Your Money Book

If you’re a homeowner and have a mortgage, the next few minutes could save you tens of thousands of dollars, or create a financial nightmare for you in the next two or three years or so. It’s up to you, but let me explain:

I’m looking at a national newspaper ad that has been running over and over again across the country, from one of the big banks marketing adjustable rate, or variable rate, mortgage loans. While the rate is really low, you have to remember that it is not a fixed rate, it will adjust when rates change, and that risk or gamble is entirely yours.

For most of us, it’s critical that you remember that your best interest rate is always your worst mortgage. That’s simply because YOU are taking on all the risk of rising interest rates. Right now, rates are at or near the lowest they’ve ever been. When rates change, where do they have to go? It has to be a rate INCREASE, and your mortgage loan will rise right along with it.

Right now, there are literally millions of families in the U.S. that can attest to that, because they took the mortgage gamble and did not choose a fixed rate. As a result, they just couldn’t afford the payments when rates started to increase. The rough rule of thumb is that every $100,000 you owe will jump your payment $70 for a one percent rate increase. So if you owe $200,000, that’d be $140, and if you owe $200,000 and rates go up two percent, that’s about a $280 higher payment a month.

Now, a bunch of economists in the same room couldn’t agree on what day it is today. And with that in mind, you need to remember that none of us have a crystal ball. But we do know for a fact that rates will go up sooner or later. BMO Capital Markets did a research report in December that predicted rates will rise by four percent between this year and 2012. Others believe we’ll be at current rates for another year or two. I don’t have the answer, just the heads up, and some options.

Gary Marr is a national financial writer. He had a column last year claiming his biggest mistake when he was younger was to take a fixed-rate mortgage. For him, and most of his readers, that’s great. He has the monthly cash-flow and income to ride out any rate increases and not feel the pain. But when we talked about the poll a few weeks ago, that more than 60% of families live paycheque to paycheque, tell me where those families are supposed to find another $200 to $400 a month? Should those families gamble on the temporary low rates, or take the sure thing and have a fixed rate mortgage?

Debt and credit are not about logic, they’re way more about emotions. It isn’t logical to charge something on a 20% credit card. Is it logical to finance a car for seven or eight years just to get a slightly lower payment than a four-year loan? Does it make sense to go to a payday lender at 400 plus percent, or to finance that “don’t pay for six months” when two-thirds don’t pay it off, and the rate is around 30%? Or is it logical to take that line of credit, gambling our home as collateral, and pay interest only, knowing we’ll be paying that for the rest of our lives?

None of that is about logic, or we wouldn’t do it in the first place. So I would suggest that the last thing most of us on a budget need is to have more uncertainty with our largest debt and our biggest monthly payment. The math makes an adjustable rate a better deal today, and for another year or two. If it were only about math and logic, wouldn’t we all be debt free?

I don’t have the answers. But I do know that knowledge is power and when we know all of our options, think ahead and consider the consequences, both good and bad, we’re light years ahead of 90% of the world. And when we’re informed we won’t turn our dream home into a nightmare mortgage down the road.

According to the Washington Post, the on-line cost of hiring a hacker to break into someone’s e mail accounts is now down to $30. And hackers have an almost 100% success rate. But the majority of the buyers from these hackers are actually boyfriends, girlfriends, or spouses. The point is, that for your on-line banking, or anything on-line, you need a better password than most people have! Because the most common password is still 1234 and that’s nuts.

When is a deal actually a deal when we’re financing huge amounts of money? Here, and in the U.S., I keep seeing ads for houses and lots that are supposed to be incredible deals at 50% off. Off what? I’ve seen these ads in Ontario, and for resorts in BC. Lots that were originally listed at $500,000 are now half price. But that’s a phony figure, because the original price of the lots are just made up, and hoping that someone will pay it. What matters is what the house or the lot is appraised at TODAY, not what it’s listed for. Whether you’re selling your home, your car, or anything else, it’s the TODAY value, no what it was somewhere in the past! Careful with that, and don’t get trapped in the hype of an advertisement.

Kelly Blue Book just published their 2010 list of vehicles with their retained value and depreciation: Less than HALF of all new vehicles this year are projected to be worth 20% or more after five years. That is a staggering figure. The brands that will best hold their values:
Number one is Lexus, followed by Toyota (and that’s not accurate anymore with their current problems) and Honda. The only European brand in the top tier of vehicles that hold their resale value is BMW, which is fourth, and Subaru rounds up the top five.

Overall, the average vehicle will be worth 32% of new vehicle price in five years. So remember that the longer you keep the vehicle, the less it matters. But the shorter buying cycle, or anyone fleasing…I mean leasing the vehicle, the more you will feel some real financial pain of paying for the depreciation.

Have you heard of the Visa Black credit card? Well, they just sent me an invite. It’s a great looking, high quality, wedding-type invitation. But inside, it’s just another credit card application with great marketing. You are hereby invited to join an exclusive club limited to only one percent of the population. But at 13.25%, the rate isn’t very exclusive, and the annual fee is $495. But the card is made with actual carbon and guaranteed to get you noticed. Really? Is that why I need a credit card? It also talks about “fantastic rewards,” but doesn’t list any of them at all. I’m afraid I’d be getting a plain burger for the price of a steak.

Good old CBC is now getting into the product placement market. A lot of it will be with TD/Canada Trust. The bank will show up (OK, not show up – pay to be included is more like it) on Being Erica, Little Mosque on the Prairie and Hartland.

Every Wednesday we spend a few minutes looking out for your wallet. Today, I wanted to share a few updates, and some consumer stories that we should all be aware of.

You and I know that money certainly does talk. Unfortunately, for most of us, it just says goodbye.

Since May last year, we’ve talked about waiting before getting stuck with another three year cell phone contract. I hope you listened, as a new national cell phone provider called Wind is now blowing across the country, a few cities a month. Their unlimited plans are $45 and not the rip-off system access fee. Hang in there for a while longer, because competition will keep driving prices down, and your wallet will thank you. Last year, I told you that I got rid of my $35 plan for a pay as you go package. I just loaded $100 on my phone, so my cost per month is now under $9!

Do you want to volunteer to get robbed? I didn’t think so – but let me explain:
All kinds of new and really popular applications for iPhones, Facebook, and the likes let you share with people where you are. But thieves also love it. All they need to do is see where you are, and it’ll tell them exactly how much time they have to rob your home. There’s a great web site to explain it to you called: pleaserobme.com
Two of these programs are Four Square and Bright Kite. It’ll notify people that you’ve just checked in to Safeway Rutland, for instance. That’ll mean you’ll be away from home for, what? An hour or so? If you’ve just checked in to the Coast Hotel in Vancouver, they’ve got a day, at least.

On Facebook, it’s even simpler. What’s greater and more current than posting some pictures while you’re on holidays? It may seem like a great idea, but thieves know you’re in Mexico and certainly not at home. Never post your pictures until you get back.
With a bunch of Provinces and Federal Budget last week, I found a great quote that certainly applies today: “The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt.”—That came from Cicero, a Roman philosopher in 43 BC. You’d think in over 2,000 years we’d have learned something? Apparently not…

A quick update on Arizona: For over two years now, I’ve been saying I want to buy an investment property in Phoenix. I also keep saying wait a little longer, and then longer, and then wait some more. Well, I can now say: wait a little longer. According to Moody’s Economy.com the Phoenix market may drop another 23% in 2010. Not to mention rental rates are plummeting as well. So it’s another year of hurry up and wait.

Just because the U.S. media has moved on to new and sexier stories, doesn’t mean the foreclosure problems in the US are solved, or even getting much better: In a four day foreclosure auction in Detroit last month, there were 9,000 homes on the auction block. But get this: 80% of them didn’t even get an opening minimum bid of $500! Yes, you could have purchased over 7,000 homes for $500 each! Sure, it’s Detroit. But that’s depressing to think about.