The Refinancing is Finished–Should You Look Into It, Too?

It took about two months–and a whole lot more stress than I hoped it would–but the refinance finally closed yesterday. Surprising how just casually browsing the web one day can lead to so much activity over two months of your life, but I suppose a lot of even bigger life-changing things start with such small things.

We’ve almost lived in our house for 5 years now. We’ve now refinanced twice. The initial rate we had was something like 6.625%, as I recall. Three years ago, I refinanced because rates seemed so rock bottom: I got 5.25%, and I was very happy. My payments dropped 11%. Then rates kept falling. And falling. And I was leery of refinancing again, because house prices had fallen, as well, and I didn’t want to have to get Private Mortgage Insurance.

But they fell some more. And house prices had come up some, so I went for it.

We closed for 3.875%. Our payments are dropping 17%. Compared to our original payments, we’ve come down 24%. That ain’t bad, being able to save that much money each month. The bad news? Our house’s appraisal is now down 13% from what it appraised for when we bought it. That meant that we had to chip in some of our savings to cover closing costs and avoid PMI. (Not a good time for us to be trying to sell our house, either. Good thing we’re not planning on doing that.)

The good news? We had enough savings to cover that, leave our emergency savings alone, and still have enough left over. It helps to have so many different income streams coming in (my day job, writing, Denisa’s online job, her bread baking, both of us teaching–some of those streams are a lot smaller than others, but they all contribute). But it’s definitely true that it takes money to make money sometimes–if we hadn’t had that money from our savings, we wouldn’t have been able to save as much money as we will now in the future. And if we’d had debts from earlier (student loans, credit card debt), we would have been hosed, as well. (Really, a large part of the credit for us having enough savings goes to Mint, which I still use every day to keep track of finances. It’s such an awesome budgeting tool. If you’re having trouble staying on top of your finances and you’re not using this . . . you really need to start. It’s free. And the longer you use it, the more helpful it becomes.)

Anyway. If we don’t refinance again, we’ll still have paid the house off before we retire, which is my main goal. So hooray for that.

Would I recommend people refinance right now? Yes. With a few stipulations:

• Know how much you have left on your mortgage. It’s not easy to refinance unless you are doing it for 80% or less of the value of your home. (Over that, and the banks get skittish. They start wanting PMI–which is pricey and you do NOT want–or they try and con you into getting a home equity line of credit (something our bank “helpfully” tried to do when our appraisal came in too low. I said no thank you (the line of credit was going to cost a ridiculous amount of money in monthly payments–it would have meant our monthly payments would have gone down by only 3% instead of 17%. I was no math major, but I can see a bad deal like that from a mile away. Yikes!)
• Be fairly confident of how much your house will appraise for. This is the one thing that was really tricky for me to anticipate. And I turned out to be wrong. The problem is that the appraisal cost $450 or so, and I was going to have to pay that one way or another–even if I decided not to refinance. I didn’t want to pay $450 just to find out I couldn’t do it.
• If your loan interest rate is currently within 1 percentage point of the advertised mortgage rates, then it’s probably not worth it. (Them closing costs are expensive, folks). Rates today are around 4%. That means if your rate is between 4% and 5%, then I’d probably not do it. If it’s over 5%, I’d definitely look into it. Especially if
• You’re planning on staying in your house more than 3 years. If refinancing costs $2000, and it will save you $200 a month on payments), then it will take 10 months before you’ve earned that money back. If it costs more and saves less, obviously that time gets longer. No need to refinance if you’re just going to move next year or the year after.

Refinancing. Again. And Thoughts on Ninja Researching

Today was supposed to be a morning spent going to DC’s preschool graduation. And it was. Her class sang for the group, we had punch and cookies. A fun time had by all. But I also came across a tidbit of information: interest rates had dropped to a new low for house loans again. And so I started looking into things, and next thing you know, I’m applying for a refinance. It’s lowering my rate from 5.25 to 3.875, which used to mean absolutely nothing to me, but now means a whole lot–in terms of actual money I’ll be saving each month on my loan. When you pay interest on something for 30 years, every little quarter of a percent matters.

One of the things I like most about my job is how it forces me to stay current on how to research information quickly and effectively. When you’re sitting at a research desk, you have no idea if the person who’s coming up to ask you a question is just going to want to know where the bathroom is (often the case) or if they’re going to have a deep question about laws in Maine in the 1850s. Or maybe the genetics of moose. Who knows? And maybe they ask you an easy one–anything on literature or linguistics, in my case–but maybe you’re suddenly helping them research medical studies. You just never know.

But the thing is, you don’t need to know everything. You just need to know the basics of how to search. When you have those down, you can find out anything these days–very quickly. That’s how I taught myself the basics of TV antennas. It’s how I analyzed what kind of car would be best for me, and what a fair price to pay for it would be. It’s how I helped my son decide which Beyblade was “the best”. It’s how I researched what backup/cloud storage solution would be best for me. And it’s how I taught myself all about mortgage rates, refinancing costs, and the like.

Some of it is Google. (Although even Google can be tricky to use right–something I’m reminded each time I help someone find something on Google that they just. couldn’t. find.) Some of it is knowing who to call or email (my brother in this case, and a realtor friend). Knowing the answer is “out there” and knowing where that is in each specific case is a huge difference.

If you have access to the internet, you can find just about any information you need. Whenever you want. The trick is sifting through all the garbage to find the right information. Reliably. That’s what librarians are great at. And now I’ll stop bragging about my profession. Sorry.

In case you were wondering, if you can drop your interest rate by about a percent or more–and you’re planning on staying in your house for another couple years at least–then it’s often a great idea to refinance. Especially if you’re like me and have a ton of time left on your loan anyway. Rates are low right now. If yours is 4.75 or higher, you should look into it, at least a little.

And now, back to the rest of my day.

So What Happens When You Go Bankrupt?

First of all, a big fat disclaimer: I’m not a lawyer. Not even sort of a lawyer. What follows is based on some conversations I’ve had with bankruptcy lawyers, and it’s limited by my memory. I asked the questions because there seemed to be some interest from my faithful readers in hearing more about the “get out of debt . . . or else” topic that came up a while back. Some had wondered what happens when you go bankrupt. Why is it so bad? After talking to several people, I discovered there seems to be some wildly differing ideas on the process, so I thought it might be useful to go over what I learned. Ready? Here we go.

Let’s set the stage first. You’re in debt up to your eyeballs, although maybe you’ve been doing a fair job of hiding it. You’ve got several credit cards–all maxed out–you’ve got student debt, two mortgages, a car loan or two, you’re behind on your utilities payments, and you’re basically at the point where you have to decide which bills to pay each month, based on how overdue they all are. That said, your actual life hasn’t changed all that much yet. You’re still buying things when you can, still living in your home, still driving your car. You’re on the edge, but you haven’t gone under.

Then, it happens. You have an unforeseen debt pop up. Maybe the car engine goes, or you have damage to your home, or some unexpected dental bills–but in any case, you’re no longer on the edge. You’re now getting phone calls from creditors, and since you were already on the edge to begin with, you start sliding into real crisis.

What can happen? For one thing, your creditors will be in a rush to garnish your bank accounts and your salary. What does that mean? It means that if you owe people money, they can contact your employer or bank and tell them, “Hey–we know you owe this person some money, but he owes us money. From now on, we want you to pay us X% of whatever he makes, or give us X% of his bank account funds.” Yes, they can do this to you. Yes, they will do this to you. At this point, everyone you owe money to is realizing you’re likely going to go under, and it turns into a big game of Hungry Hungry Hippos to see who can gobble up what they can while it’s still there for gobbling.

Up until now, you’ve been able to make sure that what money you make goes to things you actually really care about: your car, or your house, or your XBox Live subscription. But once your wages start getting garnished, that freedom goes out the window. You now are forced to pay some bills, and your other creditors start gathering the torches and pitchforks to come after you, as well. You are now in real danger of losing things you really value.

It gets to the point where you really are in trouble, and there’s just no way you’re going to stay afloat anymore. So you start looking into filing for bankruptcy. As an individual, there are two “chapters” you can file under. Chapter 13 is where you work with a central figure to pay off a certain amount of your debt over the next three or five years, with clearly established monthly payments. At the end of that time, then you’re back in the clear. It’s the preferable Chapter, for the most part. Once you file, all those nasty creditor phone calls go away, and you get some protection.

Of course, if you’ve made it far enough to need to file for Chapter 13, chances are you really haven’t learned your budgeting lessons. You make the payments required for a month or two–maybe even a year. But old habits are hard to break, and sooner or later, you start getting behind again. You miss your bankruptcy payments, and your “protection” goes away. Creditors start clamoring again, and it’s time for the final step: Chapter 7.

Chapter 7 essentially consists of liquidating your assets. In order to have your debts discharged, you need You’re allowed by law to keep a certain amount of money for your assets, depending on state exemptions. For example, if your state has an exemption for cars of $3000, and you have a car that’s worth $10,000, then your car will likely be sold, and you will get $3000 for it, with the other $7000 going to the people you owe money to. This same principle usually applies to home equity, as well–your house can be sold, but you’re entitled to a portion of that equity, depending on the state exemptions. Non-exempt property will be sold to pay back your debts. It all depends on how much you owe, how much you own, and how it will be handled. Many Chapter 7 filings end up not selling off any property, because it’s all under the exemption threshold.

In Maine, $5000 of a single car is exempt; $47,500 of a home if you have no dependents; $95,000 of a home if you do. You can find all this information online.

Anyway, it’s more complicated than I’m making it, but hey–I’m not a lawyer. I’m just trying to illustrate what can happen. Basically, if you’re forced to file for Chapter 7, then you’ll emerge from it with some money for basic house and car, and most other debts wiped clean. (Student debt, tax debt, and some other debt isn’t wiped–you have to pay those back eventually) Of course, getting any credit for the next while will be difficult, and you’ll pay a lot for the credit you do get. So don’t expect credit cards in your near future.

What it boils down to from my perspective is that you can either choose to start living within your means now, or you will be forced to live within your means later. And for a good year or two of your life–maybe more–you will not have a very pleasant experience. Then again, this is just from what I’ve read. I’ve never gone through bankruptcy–I suppose I might be painting it as being worse than it is. Heck–maybe I’m portraying it as too lenient.

Anyone have anything to add? Any questions? Discuss away!

How Did You Get Out of Debt? Or Are You Still in It?

I’m prepping a class this week that I’ll be teaching on Sunday on how to get out of debt. Why am I doing this? Well, on the one hand I suppose you could say I’m not really qualified to teach a class on getting out of debt, since I’ve never really been in debt to begin with. That’s not to say that I don’t have a mortgage or have a car payment, but Denisa and I managed to get through two undergraduate degrees and three masters degrees without getting any school loans. (Through a lot of scholarships and working multiple jobs. It also helped that we went to BYU for all but one of those, and BYU is dirt cheap compared to elsewhere). We also don’t have any credit card debt, and we’ve been saving for retirement for a good six years now (not perfect–it would have been better if I’d started when I was 20 or something, but hey–who’s perfect?). Then again, since we’ve managed to pull all that off, I suppose I’m somewhat qualified to talk to other people and give advice about how to get onto more secure financial footing.

In the end, though, I feel confident enough to teach the class because I don’t think the principles are all that complex. This Saturday Night Live clip presents the basics in a pretty funny format:

Of course, I think the problem a lot of people run into these days is that it’s easy to have a credit card in your wallet, and then it feels like you have money to buy things, even though that money doesn’t really exist. Thousands of dollars of credit card debt later, and you’re in a hole that feels insurmountable. Add to that any other debts you might have (student loans, mortgage, etc.) and it’s amazing you’re not blubbering in a corner somewhere.

Let me give you a rundown of what I’m thinking about teaching, and then if you have anything to add, I’d really appreciate knowing it. Maybe some of you have “get out of debt” stories that would shed some light on things. (Or get into debt horror stories) Anyway–just looking for any advice you might have that will make my lesson better.

Ready? Here we go.

In the end, what I’m arguing for is basically there are two “knobs” to money: how much you earn, and how much you spend. In order to get a hold on your finances, you need a clear picture of both. If you think you earn more than you actually do, then you could get messed up. If you think you spend less than you do, then it’s even worse.

So step one is to figure out how much you make each month. I break it down by a monthly income because that’s easier to control. I don’t recommend including extras like Christmas bonuses, tax returns or gifts you regularly get. Why? Because it’s better to be able to use those items to pay off your debt rather than sustain a lifestyle you can’t afford.

Once you know how much you make, then it’s time to know how much you spend. I’ve blogged before about  how I use Mint to keep track of my spending. It’s a great tool, but it can be complicated to use, and it takes effort. Then again, from my experience it takes MORE effort to do it without Mint. Here’s the thing: budgeting takes effort. Period. It’s hard to do. It requires sacrifice. But if you want to get out of debt, it must be done. Like dieting. Grrr…..

After you know how much you make and how much you spend, you’ve got a feel for both knobs. To get out of debt, you can either turn down the spending or turn up the earning–or both. The first priority is to make sure you’re spending less each month than what you earn. If you’re deep in credit card debt, this will be difficult. You’ll have to give up a certain lifestyle you’ve grown accustomed to. It might mean no more television, fewer toys, cheaper clothes, no eating out–it all depends on where your money is going. You look at what your needs are and what your wants are. Hopefully the sum of your needs is less than what you earn. If that’s not the case, then you need to find ways to reduce that number. Move into a cheaper apartment, or stay with family. Sell the car and start walking to work, or buy a cheaper one. Or pick up a second or a third job. If you’re married, your spouse might have to work, too. These are decisions that a family has to talk through. What’s important if you’re married is for both you and your spouse to be on the same financial page. You can’t have one person saving like crazy and working her tail off only to have the other spending like Michael Jackson on a Vegas binge.

Anyway. Once you’ve got spending reigned in, it’s time to address the debt you’ve accumulated. Take the remainder of what you have left over each month and start paying extra on your debt with the worst interest rate. Once that’s paid off, roll that payment into paying your next worst rate. Rinse and repeat. Put any extra money you make toward paying off those debts. It might take a few years, and it won’t be easy, but once you’re free and clear (of all but your mortgage, at least), you’ll feel much better.

At the same time, it’s a good idea to be saving up some money for emergencies–so that you don’t have to put those on credit cards when they happen. (And they will happen.) I don’t know when saving this will fit in best in your debt recovery plan, but sooner is better than later.

Living in a budget hasn’t been easy for Denisa and me. There are times we really struggle to keep things checked. (Case in point–we try to make it over to Slovakia once every three years to visit her family and let TRC and DC experience what it’s like over there. We think this is very important–but it costs an arm and a leg, especially now that there are four of us . . . ) That said, knowing where I am financially is a load off my mind, and it lets me sleep comfortably at night.

That about sums up what I have planned at this point. I think I’ll go over some sample “case studies” to illustrate the point a bit better and more concretely. I also will talk a bit about why it’s bad to be in debt in the first place, and the possibilities for debt reconsolidation–what that is and why you would do it. If any of you have anything to add on any of this, fire away.

And yes, you can even do so anonymously–this is one time when I won’t mind. 🙂

What a Pain

Today I discovered the joys of mortgages. Sigh. Why do I have the feeling this is the start of a very long relationship that I will never really appreciate? After sludging through all the legalese and the details, I signed the papers and sent them back to Maine. I also spent time looking into insurance details, which was a pleasant surprise: it’s going to cost less than I feared. What haven’t I done yet?

My writing.

But that’s what I’m going to do now. Once I’m done with that, I might actually (gasp!) have time to relax some. Of course, last night I was able to go over to a friend’s and play War of the Ring, so I suppose that counts for relaxing, too. Then again, my friend has appendicitis or something, so maybe I could count it as service–attending the sick. Dan–I hope you get feeling better soon.

In other matters, I wanted to say thanks to all of you who have been sending me your comments on Ichabod and Lesana–they are all much appreciated. I miss the days when I’m working on writing a first draft. This second, third and fourth draft stuff is not as much fun for me.

Sigh.