Personal Finance Blog By MoneyRates - December 2007
December 21, 2007
The quality lending site LendingTree.com has published an informative article on the difference between Home Equity Loans and a Home Equity Line of Credit. If you're a homeowner, you can borrow against the value of your house through either a home equity line of credit (often called a HELOC or a line) or a home equity loan (often called a HEL or loan). Both are essentially a second mortgage. It is important for borrowers to review both options.
What's the difference?
A HELOC is a form of revolving credit similar to a credit card. It allows you to draw funds, up to a predetermined limit, whenever you need money. There is generally a minimum payment due each month, with the option to pay off as much of the line as you want. With a HEL, you receive a lump sum of money and have a fixed monthly payment that you pay off over a predetermined time period. In each case, the amount you can borrow is based on factors such as your income, debts, the value of your home, how much you still owe on your mortgage and your credit history.
The appeal of both of these types of loans is their interest rates, which are almost always lower than those of credit cards or conventional bank loans because they are secured against your home. In addition, the interest you pay on a home equity line or loan is often tax deductible (consult a tax advisor about your particular situation).
Which is best for you?
Generally, a HELOC is a good choice to meet ongoing cash needs, such as college tuition payments or medical bills. A HEL is more suitable when you need money for a specific, one-time purpose, such as buying a car or a major renovation.
Comparing the costs
Both HELOCs and HELs usually carry a higher interest rate than that of a first mortgage. With a HEL, you may choose either an adjustable rate that fluctuates according to variations in the prime rate, or you may opt for a fixed rate. A fixed rate enables you to budget a set payment monthly without worrying about increasing costs should interest rates rise. With a HEL, there are also closing costs that you should consider.
A HELOC usually carries a lower initial interest rate than a HEL, but its rate fluctuates according to the prime rate, so there is more interest rate risk. Unlike a HEL, where your monthly payments are a set amount, a HELOC enables you to borrow funds as needed and repay as little as interest only each month. In addition, there are generally no closing costs when you open a HELOC.
Keep in mind, your home is the collateral for both a HELOC and a HEL. If a HELOC's easy access to cash tempts you to run up more debt than you can repay, or if you fail to make your payments, you risk losing your house.
Posted in: Mortgage
December 17, 2007
We receive a fair share of comments at The Savings Investor regarding the promotional-rate money market accounts which many banks are offering. These type of accounts, which are typically only available to new banking customers, will guarantee a rate for a pre-set number of days. Everbank and AmTrust Direct are offering these promotional-rate money markets with a 90-day rate guarantee. In the case of the EverBank money market account, the yield drops to 4.51% from 5.51% after 90 days. Instead of complaining bitterly about the banks and their ability to drop the rate, perhaps we should consider this type of an account like a 90-day CD which needs to be reinvested at maturity. Investors have seen falling deposit rates since last summer, so the bank's guarantee in fact has saved investors from a reduction in rate which a typical money market account could have effected by the bank on any given day. Couple that with the fact these rates are well-above the national rate average then these deals should not be considered another cautionary tale of the banks ripping off their customers, but should be considered a great deal for the online bank investor.
Umbrella Bank has an introductory offer on their Savings account which guarantees the savings rate of 5.35% for the first 90 days the account is opened. The rate that is applied after 90 days is currently either 4.56% ($1-$24,999), 4.75% ($25,000-$74,999), or 4.93% ($75,000+). Again these tiered rates are excellent in comparision to rates across the country on bank deposits as well as other short-term investments in general. So while the bank's motivation is to keep their new customers in-house with good service and good deposit rates, the investor will always have the ability to switch to the next rate deal if they are not happy with the current bank. Perhaps suprising to many though, many consumers are finding their online bank more than satisfactory.
December 13, 2007
The Treasury Department has had a Savings Bond program since 1935 to raise funds for the U.S. Government. With the backing of the government implicit these bonds considered among the safest investments in the world. They have not drawn a great deal of attention from investors due to the rates paid on them, which is typically below that of investment grade bonds and longer term U.S. Treasuries. In 1998 the Treasury Department introduced the Series I bond which has a variable inflation-indexed component effectively making it a hedge against inflation. The Series I Bond pays a fixed rate (changed every six months for new issues) of interest and the variable inflation-adjusted portion of interest every six months. In the case of deflation (a CPI rate below 0.00%), the inflation-adjusted portion of interest is zero. Currently, the fixed portion of the Series I Bond is 1.20% and with a trailing inflation rate of 3.06% the Series I Bond is currently earning a rate of 4.26%. The recent rate cuts by the Federal Reserve have made this a more competitive rate with other safe investments. For instance, the 180-day U.S. Treasury is only yielding 3.09% today. It is very likely that the Treasury Department will in fact lower the fixed rate in May 2008 when they adjust if the Fed keeps lowering rates, but investors who buy the Series I Bonds between now and May will receive the 1.20% fixed rate for the lifetime of their bond. Many economists are looking at the high rates of increase in energy and food prices and are beginning to question when "secondary inflation" from these two sectors will in fact drive up wholesale consumer prices. If that does in fact happen, investors who own the Series I Bonds will receive good returns on their investment.
More information about Savings Bonds is available at http://www.savingsbonds.gov/
December 11, 2007
The news has been full of stories regarding the debacles of banks which dealt heavily in the subprime lending markets. Notably, the stocks of Countrywide Financial (-67.9% YTD), IndyMac Bancorp (-79.4% YTD), and Washington Mutual (-51.8% YTD) have garnered a lot of attention. While these stocks may be attractive to speculators who basement hunting, there are still unanswered questions regarding their loan portfolios. The companies themselves are in disaster-mode having slashed jobs, dividends, and been forced to increase deposit rates to increase their base. Lost in the shuffle is the large amount of banks which have no exposure whatsoever to the subprime mess, but whose stocks are suffering none-the-less. Banks which only make loans to well-qualified buyers or who earn revenue through processing, trust business, brokerage, cash management, corporate lending, among other sources. An investor can go to a site like Yahoo Finance or Morningstar and filter banks stocks for stocks which pay dividends over 5%, have growing earnings, and a current price-to-earnings ratio below 20 and find a long list of local and regional banks which meet these criteria. So while most of us do not have the speculative nature to take a shot at stock down 80%, perhaps a bank stock paying investors 5% with positive growth potential deserves a look. A partial list of bank stocks is listed here.
Note: Bank deposits are insured by the FDIC up to $100,000. Investors can lose principal by investing in bank stocks.
December 10, 2007
KeyDirect offers great interest rates directly to consumers and businesses in 37 states and the District of Columbia but not AK, CO, ID, IN, KY, ME, MI, NY, OH, OR, UT, VT, or WA. Key is currently offering the following rates on their longer term certificates of deposit'
5 year CD - 5.26% APY
7 year CD - 5.35% APY
10 years CD - 5.75% APY
* Minimum deposit $50,000. APY
* Terms from 3 months to 10 years, or anywhere in between as you choose
* FDIC Insured to protect your balance1
* Interest compounded daily and paid monthly, or choose a payment option that fits your needs
* Auto renewal to a Key CD for the same term ensures your balance continues to earn interest
* Maximum deposit $99,000