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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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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.

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Should I trade my annuity for a CD?

July 14, 2014

| Senior Financial Analyst, CFA

Q: I am 83 and I have an insurance annuity. I would like to take it out and put it into an IRA CD at a bank. How do I go about doing this?

A: There are three sets of issues raised by this situation:

  1. Tax issues. Your situation is complicated by the fact that you are over age 70 1/2. IRS regulations stipulate that you have to be below age 70 1/2 and have wage compensation in order to start an IRA. You should probably consult an accountant to make sure there are no adverse tax consequences to accessing the value of the annuity at this time, especially if the option of an IRA is not open to you. However, just because you cannot open an IRA does not mean a CD is not an option for you if you are looking for guaranteed income.
  2. Contractual issues. Your annuity contract should include the logistical details of who to contact about terminating the annuity. Before you do that though, you should also look through the contract to make sure the are no penalties for terminating the annuity at this time. The more recently you purchased the annuity, the more likely there are to be such penalties. Also, you should see what the insurance component of the contract entails, because this is a component of an annuity that will not be replicated by a CD. As for the CD, if you decide to open one, you should consider first what your probable liquidity needs are, because this will help you decide how long a CD term to choose. Typically, you will find the best CD rates in longer term CDs, but you may not want to commit for that long. Another important consideration is the penalty for early withdrawal -- the smaller the penalty, the more flexibility you will have if your liquidity needs change.
  3. Interest rate issues. If you determine that it makes sense in other respects to terminate the annuity in favor of the CD, the next step is to shop for the best CD rates. Not only do you have to compare banks to find the best rate, but you should make sure you can find a CD that offers a rate advantage over your current annuity.

The order in which these issues appear above is probably the best order in which to address them. In other words, you want to start by avoiding any adverse tax ramifications, and then avoid any potential contractual problems. Only when you know you are free of these two issues does the decision essentially come down to comparing interest rates.

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Cosign or lend?

July 3, 2014

| Senior Financial Analyst, CFA

Q: A friend of mine has had some financial problems in the past, but now has a good-paying job and has gotten his budget under control. He needs a car loan but is having trouble qualifying because of his past history. He asked me if I would lend him the money myself or cosign a loan with him. Which do you think would be better?

A: Ugh. Your friend is putting you on the spot by offering you a choice of two unappealing options.

If you cosign a loan, you are agreeing to be fully responsible for the loan if your friend defaults. So, you could be out the amount borrowed, plus any interest and penalties resulting from late payments. Beyond that potential cost, your credit rating could be affected simply by taking on this obligation, and it would certainly be affected if your friend defaults and you have trouble paying back the loan.

In contrast, there are a couple of advantages to lending him the money yourself as opposed to co-signing a loan. Both put you in the position of potentially losing the principal of the loan, but at least if you made the loan yourself, you would not be on the hook for any interest or penalties. In fact, a potential upside is that you would presumably be charging your friend interest, and with interest on savings accounts and other deposits near zero, this could be a way of earning a little more on your money -- if everything works out.

Of course, personal loans are also much more risky than savings accounts, so you should take that into consideration when deciding what interest rate to charge your friend. Basically, his inability to qualify for a loan on his own tells you that lenders consider him a high risk, and friendship or no friendship, you should view him the same way. You should charge an interest rate that takes into account the amount of risk you are taking.

If you decide to make the loan, you should set up a formal loan agreement and payment schedule. This should not be treated casually because you are friends. In fact, one potential problem of making the loan yourself is that your friend might take an obligation to a professional lender more seriously, while he might be tempted to try to appeal to your friendship if he has trouble making payments to you.

Of course, there is a third option here: just saying no. You mention that your friend is getting beyond his past financial problems, but part of becoming financially responsible is accepting the consequences for past mistakes. Your friend may just have to wait and save up for his car.

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Are shipping containers a good investment?

June 26, 2014

| Senior Financial Analyst, CFA

Q: Would it be wise to invest in shipping containers in this economy?

A: This type of investment calls to mind famed Fidelity Magellan investor Peter Lynch, who advocated investing in things you see in use every day. There is some merit to this type of common-sense investing, but it should also be noted that Lynch rose to prominence in the late 1970s. This was a time when the stock market was still recovering from an extended bear market, and international investing was still in its infancy. As a result, valuations were much cheaper than they are today.

Now, investors around the world are constantly on the hunt for the next compelling investment story, and that makes things more complicated. A huge amount of money chasing investment opportunities tends to raise the price of investments, attract competition to growth businesses and create opportunities for scam artists. All of this is exacerbated by the low yields on bonds and savings accounts, which have investors desperate for alternatives.

In today's global economy, there is no doubt that the intermodal transportation of goods that uses shipping containers will be a central part of commerce. So, barring some kind of extended economic slump, you can take demand growth as a given. However, there are some other key questions you have to ask before you assume that shipping containers are a good investment:

  1. How is supply growth? Demand growth may be steady, but if people are building new shipping containers faster than that demand growth, it will diminish the return on those containers.
  2. What is the current yield? Promoters of investments like to cite past returns, but what matters to new investors is the current yield. What earnings are shipping containers generating as a percentage of the price it costs to invest in them? Note that this yield not only has to compete with the yield on savings accounts or bonds, but it should offer a substantial premium to compensate for the greater risk.
  3. Is there a diversified vehicle for investment? The more diversification, the better. This is true for the variety of shipping companies and the range of trading partners in various parts of the world.
  4. Are the fees for accessing the investment reasonable? Diversification is good, but anyone bundling these opportunities into an investment vehicle is going to be charging a fee. You need to consider how much that will erode the return available.
  5. Is the provider trustworthy? This is the most important question. Try to make this kind of investment through a reputable bank or brokerage firm regulated in the U.S.

There are no easy answers in today's investment environment, but good opportunities should be worth doing a little extra research.

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