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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.
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October 6, 2016
Q: My Mobile Home interest is 8.0 percent and feel I have been ripped off. I have been living here for 17 years and my home is not worth my balance. I think I was railroaded. Should I do a short sale or can they lower my interest rate?
A: The lack of equity in your mobile home after all this time makes it sound like there is a somewhat complicated history involved that may limit your options. Even so, it is worth exploring the possibilities to see which alternatives may be open to you.
Reviewing past and current mortgage rate history
For starters, while 8 percent sounds high by today's standards, if your loan dates back to when you originally bought the mobile home 17 years ago, 8 percent does not seem so out of line. After all, current mortgage rates are about half what they were 17 years ago, and auto loan rates have experienced a similar drop over that time. Solid data on mobile home rates is not as easy to find. But since those loans can be thought of as combining some elements of both home mortgages and vehicle loans, it is reasonable to expect that they have dropped considerably in the past 17 years.
Of course, that assumes that you have had the same loan all that time, but the fact that your home is not worth your balance after all this time suggests that you have refinanced at least once. A combination of overly-aggressive refinancing and rapid depreciation of your property could well have left your loan under water. Unfortunately, that limits your options.
Options to deal with an underwater mortgage loan
Here are five possibilities at this point, depending on some of the details of your situation:
1. Refinance your mortgage
Unfortunately, your loan being under water probably eliminates most refinancing possibilities. However, it is possible that your current lender might be amenable to a rate reduction since they already own the risk of the underwater loan.
2. Use savings to retire part of the remaining loan
If you have savings accounts or other assets, you might pay the loan down to below the value of your property. This could open up more refinancing opportunities.
3. Put down savings to pay off all of the remaining loan balance
Given how low interest on savings accounts is these days, it might be worth using savings to retire the entire loan balance. Eliminating an 8 percent expense is better than earning 1 percent in deposit interest.
4. Initiate a short sale
You mention a short sale, but this would still require resources to retire the excess balance on the loan.
5. Stay in the home
If you can still afford your payments, your best option for the time being may be to stay put. After all, if you sell out, you are still going to have to pay for some other form of housing.
Your current loan rate and your lack of equity are certainly less the ideal. However, the important thing is to assess which of the above is your best option for the future, rather than trying to remake the past.
Got a financial question about saving, investing, or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.
September 29, 2016
Q: I have $7,000 I can deposit and not touch for 6 months. What's the highest interest rate I can get?
A: The most likely case is that you could invest this in a 6 month CD, but that may depend on the details of your situation.
Finding the best CD rates
At the time of this writing the average 6 month CD rate nationally is 0.13 percent, according to figures from the FDIC. That would produce about $4.55 in interest on $7,000 over the course of six months. That doesn't sound very exciting does it? Fortunately, there are better options for short term CDs.
At the same time the national average for 6 month CD rates was 0.13 percent, the MoneyRates.com CD rates page showed a number of options in the 0.80 to 1.00 percent range. These would increase your interest earned by more than six times.
To find the best CD rates currently, go to that rate page and enter the appropriate CD term and size for your needs. The page will display a number of appropriate options and the rates associated with them.
Questions to ask before choosing a 6 month CD
Before assuming that a 6 month CD is the right vehicle for your needs, consider the following questions:
1. Will I need access to the money earlier?
Be aware that if you have a need for the money before the CD matures, you will likely have to pay a penalty to access it. If this seems a likely occurrence, you might be better off in a savings account or money market account that allows more immediate access. At the very least, you should check the early-withdrawal penalty before signing up for a CD.
2. What are my financial needs beyond six months?
You mention that you won't have to touch this money for six months, but at that point will you need all the money? If not, you may want to put enough in a 6 month CD to meet your needs at that point, and put the remainder of your money in a deposit after looking at long term CD rates to earn a higher yield.
How to maximize interest earned with high CD rates, savings accounts
Once you decide on the deposit approach that suits your needs, you should go through the type of search process described previously.
Split money between different accounts
If you decide to split your money into multiple vehicles, keep in mind that you don't necessarily have to keep each account at the same bank. Different banks may offer the best CD rates for specific term lengths, and the bank with the best CD rate may not necessarily have the best rate for savings accounts.
Research the highest savings rates
Shop around, and place each deposit where it can do the most for you.
As low as interest rates are, you are smart to search for the best option even if it turns out to be only for six months. Wealth is rarely accumulated in a hurry. Generally, building wealth is a more gradual, step-by-step process. Attention to detail at each step of the way will make the journey more rewarding in the long run.
Got a financial question about saving, investing, or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" Box on the lower left.
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September 21, 2016
Q: I've heard commentators say that the Brexit vote should mean lower interest rates here in the U.S. I was thinking of refinancing, but if rates are going lower should I hold off until later?
A: There are a couple of good reasons to believe that Brexit could help keep refinance rates down. However, if you hold off on an opportunity to save money by refinancing, you do so at your peril.
Why Brexit is generally thought to be good for low interest rates
Low interest rates have become the norm in several of the world's major economies, and there are reasons to expect that Brexit will help prolong this trend, especially in the US:
1. Flight to the dollar lowers prices for U.S. consumers
The U.S. dollar got a boost from the Brexit vote, as nervous investors fled securities denominated in the euro and the British pound. A stronger dollar aids the purchasing power of U.S. consumers, which helps keep a lid on prices. Low inflation generally translates to low interest rates.
2. Slower growth encourages low-rate monetary policies
It is expected that the Brexit vote will slow world economic growth, and it is not just Britain and the European Union that are affected. Slower growth abroad means fewer sales for U.S. exporters. The stronger dollar will stack the deck even more against U.S. companies competing against foreign firms. Central banks around the world have been keeping bank rates low in an attempt to stimulate stronger growth. If economic growth takes a hit, expect these low interest rate policies to be prolonged or even expanded.
Why think twice about delaying mortgage decisions
While the compass seems to be pointing squarely towards lower interest rates, here's why you should think twice about delaying refinancing:
1. Current mortgage rates are already extremely low
The need for lenders to cover risk and make a profit means that mortgage rates can only go so low. To some extent, the risk of Brexit may already have been factored into rates, which have been falling throughout this year. There does not seem to be much room for them to fall further.
2. A slower economy could mean less loan availability
While slower growth could well translate to lower rates, the catch is that it could also mean tougher loan approval standards as lenders get nervous about default risk in a weakening economy.
3. Brexit is just one example of a global economic shock
Brexit is an example of how a single event can shake up the world economy, but there is always the potential for a new shock to come along. An inflationary surprise, such as a spike in oil prices or a rise of trade barriers, could send interest rates higher.
If you can save money now by refinancing, you would probably be only mildly disappointed if you found out you could save a little more by waiting till later in the year. However, what you would be likely to regret more strongly is if you missed out on the opportunity to refinance altogether.
Got a financial question about saving, banking, or investing? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.
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September 15, 2016
Q: You've recommended encouraging savings by having direct deposits go into savings rather than checking accounts, but for the sake of convenience I've split the difference and allocated my paychecks 50/50 between savings and checking. By now, I've seen a considerable accumulation in my checking account, to the point where I feel I should leave enough in checking to keep the account active but invest the remainder elsewhere.
Since depositing half my pay into checking is more than covering my spending needs, going forward should I increase the deposit allocation to the savings account, or keep the allocation at 50/50 and use the accumulation that builds up in checking to diversify into more active investments?
A: You are in a good situation - not all payroll services allow you to split direct deposit allocations. You are wise to take advantage of the opportunity. It also indicates that your finances are in good shape if 50 percent of your pay is more than covering your immediate needs. So now, you have the happy problem of figuring out what to do with the extra savings.
Building up checking vs. savings for investments
Given how low interest rates on savings accounts are these days, it probably does make sense to diversify into more active investments, such via online brokers. Especially since your cash flow seems strong enough for you to avoid having to dip into savings. The question then becomes whether it is better to use the checking account or the savings account as the springboard into those investments.
Advantages of growing savings accounts
The savings account might have a couple advantages over the checking account as a place to let savings accumulate prior to investment:
1. Savings rates are higher
As low as savings account rates are, they are probably higher than the rate you are earning in your checking account, if any.
2. There are fewer chances to overspend
Having the excess accumulate in your savings account would reduce the temptation for any new spending to creep into your habits by having extra money easily accessible in your checking account.
Other considerations for direct deposit
Two other points to keep in mind as you set all this up:
- First of all, meet balance requirements to avoid checking account fees. Make sure you don't starve your checking account to the point where you incur fees by dropping below minimum balance requirements or overdrawing the account. Those fees could easily wipe out any interest you would earn by making extra allocations to savings.
- Second, raise deferrals for retirement savings accordingly. If your employer has a 401(k) retirement savings or other voluntary contribution plan, you might want to consider raising your deferrals into that plan if possible. This would maintain the principle of making savings automatic, but would get some of those savings directly into more active investments while also taking advantage of the tax-deferral and possibly matching benefits of a retirement plan.
Again, it sounds like you are dealing from strength financially, and incorporating more long-term investments into your plan should only strengthen your position.
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August 24, 2016
Q: Are there any tax consequences if I transfer money out of a money market fund or a money market account and into a long term CD?
A: This should be no problem, assuming the money is in an ordinary taxable account. If it is in a tax-advantaged vehicle like an individual retirement account (IRA), make sure the certificate of deposit (CD) is also within the IRA, or rolled into another IRA.
Interest held in a money market account is taxable in the year in which it is earned. So if you close the account, just remember that you will have to include any interest earned so far this year on your 2016 tax return.
As you contemplate the switch from a money market account to a CD, take some time to think about how to make this move fit with your eventual financial goals for the money.
How to evaluate financial needs and tax status for CDs
The first thing to think about is whether you are saving this money for some particular upcoming need, or generally for retirement. If there is a specific need on the horizon, that will help determine what length your CD should be, whether a long term CD or a short term CD.
If you are shifting this money into a long term CD because you are saving for retirement, you might consider shifting it into a Roth IRA. Assuming this is currently a taxable account, putting the money in a Roth IRA won't provide any tax advantage in terms of the principal you deposit. However, it will allow the account to earn interest tax-free until you withdraw money from it. Be advised, though, that there are income restrictions and contributions limits that determine whether and how much you can contribute to a Roth IRA.
What to look for in a CD
Whether or not you move the money into an IRA, identifying the purpose of this money will help guide your search for the right CD.
Here are four things to consider as you make that search:
If you have an upcoming need for the money, that may determine the length your CD should be. Otherwise, since CD rates are generally higher on longer deposits, longer is better unless you think a rise in interest rates is imminent.
2. Laddering opportunities
If you have a series of different needs or want to hedge against interest rate changes, you might want to consider a CD ladder, which is a sequence of CDs with different maturity dates.
3. High Yield
Once you have decided on CD length, shop around to find the highest yield being offered at that length.
4. Low early withdrawal penalty
CDs carry a penalty for withdrawals made before the maturity date, but the penalties vary. Assuming the yield is competitive, look for a CD with a relatively low penalty because that will give you some flexibility if there is a significant move in interest rates.
Finally, in a few years when the maturity date of this CD is approaching, you should consider these issues anew with respect to your next CD, rather than letting the existing one roll over automatically at the same length and the same bank.
Got a financial question about saving, investing, or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left or send an email to Ask@MoneyRates.com.