starting to worry about it because things haven't gotten any better for us financially. Our house still isn't worth as much as we owe, so I'm wondering if we should just default on the loan now, rather than put another six years of payments into a property we're likely to lose anyway. What do you think?

A: It's a tough situation, but six years is a long time, and you may not want to give up just yet. Here are some variables you need to consider:

  1. How does your loan rate compare with current mortgage rates? Based on what you describe, you would have restructured your mortgage about four years ago, when mortgage rates were over half a point higher than today's mortgage rates. There may be even greater potential to reduce your mortgage rate if you have since cleared up any black marks on your credit history, so this is one possibility to look into.
  2. How do your mortgage payments compare with rental costs? Never view any financial decision in isolation, but rather in comparison with alternatives. In this case, you have to compare your current mortgage costs with what it would cost you to rent. Unless you would save a lot by renting, it argues for staying in the home at least until the step-up in payments comes closer.
  3. How far is your home's value from being above water? The home may not be worth what you owe now, but if it is getting closer there may be a realistic chance of it getting there within the next six years. That would give you a chance to sell before the higher payments hit, and walk away with some equity.
  4. How are your employment prospects? The job market is getting better, so depending on your health and your skills, there is a chance you could raise your income enough in six years to afford the higher payments.
  5. Is there room for any belt-tightening? You have probably already thought about this, but a ruthless round of budget cuts designed to make your mortgage a priority might allow you to build up enough of a reserve to cushion the impact of the increased payments.

You are right to be thinking ahead to when your payments expand, because you need a plan for dealing with that. However, there is still enough time for improving circumstances to put a viable plan more within your reach.

Got a question about saving, investing or banking? invites you to submit your questions to its "Ask the Expert" feature. Just go to the home page and look for the "Ask the Expert" box on the home page.

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