Beating Broke

Personal Finance from the Broke Perspective

Buying a House: How Much Can You Buy

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This post on behalf of Emortgage Calculator

One of the more important parts of buying a house, is not over spending on the house that you plan on buying.  Despite all the headlines during the recent real estate boom and crash, people are still trying to buy much more house than they can reasonably afford.  When they do that, any little setback can be a disaster to their housing situation.  Think about it; if you’re already stretching to pay the mortgage, and you lose your job or have some other major expense, will you still be able to pay the mortgage next month?  Probably not.   And that’s where the trouble begins.

door keyMany will say that you shouldn’t buy a house where the mortgage payment accounts for more than 40% of your income.  Some will include the escrow and utilities into that equation, some do not.  Being the frugal fellow that I am, I suggest you shoot for a far smaller number than that.  If you want to truly be able to afford your house, the mortgage payment, including escrow (but not utilities), shouldn’t exceed 25% of your income.  If you really think about it, do you really want to pay any more than one quarter of your income on just your house?  How will you afford anything else, let alone pay down debt?

There are several ways that you can estimate how much house you can buy.  Your lender will tell you how much you can buy and still qualify for the loan, but that’s a terrible way to go about it.  They are only interested in completing the loan, not whether you can pay for it for 30 years.  Many of the real estate websites will have a loan calculator on their sites as well, which can give you a pretty close estimate.  If you’re in the UK, the Emortgage Calculator can help you estimate those costs.  Most calculators will ask you a few simple questions.  How much is the house worth (value), how much will you borrow (loan total), how long will you borrow it (Term), and at what interest rate (Rate).  Using those numbers, the calculator will amortize the loan, and return the estimated monthly payment on the mortgage.  Use that number, plus an estimated escrow amount (roughly 20-25% of the payment amount makes it a safe estimate), and you’ve got a number that you can use to determine if the house is too much house for you.  Then, you can continue on with shopping for a house.

A few other notes.  Yes, an “interest only” loan gives you a much smaller payment amount and may seem like a good way to get into a house that you otherwise couldn’t afford.  But, you’re only paying interest for that period.  When the interest only period ends, so does your affordable payment amount.  Then, you’re stuck with a much larger payment, and all of the principle of the loan.  Same goes for an “ARM”, or “Adjustable Rate Mortgage”.  The payment is nice and low before the first adjustment period, but when that adjustment happens, the payment can go up by a good amount.  Avoid both and stick with the conventional 15 or 30 year mortgages.  You’ll be glad you did.

photo credit: woodleywonderworks

Debt Consolidation Loans: What, When, Why

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Many of us have heard of debt consolidation loans.  Some of you might have even used one before.  They’ve gotten a bit of a bad rap over the last few years because they get associated with debt consolidation companies, some of which can be a bit shady.  But, they aren’t all bad.  And, in some cases, they can be a very useful tool in your debt repayment strategy.

Debt Consolidation Loans: What Are They?

The concept is actually pretty easy to grasp.  As the name implies, a debt consolidation loan is a loan that consolidates all of your other debt and puts it all under one single loan.    Depending on the lender, you can consolidate just about any debt.  We’ll talk about some of the things you might not want to consolidate in later.  For many, the prospect of trading their high interest credit card debt for a lower interest rate loan can be very enticing.

Debt Consolidation Loans: When Should They Be Used?

While you can get a consolidation loan at any time, there are a few times when they are of the most use.  The most common of these is when you have several credit cards that have high balances and higher interest rates.  As we all know, paying only minimum payments won’t get us very far, but having several cards to pay sometimes leaves us with little left over to pay extra towards those balances.  A consolidation loan can reduce the interest rate, and reduce the payment amount, making it easier to pay extra on the balance. One of the biggest factors to determining if you should use a consolidation loan is your resolve to stay off the debt treadmill.  If you can’t commit to not adding any more debt, you’ll only find yourself worse off in the long run.Bank Debt Word Cloud

Debt Consolidation Loans: Why Should They Be Used?

A debt consolidation loan can be a great tool when you’re working on paying off your debt.  The reduction in interest rates and payments can help ease the burden of your debt while also enabling you to pay off the debt at a quicker rate.  Again, if you aren’t committed to not adding any more debt, and you start using those same credit cards again, you’ll find yourself in a much worse situation than you were before.  Combined with a commitment to no more debt, they are a great tool.

Debt Consolidation Loans: Caveats

With anything, there are a few things that you’ll need to watch out for.  Besides reloading your credit cards, that is.  Some lenders will attempt to roll a car loan or a home equity loan into the consolidation loan.  Only do that if there is no other option.  Why?  Both the car loan and the home equity loan are what are called secured loans.  There is some physical asset that the lender holds title to should you default.  If you roll either into the consolidation loan, you don’t own that physical asset until the consolidation loan is paid off.  Consider this example.  You have a car loan for $5000, on a car that has a value of $10000.  You roll that car loan into your consolidation loan along with $20000 in credit card debt.  The total for your consolidation loan is then $25000.  Until you pay that $25000 off, the lender will keep it’s lien on the car.  What if you get in a wreck and total the car?  You can’t use it as a trade-in, or sell it to a salvage yard until that $25000 is paid off and you can get the lien removed from the car.  It’s a hairy situation to be in, to be sure.  All that said, getting an unsecured loan can sometimes be difficult, and depending on your situation, some lenders might require at least part of the loan be secured.  You’ll have to determine if that’s a risk you want to take in order to take ownership of your finances.

Much like any other financial tool, a debt consolidation loan can be helpful under the right circumstances.  Be careful, examine the details, and learn how it works, and you can make sure that it remains that way.

photo credit: Vectorportal

Selecting Lending Club Investments – How I do it

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As I mentioned in my previous post on finding a Real Rate of Return for My Lending Club Portfolio, I am unable to invest directly into the loans on Lending Club.  There’s some regulatory issue between Lending Club and my state that makes it that way.  So, I have to purchase my investments through their note trading system called foliofn.  Not a huge deal, but it makes it a bit more interesting.

Using the Lending Club foliofn Search

First, I have to search for available investments.  They’ve got a decent search, but it’s missing a few key things that really would make it top notch.  Here’s what you’ve got as far as filters for the search, and, also how I usually set it up when I do a search.

Lending Club foliofn search options

I don’t like seeing anything that’s been late, or is currently late.  Late payments don’t show any intention of improving your situation, so I’m not going to take a risk on you if you don’t take it seriously enough to pay on time.  You’ll notice that I also change the remaining payments to 56.  The max is 60, but it’s hard to eliminate those who have been late if they haven’t had the chance to be late, so this makes it so that a few payments have to have been made.  Of course, there are shorter term loans available in Lending Club, so you’ve got to keep an eye out for those.  I don’t really limit the rates at all.  I’ll explain why in a moment.  Here’ s a sample of the results you’ll see when you do a search (click to see bigger).

Lending Club foliofn search results

Selecting Lending Club Investments

As you can see you get a really basic overview of the available loans.  They’re all sortable.  I usually sort by Asking Price because I usually have a set amount of available funds in my account and I want to purchase investments that will come as close as possible to exhausting those funds.  There are three things that I pay very close attention to when I’m shopping for investments here.  The first is the Credit Score Change.  This is a visual indicator of whether the borrower’s credit score has gone down, up, or stayed the same since the loan was issued.  I only buy loans where the credit score has gone up.  It’s indicated by a green arrow that points up and to the right.  Again, this is a personal preference, but I want borrowers who are want to improve their situation.  It’s what this site is about, and something that I feel strongly about.  I like to think of it as ethical investing.

The second thing that I look closely at to compare the term of the loan with the remaining payments.  This goes back to the late/never late thing.  I’m able to eliminate loans that have been late through the search if the term of the loan is 60 months, but not if it’s anything shorter than that.  I’m looking for loans that have made at least 2-3 payments.  Finally, and most importantly, I look at the Yield to Maturity field.  If I could change one thing about the search on foliofn, it would be to add a way to filter by this field.  Here’s why.  Because foliofn is a secondary market for these investments, you aren’t necessarily paying the price of the remaining principle.  The seller is able to set his own price for the investment.  So, the interest rate on the loan isn’t necessarily what you will earn on the loan.  The Yield to Maturity field shows what the yield on the loan will be when it is paid off.  This field will vary. That’s also why I don’t limit the interest rate in the search, although you could if you were looking for a certain credit level of loan to invest in. If you look at the example above again, you’ll see that the investments shown would be very, very bad choices.  Where you draw the line for the yield will vary based on your personal preferences, but I usually won’t buy any of them unless they are at least 5%.

Further Thoughts and My Results

My goal is to maintain a higher interest rate than any savings account, while maintaining a medium-high risk level.  This means that my portfolio is weighted towards the C-D range loans.  I still keep it diversified amongst the different rate levels, but it’s heavier in that area.  You’ll notice that the results don’t show what range the loan is.  For that reason, it’s handy to know, generally, what the interest rate ranges are for each of the loan credit ranges.  Using the interest rate (not the yield to maturity) field, you can guess where the loan lies.

Lending Club Net Annualized ReturnSo, all that goes into it.  I look for an investment that has a upward trending credit score, that hasn’t been late and has made at least 2-3 payments, and that has a Yield to Maturity of greater than 5%.  My portfolio is still rather small, so I try to keep individual investments to a $20-$40 range.  I just don’t want to put too much of the portfolio in one loan and then get caught with my pants down if it defaults.  As the portfolio grows, I’ll likely increase the upper end of this range.  So far, I have had 4 of the investments paid off.  Two of them have been paid off early.  I have had no defaults. That’s a screen grab of my real return on the left.  Adjusted for inflation, using the formula in my previous post, it’s still above 10%.  Try and get that anywhere right now.  My 401(k) is at -0.85% YTD, and my local bank pays 0.25% on savings accounts. Sure, it’s riskier, but I feel the increased return outweighs the increased risk, and I think it will keep it’s place as part of my investment strategy.

I feel that I should make a disclaimer here.  I’m not an investing professional.  None of this should be taken as advice, but merely an amateur sharing information on my portfolio.  See an investing professional if you’re looking for advice.  Otherwise, feel free to share your stories in the comments!  And, as always, if you liked the post, please take a moment to share it using the bar on the left hand side, or at the bottom of the post.

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