Harp 2.0 Refinance with Wells Fargo

I recently started a HARP 2.0 Refinance with Wells Fargo.  Before I started the refinance process I did some research online and found that a lot of people are being misinformed about the process and a lot more people have questions that are going unanswered.  Sharing my story will hopefully answer some of those questions.

First of all it is important to know that everyone’s situation is different.  If you situation is not exactly the same as mine then your experience in the HARP refinance will probably be different.  I own a property that according the the Freddie Mac automated appraisal is worth $259,000.  I currently owe $223,000 so I am at an LTV (Loan to Value) of 86% according to Wells Fargo.  I purchased the home for quite a bit more than it appraised and my PMI was just about to come off, but at the time of the refinance I did have PMI on the loan.  The original mortgage was through Wells Fargo and sold to Freddie Mac prior to the June 1st 2009 deadline to qualify for HARP, I bought the home in 2008.   Wells fargo used my middle credit score which was 731.   I was told by Wells Fargo that since they are  the original servicer of the loan they would only verify my two year employment history and they would be using a stated income for underwriting purposes.  I have never had a late payment on the home and was at an interest rate of 5.625% going down to a 4% rate because this is now an investment/rental property. 

I have seen a lot of people claiming that Wells Fargo is declining their HARP application because they pay on time so why would the bank want to give you a lower rate for an on time customer and make less money?  This is antirely UNTRUE!  While you may be paying on time, if you are at 80% LTV or higher you still carry a significant risk of default with the lender.  By allowing you into the HARP program they not only extend your loan, in my case adding 5 years, but they eliminate all risk of default since the government has guaranteed these HARP loans.  Think about it this way, if I am making $5000 per month at work and I get paid on time every month I am happy.  There is the risk that I could be laid off which would mean I no longer have that $5000 per month and I may be losing money due to my monthly debt obligations.  If you were offered a job paying $4,500 per month that guaranteed you would never be laid off, is that really a bad deal?  Absolutely not, and it is no different for the banks.

The biggest setback to HARP 2.0 loans is the amount of time it takes for closing.  Originally these loans closed in 60 days but there are so many applications out there it is now a 90 day process or longer.  I have gone through the extremely limited underwriting process and now I am just sitting around waiting for everything to finish.  I am self employed and have been for two years and Wells Fargo did not ask for my tax returns or anything else aside from a letter from my accountant stating I have been self employed the last two years. 

In the interest of full disclosure, the mortgage rep I was working with said Wells Fargo will randomly ask for tax returns which is why they have you sign a form 4506T during the application process.  The rep did say that everyone they requested returns on was denied, so if you do try a Wells Fargo HARP refinance in a Wells to Wells situation there is a chance they will verify your income and deny you.  For me, the income verification isn’t a big deal because I rent the home out and positive cash flow, plus I have only a very small amount of personal debt.  A vehicle financed at 0% interest costing $400 per month and a $300 per month student loan payment.  The home I currently live in is finance by my wife because we bought it before I had a full two years of self employment so I was not able to be on the loan.

Even if you get denied for HARP refinance, or any other refinance for that matter, you are not out of luck.  With the fiscal cliff sure to hit I wouldn’t be surprised to see interest rates drop even lower and HARP 3 to have even more relaxed guidelines to make your deal even sweeter at some point in 2013.  If they agree to some kind of fiscal cliff deal I don’t think the refinancing options will improve much, but it looks like they won’t reach a deal so refinancing in the second half of 2013 should be a great deal.

How to Build an Emergency Fund

Life rarely goes as planned. That’s why it’s always good to have an emergency fund in the bank.

Brad Smith, CEO of debt management company Rescue One Financial, in Irvine, Calif., works with more than 100,000 clients trying to avoid bankruptcy.

“Many of them could have avoided enrolling in a debt management plan had they had any type of emergency fund set up,” he says. “There are many people out there who are living so paycheck to paycheck that a blown transmission would send them into bankruptcy. An injured child or a natural disaster could easily be handled with additional funds.”

Avoid letting unexpected expenses or events lead you to financial ruin. Build your emergency fund by using these tips.

Start building your emergency fund with a specific goal in mind. While your savings goal will depend on your income and expenses, a general rule of thumb is to save enough to cover four to seven months’ worth of expenses.

“Everyone has wants, needs and desires when it comes to spending money,” says Pete D’Arruda, financial radio show host, author and president of Capital Financial Advisory Group in Cary, N.C. “Make sure you have seven months’ worth of emergency income available for the needs.”

Kevin Gallegos, vice president of Phoenix operations for Freedom Debt Relief, says to focus on having enough to cover expenses when setting your savings goal, not on replacing your entire income.

“Remember, in an emergency, we don’t fund vacations, fancy new clothes, dining out or other luxuries,” he says.

While you may aim higher eventually, Smith recommends making small goals at first, such as saving $1,000 and working your way up to a reserve to cover several months’ worth of expenses.

Your rainy day emergency fund should be easily accessible, but not so easily accessible that you’ll be tempted to make withdrawals for everyday spending.

“I like using an account away from my normal checking account to build a psychological wall between my spending habits and my emergency fund,” says Ray Lucia, a Certified Financial Planner and nationally syndicated radio host. ”Credit unions work well because they normally allow you to start with smaller amounts of money.”

Online banks also are good locations for your emergency savings account because you can’t just walk into the bank and withdraw your cash.

Danielle Marquis, adjunct professor of personal finance at Red Rocks Community College in Lakewood, Colo., recommends keeping emergency funds in a combination of locations and/or saving accounts, including an online savings account, in savings bonds and as cash in a lockbox at home.

If you can’t stomach keeping a significant amount of money in a standard savings account with a low interest rate, consider a money market account that allows withdrawals only at certain minimum levels, or purchase short-term certificates of deposit with three- or six-month terms on a regular basis. You’ll earn some interest and be required to constantly reinvest.

Establish a monthly savings goal and make it part of your regular budget. Marquis recommends setting up an automatic monthly transfer, just as you would with the electric bill or fitness club membership, to ensure the money is saved each month.

“The forced savings should feel like a bill pay transaction that is done on the same day of every month,” Smith says.

Paying yourself first through a direct deposit from your paycheck into your emergency fund account will help you build your fund steadily. But make sure you’ve created a balanced budget so you know you have enough money to save, says financial coach Matt Wegner of Matt Wegner Coaching in Sheboygan, Wis.

“Too many people direct deposit money in their savings accounts, only to turn around and pull the money back out to pay bills,” he says. “A solid monthly spending plan can help avoid this situation.”
Read more: 5 Ways To Grow An Emergency Fund | Bankrate.com http://www.bankrate.com/finance/savings/5-ways-to-grow-an-emergency-fund-1.aspx#ixzz2AvXb9Q4z

Which Credit Card Is The Best?

Anyone looking to change credit cards wants to make sure they get the best card available.  Which credit card is the best will depend on what you are using the card for.  You can classify credit cards in three categories; low interest, rewards and balance transfers.  The best credit card is going to be different for each individual circumstance.

Low interest credit cards seem to come from American Express.  Their Optima Platinum allows you to carry your balance over month to month and for excellent credit they have rates from 8-9.5% available.  Those looking for a low interest credit card are the types that don’t usually charge on credit cards but want to make sure they have one available for a true emergency.

The best rewards credit card depends on the rewards you are looking for.  If you fly one particular airline there is a good chance that airline offers a rewards program that would earn you more miles than any generic travel rewards card will earn you.  If you want cash back the current leader would have to be a tie between the Discover More card and the Chase Freedom card.  Both of these cards offer 5% cash back up to $75 on quarterly promotions like gas and groceries.  They offer unlimited 1% cash back on all purchases.

For balance transfer cards there are a lot of options available.  American Express has very good entry offers. but it is rumored that if you max out your balance transfers with American Expresss they will lower your credit limit.  Citi and Discover both have offers of 0% interest for 15-18 months with a 3% balance transfer fee.  You can find a lot of 12 month 0% balance transfer options with no fee.  Those looking for balance transfers are probably people that over utilize their credit and were put in a position that they are carrying a larger balance than they like on the card.  This is the type of spender that credit card companies love to solicit.  Someone that can’t live within their means but still has decent credit making payments on time is the perfect customer for any credit card company.

However you use credit cards, and whichever perk you are looking for, the best credit card available is the one you pay off every month.  For more information on credit card rates visit HowsTheRate.com.

Please tell us in the comments what you think. which credit card is the best?

Refinancing Your Home

With interest rates hovering near all time lows, everyone is talking about refinancing their home.  Some people have curious talk asking things like “Should I refinance my home?” or “Is now a good time to refinance my home?”  Others have doer talk, asking “Should I refinance at a 15 year or 30 year mortgage?”

If you are the curious individual not sure if refinancing is for you then the following bits of information should help you make your decision.  If you are a doer and already committed to refinancing your home then the following information should serve as a guide for you.

So what factors go into the interest rate when you are refinancing, and what is most important?

Your loan term and loan size will be most important because the amount of your monthly mortgage payment will be considered in your debt to income ratio.  Obviously with a 15 year mortgage you will pay less interest, but you may not qualify for that short of a mortgage term.  The size of your loan is important too.  Can you refinance the $200,000 you owe on your existing mortgage or do you need to do a cash out refinance at $350,000 because you want that in ground pool or some other expensive home addition?  The amount of your loan will certainly impact the term you are eligible for when refinancing.

Your credit score is probably the second most important factor when it comes to refinancing your home.  (It probably takes the top spot on a new home purchase.)  These days with tight credit guidelines you are only going to qualify for the 3.75% on a 30 year mortgage or 2.75% on a 15 year mortgage if you have a credit score above 750.  Sure you can buy points to get those rates if your score isn’t that good, but you are spending money you wouldn’t have to if you improved your credit.

The loan to value is another key factor when refinancing your home.  Many times on a traditional primary home refinance you can go to 90% loan to value.  On a second home you can find refinance offers at 80% loan to value and for investment properties you are looking at 70-75% loan to value.  This is because the amount of risk associated with default is highest on a rental property, followed by a secondary home.  I wouldn’t recommend refinancing your primary home unless you are at 80% loan to value or better because if you’re not you will have to pay private mortgage insurance or PMI.  Today’s PMI rates are double the rates from just 5 or 6 years ago.  Refinancing might save you $200 per month in your mortgage payment but cost you an extra $150 per month in PMI.  When you factor in closing costs it is silly to pay all that money to save $50 per month on a home that you will probably not own for the amount of time it would take to make up the difference.

Best CD Rate Return

I recently found an article that speaks to optimizing the returns available on the currently abysmal CD rates.  While it is the full recommendation of RPP Financial that investors seek other investments to replace CDs from their portfolio, those that refuse could use this bit of information.

It’s been a challenging few years for low-risk investors. Certificates of  deposit used to offer the guarantee of increased earning potential, but opening  a CD in 2012 doesn’t give account holders many reasons to celebrate.

However, banks and credit unions have begun to offer new products with  greater potential for CD returns. With more flexibility, more liquidity and more  ways to break the traditional restrictions of timed deposits, today’s CD climate  has become more welcoming.

If you’re in the market for fixed rates with fewer reasons to feel on edge,  here are four ways to get more comfortable with locking your money away

For savers who want a CD that functions more like a savings account, some  financial institutions have begun offering an add-on or add-to function that  allows account holders to contribute more funds before maturity. Instead of  locking away a lump sum on account opening day, customers can arrange monthly  deposits that increase the principal and therefore a bump in CD returns.

Shawna Thompson, senior product strategy manager of BECU, the Tukwila,  Wash.-based credit union, says that the add-on CD option makes a great match for  consumers who are saving for specific expenses with set dates, such as annual  property tax dues.

Thompson says the option provides a way for consumers to learn how to save  with self-discipline through automatic monthly transfers that cannot be  withdrawn without paying a penalty.

“We think the add-to option provides a strong way to help our members  understand how to save more,” Thompson says.

While traditional CDs lock account holders in to one set rate, bump-up CDs  give account holders the ability to raise their interest rates.

The ability to increase your earnings potential in the middle of a term can  be attractive, but knowing when to exercise that rate increase can be  challenging. Thompson recommends paying close attention to when the Federal  Reserve raises the federal funds rate.

“Keep your finger on what’s going on in the economy,” Thompson says.

Some institutions send customers notifications when the bank’s rates rise on  savings and investment instruments. Beth Coggins, spokeswoman at Midvale,  Utah-based Ally Bank, says account holders can schedule alerts when rates cross  a certain threshold.

However, today’s sluggish market means that CD rates may not reach much  higher. While raising your rate sounds like a winning scenario, consumers often  wait too long to actually utilize a rate increase on bump-up CDs, says Ryan  Bailey, senior vice president of TD Bank.

“Bump-up CD holders typically hold out hope that rates will rise, but we’re  in a flat-rate environment,” Bailey says. “Before you know it, the CD is ready  to renew, and you never had the chance to raise your rate.”

While bump-up CDs require timing the market and being aware of interest rate  shifts, Bailey says that step-rate, or step-up, CDs provide predictable annual  increases.

“CD buyers generally like the certainty of CD rates,” Bailey says. “Step-rate  CDs provide the certainty that your rates will climb over time.”

The frequency of rate increases varies with the financial institution. While  some banks offer step-rate CDs that increase every six months, similar CDs may  only increase once each year.

Regardless of how often predetermined increases go into effect, account  holders can use the schedule of interest rates and the principal deposit to  calculate their earnings before opening a new step-rate CD.

Traditional CDs come with one heavy piece of baggage: a penalty for removing  money before maturity. Today, many banks and credit unions are offering CDs that  lighten that load. While interest rates and CD returns for no-penalty CDs are  typically lower than traditional CDs, account holders benefit from the assurance  that they will not lose a penny of their principal.

For consumers who worry that they may need their money before the end of the  term, TD Bank’s Bailey says that no-penalty CDs provide the benefit of a small  earnings bump with the additional perk of easy access to money.

“If you have concerns about job security or the economy in general, a  no-penalty CD can make a great choice,” Bailey says.

Read this article in full at Bankrate.com.

Buying A Home Without A Down Payment

Credit guidelines for home mortgages are extremely tight right now.  To qualify for the best rates available you need a great credit score, low debt to income ratio and a large down payment.  Even on an FHA loan you are still required to come with a 3.5% down payment.  One a $200,000 mortgage you are looking at $7,000 down.  So why is it that you can still hear about people buying a home without a down payment?  It is happening everyday, there is no doubt about that.  Here are a few tips if you are buying a home without a down payment sitting in your bank account.

Before you can even consider buying a home without a down payment you need to make sure all other areas of your mortgage profile are in order.  For instance, you will still need good credit and a low debt to income ratio.  You will need to have a verifiable income and stable job history.  If you have all of those things then you will most likely qualify for an unsecured line of credit.  Be warned, this is essentially the same thing as a credit card.  A survey of some of the major banks in the United States shows a line of credit for excellent credit scores will have interest rates as low as 9% for qualified individuals.  You open that line of credit and leave the money in your savings account before you apply for an FHA loan.  Hopefully your line of credit is high enough to cover the 3.5% required down payment for an FHA loan.  Your debt to income will need to be low enough that you still qualify for the mortgage with the added minimum monthly installment amount on the line of credit.  This is a risky way of buying a home without a down payment and may not be a good fit for everyone.

Another option is buying a home on contract.  Many people seem to be scared of buying a home on contract but it is no different than getting a mortgage from the bank.  The risk you run is the homeowner having a mortgage that they fail to pay and you are in a legal battle with a bank on who owns the property.  If a homeowner owns the property outright then buying on contract really is no different than a mortgage.  You need to make sure the contract is filed at your county recorders office in case the homeowner decides to try anything shady.  If you are buying a home on contract then you need to make sure it is a good fit that both you and the current homeowner are comfortable with.

If you have any experience of your own for buying a home without a down payment please feel free to share your insights in the comments section.  For more information on mortgage rates please visit HowsTheRate.com.

What is an ETF? Plus the Pros and Cons

A lot of investors are making the change from mutual funds to ETFs.  So what is an ETF? An ETF, or Exchange Traded Fund, is essentially a mutual fund that trades like a stock.  Anyone that has bought a mutual fund knows that when you make the buy order it does not get processed until the market closes that day depending on when the order was placed and the cutoff time.  Buying an ETF gives you the opportunity to know the exact buy and sell price when the order is placed.  You can buy and immediately own an ETF if your buy order was made while the market is open.  The same is true for when you sell your ETF.

An ETF will have many holdings like a mutual fund does so you are not limited to one investment like you are when buying a stock.  For instance, if you want to follow the S&P 500 you can buy an ETF index that follows that particular index.  For example, say shares of an ETF S&P 500 index are trading at $10.00 per share when you put your buy order in for a total investment of $1,000.  You now own 100 shares of this ETF that will perform very similar to the S&P 500.  Using the same example, say by the time the market closes the S&P is up one percent on the day.  (See HowsTheRate.com for investment return rates for the S&P 500.)  If you made a similar buy order for a mutual fund that was at $10.00 per share when the market opened, your buy order wouldn’t go through until market closed and shares were at $10.10 per share.  The same thousand dollar investment would have bought you 99 shares of the mutual fund.  So you are out one share and $10 profit because you had to wait for your buy order to go through on a mutual fund.

That same example can work in the opposite direction too.  Just like a stock you can lose money the second your buy order goes through.  If you are taking a buy and hold approach the small difference from your order being executed at the end of market day probably won’t make much difference in 20 years.  This brings us to another benefit of ETFs.  Say you buy into a large position of a mutual fund and things look bad for the sector it is invested in.  You want to sell, but shoot…. There is a 90 day holding period or a 2% early redemption fee.  With an ETF you don’t have that problem.  You are simply out your brokerage fee for the buy order.  Many discount brokerages will charge you less than $10 for the purchase of an ETF.  The 2% early redemption fee can cost you a lot more than a $10 commission.  A round robin trade is buying and selling the same mutual fund.  Many mutual funds have restrictions on the number of round robin trades allowed within a given period of time.  If your investment takes off and you want to dilute your position you may be forced to pay another penalty or fee for the sale.

Now you know the answer to the question a lot of investors have been asking lately, what is an ETF? There are pros and cons to ETFs, but in short they allow investors to buy and sell mutual funds like they would a stock.  The biggest benefit to this is the limited risk that comes from an ETF over a stock because of diversification.

Best Dividend ETF

For those of you that don’t know an ETF or Exchange Traded Fund is a mutual fund that trades like a stock throughout the day.  We recently received an email request from a visitor looking to save time on research.  They were looking for the best dividend ETF available.  Why anyone would prefer a high dividend ETF over a mutual fund is beyond me.  An ETF will not have the same minimum holding period or round trip trade caps that a mutual fund will have, but you also won’t make any more money buying and selling an ETF around the dividend execution dates than you will holding a mutual fund.  Also, it should be known that the “dividend” an ETF pays is many times actually a distribution, not an actual dividend.  But in the interest of providing the information our visitors are looking for, this is what we found for the best dividend ETF.

Best Dividend ETF List

BDCL (14.76% Distribution Yield) – This fund seeks to replicate the Wells Fargo Business Development Company index.  The index is a float adjusted, capitalization-weighted index that is intended to measure the performance of all Business Development Companies (“BDC”) that are listed on the New York Stock Exchange or NASDAQ and satisfy specified market capitalization and other eligibility requirements.  The BDC business model is to lend to small and midsized companies at high yield equivalent rates while also at times taking equity stakes in such companies.

NLR (13.64% Distribution Yield) – The investment seeks to replication as closely as possible, before fees and expenses, the price and yield performance of the DAX global Nuclear Energy Index.  The fund normally invests 80% of its total assets in equity securities of U.S. and foreign companies primarily engaged in various aspects of the nuclear energy business.

TAN (13.62% Distribution Yield) – This investment follows solar energy and is NOT recommended by RPP Financial.  As we have stated in previous posts, it doesn’t seem that solar is going to be the sector to be involved in if you are looking for an alternative energy play.

REM (11.47% Distribution Yield) – The investment seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the FTSE NAREIT All Mortgage Capped Index. The fund invests at least 90% of its assets in securities of the index and in depositary receipts representing securities of the index. The index measures the performance of the residential and commercial mortgage real estate, mortgage finance and savings associations sectors of the U.S. equity market. It is non-diversified.

These figures are based on the ETF screener available through Schwab.com.  This is not an all-inclusive list of ETF investments available.  Our screener’s only criterion was a dividend or distribution yield above 6% interest.  This is the top four listings for the best dividend ETF.  Please also note that a dividend and a distribution yield are not the same like many investors think.  The distribution an ETF provides is income from dividends the investment holds as well as capital gains.

What is Home Equity?

Many people believe they have a lot more equity in their home than they do. Before you can say how much equity you have in your home, you need to know how to calculate it. So what is home equity for those of you pondering? In short it is the value of your home minus the balance on your mortgage. At least that is what most people think. That calculation would give you a good idea of your gross home equity but not your net equity amount. Your net home equity is the amount you would receive in the form of a check at closing when you sell your property. To calculate your net home equity you would take the sale price of your home, minus your outstanding mortgage balance, minus the realtor fees and any seller responsible closing costs.

Here is an example from my own real estate portfolio. I have a home I bought and live in that was turned into a rental property. Recently I had two different real estate companies look at the home to give me a valuation of the sales price. Both were right around the same number at $274,000. My mortgage on this property has a balance of $204,000. My gross home equity would be $70,000. My net home equity will be much less. When I sell the home I will probably be responsible for 100% of the closing costs since it is a buyer’s market in the area I am selling. I will also have to pay a commission to the real estate company. Since I have two different agencies competing for the listing I was able to negotiate this rate down to 5% of the sales price for a total of $13,700. Closing costs on the home will be around $4,000. Between my mortgage balance, realtor commission, and closing costs my actual amount due at time of sale will be $221,700. Assuming the home sells for $274,000 that leaves me with a net home equity of $52,300.

There is a big difference between gross and net home equity. This is especially true for those that value their home above true market value. Everyone wants to believe something they own is worth more than it is. Being realistic when you are trying to figure out your home equity will keep you from being disappointed when an agent lists your home. Take a look at comparable homes in a local real estate listing and see how much they are selling for. I did some research on the home I am considering selling and found that other 2,300 square foot homes with the same upgrades like hardwood floors and granite countertops were selling in the $260,000 to $290,000 range. My home offers a walk out basement that is unfinished and is relatively new being built in 2006. The homes selling at the lower end of that price range had the same upgrades but did not have a walk out basement and are in slightly older neighborhoods. The homes selling at the high end of that range had finished basements and are as new as or newer than my home. I knew the price range I received from the real estate agent should be close to the $274,000 they confirmed with me. By doing some of the research on your own you can see which agents are pricing your home for a quick sale, and which agents are pricing it based on the true market value. Depending on your situation you may prefer one agent over another.

How to Start Investing In Stocks

You are obviously here because you want to know how to start investing in stocks.  The answer to that is simple.  Sign up at a brokerage like Schwab, E*Trade, TadeMonster, etc.  You make a deposit, pick a stock and buy it and it is truly that simple.  Right?

Wrong!  Before you can start investing in stocks you need to know how you will pick the stocks you decide to buy, how you will monitor them, and how to diversify your portfolio.  There are several different approaches you can take to picking stocks.  Following the top 10 holdings of a very successful fund manager is a good start.  You can follow stock picks from experts like the investment team at HowsTheRate.com.  Another option is purchasing software that follows price movements and triggers the exact moments you should buy and sell your stocks.  Software from Extreme Trading is proven through many years of being in business and a lot of positive customer feedback.

Once you know how you will pick your stocks you will need to decide when to sell them.  Obviously their are many things to consider before selling a stock.  Are you simply diluting a position that has done very well, or do you see the sky falling and need to sell everything?  When do you sell?  Do you pay short term capital gains by holding the asset for less than a year?  There is a lot you need to know before you sell a stock.  This is why many times it is better to follow the moves of an expert or purchase trading software that will alert you to the right time to buy and sell.  While no investing expert will tell you positive returns are guaranteed, statistically it is proven that a novice investor making his own picks will lose money a lot more than he makes it when doing his or her own stock picks.

Knowing how to start investing in stocks is only a small piece of the knowledge you need to invest and actually make money.  Don’t jump into investing and leave yourself with a bad experience.  One of the top ways the super rich have build their wealth is through investing in stocks.  Follow an expert and you will be much better off.

For more information on how to start investing in stocks be sure to read through our investing archives.