Is It Really the Best Time to Refinance Your Mortgage?

Until a few weeks ago I thought yes, it is the best time to refinance your mortgage.  Mortgage interest rates are at an all time low.  We’re talking around 5% for a 30 year fixed conforming loan (meaning the loan is less than 417K) and a little over 5% for high-cost 30 year fixed conforming loan in certain areas (less than 729K).  Click here for the actual amounts.  Incredible, right?

Those numbers looks fantastic, but a hidden fact remains: the bank will only finance you around 80% of your home’s appraised value.  That means for everyone who’s home is now worth less than the purchase price can get caught having to put in more money.  For example, you bought your home 3 years ago for $500,000 with a $400,000 mortgage at 6.5% (80% financing: $100,000 from you and a loan of $400,000).  You now want to refinance at the wonderful available rate of 5% which would bring down your monthly payments considerably.  Everything moves along smoothly until the appraisal comes back; your home has dropped 20% in value to $400,000 and at 80% financing the bank will only loan you $320,000.  That means you need to put another $80,000 in if you want to refinance!

While the above example doesn’t account for principal payments over the three years, it illustrates what a lot of people are facing now: to get the historically low mortgage interest rates they will need to put more cash into their home.

Is it worth it?  I believe so for the following reasons based on the above example:

Assumption: You have the available investment cash for the life of the loan.  If you don’t have the non-emergency money available then stop here.  Remember, you won’t be able to take the money back until you sell or refinance again at a high loan amount.

1. You’re not just getting a new mortgage interest rate, but also lowering your loan amount.  You’re essentially investing in your home.  Given current bank savings account interest rates (the best being around 1.5%) it might be worth putting this money into your home.  Now if bank interest rates go up considerably you might miss out.  However, that goes into the next point…
2. While bank interest rates might go up, so might the mortgage interest rates.  This may be a rare opportunity to grab an incredible mortgage interest rate.  If you’re planning on spending many years in your home locking in a low rate might be a good idea.
3. Comparing investing in stocks vs. your home is a tough one.  One important point is that the money you save per year with a lower mortgage interest rate (and lowering your loan amount) is guaranteed.  Unlike the stock market it isn’t volatile.

I suggest doing a thorough comparison of your current monthly payments verse refinanced payments.  The amount saved is the amount (%) you’re receiving on the invested cash.  You can use a mortgage calculator to help compute these numbers.

Here is a rough calculation for the above example:

$400,000 loan – 30 year fixed at 6.5%: $2,528 monthly, $30,336 yearly

$320,000 loan – 30 year fixed at 5%: $1,717 monthly, $20,604 yearly

Based upon the yearly saving of $9,732, the $80,000 put into the refinance can be considered as receiving an interest rate of 12.1%.  Not too bad compared to the 1.5% you can get at HSBCDirect.com.*

* A fully accurate example will have to consider the tax deduction on the interest portion of the mortgage payment and the taxes on the bank savings account.  This will most likely lower the 12.1% by several points.

Amazon Subscribe & Save – 15% Off and Free Shipping

Something new I just noticed at Amazon.com is the offering of Subscribe and Save where you can create automatic product shipments on a 1, 2, 3 or 6 month basis.  In addition, Amazon gives you a 15% discount and free shipping (even if the amount is below $25).

For example, I just created a subscription for Bounty Paper Towels, Select-A-Size, Prints (Case of 24) for about $50 reoccurring even 3 months.  This comes to about $2 a roll instead of the $3.50 per roll I pay in NYC.  Not a bad deal! And I don’t have to lug 24 rolls from the store back to my apartment.

Where is Microsoft Money 2009?

Every year I check out the latest editions of Microsoft Money Plus and Quicken to see what are the new features and if I have any inkling to buy (not yet so far).  The description of Quicken 2009 on Amazon lists the standard new features…more banks, better interfaces, blah, blah.  Same old stuff theve had fr the past 5 years.  I also noted that there doesn’t seem to be a Quicken 2009 Mac version.  Where’s the Mac love?

Searching at Amazon for Microsoft Money yielded versions from 2000 to 2008, but conspicuously no 2009 version.  After a bit of research I discovered through a Microsoft post that:

“We [Microsoft] have decided against releasing a 2009 version of Money Plus. We are moving off of an annual release cycle for Microsoft Money Plus (no Money 2009 version in the fall), with future release dates TBD.”

Ouch!  I read this as Money wasn’t profitable enough and is essentially dead.  Not releasing a new version (even if they are correct the the yearly updates aren’t worth it) while Quicken keeps popping them out like bunnies will move the sales figures to Quicken.  In 2011, which are you going to buy Quicken 2011 or Money 2008?

The only strategy I think Microsoft might have is to fully move online, maybe leveraging MSN Money.  However, wouldn’t it make more sense to transition the customer base over by offering both a desktop version and an online version for at least a few years?

So I guess the battle is over…winner Quicken!

Portfolio Summary and Excel Portfolio Tracker

I’ve been meaning to create an Excel portfolio tracker for quite some time now, and with a little goading from my friend I’ve finally done it.  This is merely the first draft and it certainly could use quite a bit of fine-tuning, but I think it is a good start.  I’ve entered in all my taxable holdings, but only about 1/4 of my tax deferred holdings.  I’m still trying to figure out how to “easily” track my company’s 401K offerings.

Portfolio as of July 12, 2008

As you can see (and now I can see), I have most of my holdings in cash (again, not all the 401K is there, so the numbers are a bit skewed).  Also, I’m down quite a bit on most of my holdings…Bank of America was obviously a bad bet.  My next goal is to completely enter all my holdings (401K) and do a full analysis on the allocations.

Here is the spreadsheet (Excel) that I created to track my portfolio.  The first tab is where you enter your holdings, expense ratio, cost basis, etc.  All the columns after Cost Basis are auto-generated.  On the second tab is the market data  grabbed from MSN Money and populated in the Market Value column.  You can enter your own symbols by selecting Data->Get External Data->Parameters.  The second radio button on the pop-up (Excel 2008 Mac at least) allows you to enter your symbols separated by commas.  To get the latest data, just select Data->Refresh Data.  There are two groupings of market data, one for taxable and one for tax deferred.  I found this easier to maintain this way.

**Due to restictions on WordPress, I had to rename the Excel (.xls) file to .doc.  Please download the file and rename it from .doc to .xls.**

portfolio-tracker_demo

The Current Trend of Consolidation/Centralization in Corporate America

I recently read in the Wall Street Journal an article on how Yahoo! is beginning to consolidate/centralize their different business units.  This is an interesting trend where during economic slow downs corporations try to consolidate and centralize for “synergy” and “cost savings.”  In economic booms, the corporations reverse course and decentralize (usually though the creation on new business lines/unit, but rarely breaking apart existing groups).  Yahoo is doing it, my company is, and I’m sure many others are as well.

A Managing Director at my firm recently commented that it is one big cycle that he’s seen time and time again; we’re in cost savings and consolidation mode right now and eventually we’ll be in spend mode and decentralize mode again (new lines of business).

It makes sense that when money is tight you look to cut the fat and concentrate more on business as usual rather than the new great idea.  The shame is that by Yahoo combining business units such as mail and search a lot of creativity will be lost.  You know how it goes…the too many cooks in the kitchen concept.  Does anybody see a business unit the size of the new Yahoo entity agreeing that it is a good idea to take the risk and revamp Yahoo Mail using unproven Web 2.0 technology?  It worked out great (check out Yahoo Mail if you don’t already have an account), but it might not have and that is what large groups are always afraid of.

Google still pumps out the creative ideas because it is decentralized.  If we ever read that Google is “centralizing” we’ll know it is all over for them and we should sell, sell, sell!

iPhone New Pricing Scam

I’m sure many of you have been tracking the new 3G iPhone coming out on July 11th.  It is faster, sleeker, and and more versatile model of the previous version (plus it has GPS).  Furthermore, it is cheaper.  That’s right, only $199 for 8GB of memory and $299 for the 16GB version.  However, the data pricing plan has gone up from $20 to $30 a month.  Ten more dollars, not including applicable taxes (meaning we’re probably talking $12).  That means that you’re paying upwards of $144 a year more for this new iPhone.  After 2 years you might have just paid the full price for the iPhone and not have to continue bleeding money.

But here is the worse offense: the new data plan doesn’t include text messaging.  That’s right, an unlimited data plan with no texting.  Assuming that the texting will be around $5 more a month, we’re now paying between $38 and $42 (w/ taxes) a month on top of your normal phone plan.  Ouch!

I’ve been wanting to get the new iPhone for some great reasons like, I need it for, well, ah basically just want it because it looks cool.  However, paying $100+ for my phone plan plus data plan just isn’t going to fly with my bank account or my wife.

Online Money Management Site Review: ‘Mint’

I’ve recently been hearing a lot about the new personal money tracking/management site called Mint, so I decided to check it out.  Mint is similar to Quicken or Microsoft Money, allowing you to link up you bank, brokerage, and credit card accounts.  You can then track you finances, transactions, and overall net worth.  However, one key difference is that Mint is online, so you’ll need to trust them with you financial login information.  Right off the bat, you’ll notice how visually pleasing the site is. The design is clean, the colors are appealing, and graphics are fancy.  A fine example of a Web 2.0 site.  For those tech guys out there, I’m pretty sure Mint is built in Adobe Flex.

I signed up for the service fairly quickly (standard registration with ‘Favorite pet’s middle name’ sort of questions).  I started linking up my various bank and brokerage accounts and…hey, how come I can’t find some of my accounts?  Where is my 401K…what about my wife’s?  Can’t find my 529 plan either.  Hmmm, not a good start that they are missing some standard financial institutions.  However, I’ll give them a break considering that Mint does claim this to be a Beta site (whatever that means for a public/all access site).

The real issue I have with Mint is that they seem to have spent more time with the pretty colors and less time on functionality, especially when you compare it to Yodlee’s Money Center.  You can’t see the overall trend in net worth or perform bill pay.  The page layout isn’t built for a large number of accounts and becomes cumbersome the more you add.  Also it is very difficult to isolate on your portfolios (stocks).  I found that while Yodlee’s Money Center focuses on the management of your overall financial life, Mint is more of a snapshot of your current accounts.  

Mint certainly has potential and might become a contender in the online money management space.  However, right now I would say peruse Mint, but go to a place like Money Center for a more mature and functional money management site (or Quicken or Microsoft Money…but don’t get me started with what is wrong with those!).

Took the Plunge Into Bank of America

So I finally did it.  After checking the realtime BAC quote of Yahoo! Finance about every 5 minutes for the past two weeks, I decided to buy on Friday.

I picked up 165 shares at $30.50 (was down 4% on Friday).  After commission it came to a cost basis of $30.66 (I screwed up an forgot to check to “All or None” box on the order entry ticket…so the trade executed as two separate orders and I got charged two commissions [$35 each]).  

Couple of things on why I decided to buy BAC.  

1. Even though the current market is very unstable and BAC certainly could drop more, I think that BAC and Wells Fargo are the two strongest retail banks.  They hopefully will both eventually recover.
2. The current dividend yield is at an incredible 8.3%!  This is not only a rate several time better than any bank account, but you’re also only paying 15% taxes on the income (please see my previous post were I discuss the fact that you actually might be paying 22%).  However, there is a risk…
3. BAC might lower their dividend which would hurt point #2.  I don’t believe this is likely because of the Countrywide purchase.  If they have the money to buy Countrywide, they most likely won’t need to lower their dividend anytime soon.

We’ll see if I made the right move.  My sell target for BAC is $40.00.

Raising the Conforming Mortgage Loan Amount in New York City

Have you heard that they are raising the conforming mortgage limit from $415,000 (depending upon the area you live in)?  In New York the new conforming limit will be: $729,750!  I can’t tell you how excited I was to heard that.  I recently bought an apartment in Manhattan and had to get a Jumbo Mortgage since prices here are so inflated (i.e. good luck finding a place less than $500K).  

Looking at the rates on Wells Fargo’s Mortgage Rate Site there is a full percentage point difference between the conforming and jumbo loans.  Money in the bank, baby!

Here’s where reality sets in and the saying “no such things as a free lunch” comes into play.  It seems that there is an extra “fee” being charge for the extra risk of these larger loans.  The extra fee essentially wipes out the savings of having a conforming loan.

Guess I won’t be refinancing anytime soon.

Here is an article explaining more. 

Also, here is what my mortgage broker said when I asked him (this is from a few weeks ago, so the rates aren’t up-to-date): 

The new “High Balance Conforming Program” is up and running on 30 Year Fixed mortgages, but not as attractive as we had hoped. The 10/1 Arm is “out” as no investor is really buying Arm’s at the moment (they are shelled shocked) so pricing is really quite bad. The 30 Year Fixed is by far the most attractively priced from a historical perspective.
 
Regular Jumbo 30 Year Today is about 6.875% at Zero points
New High Balance Conforming 30 Year is about 6.625% at Zero points.

Bank of America (BAC)

Today at work I was in an all day training session.  Now I mostly paid attention to what was going on (Project Management application usage), but to keep my self awake I researched and almost pulled the trigger on buying 200 shares of Bank of America (BAC).  Today’s close was at $34.73.

BAC has been beaten down just like all of the other retail bank stocks (I’m considering them in a different at category than financial companies such as Goldman Sachs).  However, they seems to be on much stronger footing than their competitors.  Look at Citi and Wachovia.  BAC recently bought Countrywide (meaning they had the funds, though the debate is still out on if they should have).  Can you imagine those two companies buying Countrywide as BAC did?

Another interesting point is the dividend, right now at around 7.00%.  That is amazing!  While there certainly is volatility with the stock, you have a nice buffer with such a rich dividend (and I and many other talking heads don’t believe they will lower it as Citi did).  

One thing that does concern me a bit are the offering of Preferred Shares of BAC.  Citi was doing it to raise capital, and we all know why.  BAC maybe just trying to also raise capital, but in a less desperate way.

I believe that BAC has a while to go before heading on the upswing.  But on the upswing it will go.  We’ll see what tomorrow bring.  If it drops to around $34,  might just buy it.